Editor's Note: Here’s an excerpt from Succession Planning: Step-by-Step. Go here to read more. 

A sound dealership succession plan addresses a long list of issues, including retirement income, transferring wealth to the dealer’s heirs, transferring ownership, dealing with the income and estate tax consequences associated with an ownership transfer, and addressing other issues key to the ongoing success of the business; not the least of which (and often forgotten) is transitioning management.

Step 1: Identify and prioritize goals for the transition.

Step 2: Identify and prepare new management. 

Step 3: Determine retirement cash needs

Step 4: Review options for funding the transfer

It is not surprising that one of the most difficult aspects of transferring dealership ownership is the ability of the successor to provide the required funds. In the ideal scenario, the buyer writes a check for the full amount, but that is often not the case.

In fact, the availability of funds often limits funding options to ongoing payments in such forms as deferred compensation and payments on assets retained by the retiring dealer, like the dealership real estate. 

In addition to crafting the succession plan agreement, we often assist the buyers and sellers in obtaining funding from such sources as: 

1. The dealership. How much can the dealership afford to provide in ongoing payments? We prepare financial projections to determine how using cash flow to fund the purchase will impact operations, currently and over time. 
2. The retiring owner. This involves quantifying the owner’s ability to finance at least a portion of the transfer. If seller financing is used, you, as the outgoing owner, need to secure the note and consider how interest on the note will be paid or subordinated. The use of seller financing might need to include a personal guarantee from the buyer. 
3. Insurance. If insurance is part of the funding mechanism, there are different types of policies to consider. We conduct such comparisons as the use of term vs. various permanent life insurance and second-to-die policies. Determinations must be made relating to who owns the policies and how the premiums are paid. 
4. Commercial financing. We often help successors obtain commercial financing by locating potential lenders and preparing proposal packages.
5. Equity. Consider offering equity in the company, such as to a private equity group. If private equity is an option, detailed preparations and documents will be required prior to making any offering. 

Where there is value in a dealership, there will be numerous options for funding a sale or transfer. Depending on the successor’s finances, the option could be a combination of funding vehicles.