Chapter 16
Gus's Garage

By Jake Snyder

Gus, his attorney, and accountant closed the deal with Fred and his people to purchase Hometown Chrysler's autobody operations and lease of building and property. The new shop name is Cherock Collision. Gus decided to associate the new shop with nearby Cherock County Park and Cherock Highway.

The financial terms of the agreement included a price of $485,000 for the business and $70,000 yearly rent for the 25,000-sq/ft building and associated property. Gus's accountant protected the receivables, payables, and working capital accounts by including in the purchase agreement, cash penalties. These would come into play if, at closing, the bodyshop's balance sheet did not closely match monthly balance sheet levels for 6-months prior to Fred's initial sale-approach to Gus.

Gus and his team heavily leveraged negotiations in his favor by emphasizing how close association of the autobody business with Hometown Chrysler could limit Gus's opportunities for improving, maintaining, and selling the business. For property lease negotiations, they argued market value and subsequent lease costs for the property could not be compared to like, kind, and quality property prices that can be used for widely diverse industries and applications.

Furthermore Gus had a letter from a commercial realtor who explained that the current building and land for the bodyshop had very narrow demand features, and unless some type of automotive business relationship with Hometown Chrysler was also established as part of the purchase or lease of the building, the property would have little market value but to a very specific and limited clientele.

The "triple net" property lease agreement required Gus to be responsible for all property expenses, including maintenance, taxes and insurance.

The property lease term is for ten years and also tied to business purchase and service agreements. Both parties wanted all contracts tied together for protection from each other in case of changes in business ownership, service performance, and overall business relations between the two parties.

Gus was unable to achieve his goal of paying no more than $100,000 in rent and business loan payments for the first year. Instead, at the end of the first year he will have paid $70,000 for rent and $72,000 in loan payments to Hometown, $42,000 more than he hoped to layout for the first year.

As a means of lowering first year cash payments, the Hometown loan or note was based on 80 percent purchase of the business, with Gus having to purchase the remaining 20 percent share at today's value ($97,000) on January 1st of the third year. The $72,000 yearly loan payments are based on a $288,000 loan for five years at 8 percent interest.

We determined loan calculations: ($485,000 x .80 = $388,000) minus ($100,000 down payment) = $288,000.

This delayed ownership feature of the agreement was proposed by Hometown to help lower the initial payments and increase their security for the deal.

In the event Gus could not meet his financial obligations and Hometown had to foreclose and take back the business within the 2-year and January 1st period, Gus would be required to sell 20 percent of Gus's Garage to Hometown Chrysler for $1.

For business operations, Gus agreed to provide up to $250 of free dealer work weekly (both internal & warrantee) based on wholesale labor & materials rate.

As a deterrent to keep Hometown service managers from bunching up work, unused weekly credits could not carry-over to the following week. Work provided in excess of $250 would be billed to Hometown Chrysler at wholesale rates.

Unused weekly credits will accrue as a credit owed. Hometown Chrysler can only apply those credits during the sixth and twelfth months. Otherwise Gus would write a refund check back to Hometown.

Similarly, Hometown will provide Cherock Collision mechanical services at wholesale rates for parts and labor.

The new operation will also purchase all Chrysler brand parts from Hometown with a guaranteed discount of 27 percent which is about 5 percent lower than what Gus normally receives on average from his Chrysler parts vendors at Gus's Garage.

Hometown was also required to provide enhanced parts handling services. If not maintained, Cherock could purchase Chrysler parts from other dealerships.

As an added incentive for Hometown to refer customer cars, Cherock Collision would use a sliding parts discount rate that decreases for increased repair-referral volume from Hometown Chrysler. (See the table.) The discount rate would decrease one percentage point for total monthly parts sales for each additional $4,800 in retail parts sales above an $18,000 baseline, to a maximum of 22 percent parts discount for Hometown supplied parts.

It was estimated that Hometown's bodyshop would have been purchasing approximately $18k each month in Chrysler parts if the bodyshop had been independent of the dealership.

Hometown Profit Gain:

Monthly Parts Sliding iscount Rates

The deal and preferred repair-referral status for Hometown's customers re-quired Gus to provide:

• Sliding parts discount (5 -10 percent) (See table.)
• An added one percent parts discount for each additional $4,800 in retail parts sales
• $1,000 month free autobody repairs.
• Risk of losing 20 percent of his business.

Hometown Chrysler has to provide to Gus:

• Flexible terms for the business loan
• Lower than market lease rate
• Wholesale pricing for mechanical services
• Preferred wholesale parts service.

In a last minute move, Gus also received new car purchasing benefits for his employees at both shops that were similar to those enjoyed by Hometown Chrysler employees.

Gus and I discussed various strategies to improve shop performance. We first listed several initial objectives:

1. Improve on-time delivery and process cars in the same sequence in which they arrive or are scheduled-in
2. Significantly reduce internal defects and redo's
3. Improve shop efficiency by 25 percent
4. Spruce-up the front-end of the business.

Gus and I debated the best way to get started. He wanted immediate employee compliance to new policies, and procedures.

I agreed new operating processes and policies have to be installed immediately, but I also suggested new policies and procedures ultimately would fail unless employees can realize the value.

Clearly, the sale of the business has affected employee psyche, and they expect changes. It is up to Gus to balance new management changes with a demonstrated commitment towards employees.

The front office spaces were easy - Gus had to spend money for remodeling & re-equipping administration and customer care areas. Improving operating processes involves changing routines, habits and attitudes.

I advised Gus that this sounded like training, and perhaps he could engage his suppliers to provide technical training. The idea is to identify the employee training schemes that will help Gus reach his initial objectives.

Next month we will look at the training options and the impact that we expect training to have on improving shop performance.

Jake Snyder, creator of the popular Gus’s Garage series, is interested in hearing from shop owners with real-life questions.
E-mail JJ the Remote Pro, Gus’s intrepid consultant.