Freight Depot | 1200 Market Street | Chattanooga, TN 37402 | 423.756.7771 | hhmcpas.com

DEALERSHIP INSIDER | January ‘12

HOW TO IMPRESS (OR RETAIN) YOUR BANKER

A GOOD PRESENTATION CONTAINS AT LEAST FIVE ELEMENTS: 1. Abriefdescriptionofthecompany.

2. Adescriptionofthekeypeople.

3. Anindustryupdate.

4. Youroperatingplan.

5. Aplanforhowyouwilluseorcontinuetoutilizethefinancing.

Despite perceptions, banks and other lenders do not lend moneysolely based on collateral. They like to see a good businesspresentation toenable themto lendonsomethingmore includingsufficientcashflowtocoverdebtservice.

THE COMPANYDescribewhat thecompanydoes. Inyourdescriptionensure thatyoudiscussthefollowing:

• Objectivesofthecompany,

• Strategiesforthenextyearandbeyond,anda

• Summaryofthepastyear’ssuccessesandanhonestassessmentofwhyanyoflastyear’sgoalswerenotmet.

KEY PEOPLEA company is as good as its management. Describe the key people,providingdetailsontheirbackgroundincludingtheskillseachofthembrings to their departments and the management team itself. Shareyourpastyearsuccesseswithyourmanagementteammembers.

INDUSTRY UPDATEThegeneralpublichearsabouttheautomotiveindustryfrequently.Local,nationalandindustrymediaoutletsrarelygoadaywithoutsome story about the industry. Your banker will know a lot abouttheindustryandwillprobablyretainmoreofthebadnewsthanthegood.Tooffsetthisandtocreateastrongimageofyourcompanyyouhaveto:

• Providethemwithinformationaboutyourmanufacturer’sfutureplansandhowthoseplans(productsorimaging)willaffectyouroperations,

• Tellthemwhyyourlocalperformancediffersfromregionalandnationalstatistics,and

• Updatethemonyourrelationshipwithyourmanufacturer.

OPERATING PLANTell your bank what your outlook for the coming year is. He willalready have heard the national projections, he will have heardsnippets of the news from NADA and his team will be collectinginformationdaily.Inyourproposaltellhimwhy:

• Yourplansdifferfromotherlocaldealerships,

• Yourplansaredifferentfromwhathehasheardfromthemedia,and

• Whyyourcompanyisagoodinvestmentandwillactuallyusethemoneythebankissettingasideforyou.Thedaysof“just-in-case”linesofcreditarelongpast.

FINANCINGThis element is often the only one presented. While financing isthekeyelementofthepresentation,youhaveseentherearemanyotherimportantparts.Herearesomeoftheimportantcomponentsoffinancing:

• Incomestatementandbalancesheet,

• Cashflowprojections,

• Theexpensesshouldrelatetopenetratinganewmarketifthisiswhatyouplanned,

• Discussbreakevenpoint,

• Discusspayback,

• Bewareofdebt-to-equityratioanddebtservicecoverageratio,and

• Explainmandatoryfactoryequityandperformancestandards.Specificallydescribeyourrequestforloansastoamount,timingandrepaymentterms.

And finally, make sure your financial statementsare easy to readandassess.Todothistrytoeliminate:

• Multipleinter-companytransactions,

• Clearupinter-companybalancespriortotheyear-end,

• Ifyouownmultiplecompaniesmakeityourobjectivetohaveeachcompanysecureitsownfinancing,and

• Simplifyyourshareholderloantransactions,andtrynottousetheaccountlikeapersonalbankaccount.

Yourpresentationshouldconsideratleasttwoyearseachoftheabovecategories.Whenyouarefinishedwithyourpresentation,yourbankerwillknowyoubetterandwillknowyouknowwhereyouaregoing.

Bankerscannot(and incurrenteconomicconditionsdonothavetheresourcesto)providefundstoevery(oreventhetopfive)applicantthatrequestsorwantsto renew a loan. Therefore, you must develop anedge to obtain or retain that loan. That edge can beprovidedbyawell-designedpresentation.Followtheseguidelines and you will find that this presentation iseasiertopreparethanyouthink.

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TAX TIP! Shareholder Loan Documentation is Critical

TheTaxCourtremindstaxpayersoftheimportanceof details and following document terms forshareholder loans in Todd, T.C. Memo. 2011-123.The court determined that an amount borrowedby the sole shareholder of a corporation from itswelfarebenefitfundwasataxabledistributiontotheshareholderandnotaloan.Thesoleshareholderofthecorporationwasalsoitspresidentanddirector.Allemployeeswerecoveredunderacollectivebargainingagreement.Thecorporation,underthetermsoftheunioncontract,providedadeath-benefit-onlyplanfundedbylifeinsurancethroughawelfarebenefitfund.Thetaxpayerappliedforandobtaineda$6million insurance policy on his life on behalf of the welfare fund.The welfare fund owned the policy, and the corporation paid theannualpremiums.

The welfare fund agreement provided that the employer andtrustees of the plan had discretion to make loans to participantsonanondiscriminatorybasis.Thetaxpayerappliedforaloan,andobtaineda$400,000loanfromthewelfarefund.

Thewelfarefundissuedanotetothetaxpayerthatwasnotsigneduntil six months after the loan was issued. The note provided forinterest at market rates; however, the taxpayer was charged only1%interest.Thetaxpayerhadnotmadeanypaymentsonthenote.

TheTaxCourtheldthat“thedistinguishingcharacteristicofaloanistheintentionofthepartiesthatadvancedthemoneyberepaid.”

The court concluded that the $400,000 disbursement from thewelfarefundtothetaxpayerwastaxableincomeandnotabonafideloan. Itanalyzedthesevenfactors listedbelowandfoundthatfiveof them were not met, indicating that the parties did not establishadebtor-creditorrelationshipatthetimethefundswereadvanced.

1) Presenceofanote:Thepartiesdidnotmemorializethedebtatthetimethewelfarefunddisbursedthefunds.Theyalsodidnotexecutethenoteuntilalmostfourmonthsafterthefirstrepaymentdate.Inaddition,thepartiesdidnotadheretothetermsofthewelfarefundagreementandthenote.Thefunddidnotchargemarketrateinterest,andthetaxpayerdidnotmakequarterlypayments.

2) Interestrate:Thewelfarefundchargedthetaxpayer1%interest,notmarketrateasprovidedforinthenote.Bycomparison,theinsurancecompanywouldhavecharged4.76%onasimilarloan.

3)Repaymentschedule:Thewelfarefunddidnotprovidethetaxpayerwitharepaymentschedulereflectingthequarterlypaymentsuntilthreemonthsafterthefirstpaymentwasdue.

4)Collateral:Thecourtfoundsufficientcollateralinthealternaterepaymentprovisionsallowingthefundtoreducethedeathbenefitstothetaxpayer’sbeneficiaries.

5)Repayments:Thetaxpayerdidnotmakeanyrepaymentsonthenote.

6)Prospectofrepayment:Thecourtfoundareasonableprospectofrepaymentbecausethetaxpayerearnedasubstantialincome

7)Partiesconduct:Neitherpartyactedinamannerindicatingthatthedisbursementwasaloan.Neitherpartystrictlyabidedbythenote’sterms.Theinterestratewasbelowmarket,andthetaxpayermadenoquarterlypayments.Thewelfarefundmadenoattempttocollectthedebtwhenthetaxpayerdidnotremitthescheduledrepayments.

Thiscasepointsout the importanceofdetails ina loan transaction,especiallywhenitinvolvesrelatedparties.Inthecaseofaloanbetweenacorporationandashareholder,failuretofollowtermsandprovisionswilllikelyresultinaloanbeingtreatedasataxabledistributions.

Consult with your ATA tax advisor when making loans betweenyourselfandyourrelatedentities.

FACTORS CONSIDERED BY

COURTS IN FINDING A BONA

FIDE LOAN ARE WHETHER:

Thepromisetorepaywasevidencedbyanoteorotherinstruments,

Afixedscheduleforrepaymentwasestablished,

Collateralwasgiventosecurepayment,

Repaymentsweremade,

Thepartiesconductedthemselvesasifthetransactionwasaloan.

Theborrowerhadareasonableprospectofrepayingtheloanandthelenderhadsufficientfundstoadvancetheloan,and

Interestwascharged,

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DEALERSHIP INSIDER | January ‘12

Youknowthescenario:Earlyeachyear,dealershipsacrossthecountryareinvaded.Theinvadersdressinsuits,commandeerpartofyourbackroom,andmercilessly interrogateyourcontrollerorCFO.No,they aren’t hostile aliens. They’re your externalauditteam.Andmakenomistake—CPAscomeinpeace.Infact,withabitofadvanceplanning,theirpresencecanbebriefandpredictable.Plus,many offer business improvement and tax-savings tips that couldactuallymakeyourlifeeasier.

HANDPICK YOUR TEAMExperiencebreedsefficiency.You’llwastealotoftimeandenergygetting“green”auditorsuptospeedontheautoindustryandyourspecificdealership.Askforthesameauditteammembersfromyearto year. Although lower-level staff may turn over quickly, it neverhurtstoaskforconsistency.Alsoseekauditorswithmoreyearsofexperienceandautoindustryspecialization.

KNOW WHAT TO EXPECTYourauditwillgofasterifyouthinklikeanauditorandanticipateworkpaper requests. Auditors typically request that youprovide various documents, including a trial balance, monthlymanufacturers’statements,bankstatements,floorplanstatementsand inventory listings.Auditorswillacceptcopiesforsomeitems.Forothers,suchasthebankorfloorplanstatement,they’llexpecttoseeoriginalsourcedocuments.

You’llfindthisrequestchangesverylittlefromyeartoyear.Soareviewoflastyear’sworkpaperscanhelpprepareyouthenexttimearound.

What does change annually is the sample of transactions thatauditors randomly select to test your account balances. Forexample, they’ll likely pull car jackets for, say, a small sample ofyour sales volume to test the accuracy of inventory and salesrecords.Theelementofsurpriseisimportanttoauditors,becauseitkeepsbookkeepershonest.

CHECK IN PERIODICALLYCallyourauditorthroughouttheyearaboutmajortransactionsandaccountingquestions.It’stimetocontactyourCPAif,forexample,youadd(oreliminate)afranchise,changebanks,implementanewaccountingortaxrule,ormovetoanewlocation.Yourauditormighthave some tips to help you report these transactions or to lowertaxes.Plus,thefewersurprisesauditorsencounterinthefield,thefasterthey’reoutofyourhair.

GET A GRIP ON INVENTORYAt your year end, an audit member will arrange to observeyour inventory. Most firms assign inventory observations to anexperiencedauditoralongwithamorejuniorperson.So,besuretohaveatleasttwoofyourexperiencedpersonnelavailabletoassisttheauditorswiththeirtestcounts.

The auditors will randomly recount items from your partsinventory and compare test counts to your inventory records.Misstatements may require more testing or extrapolation overyourentireinventorybalance.

Auditors will also compare each new and used vehicle’s VIN toyour inventory listing. Expect to provide explanations for anymissingvehicles,includingdemosandloaners.Andtidyupyourlot.Excessivesnow,icyordirtywindshields,andinaccessiblevehiclesmakeitharderfortheauditortopeerinthewindowtoverifyaVIN.

GET THE AUDITOR’S TWO CENTS’ WORTHGood auditors will present a list of management points whenthey deliver your financial statements. These are ideas gatheredthroughouttheauditprocesstohelpimproveyouroperationsandbuildvalue.Sometimesoutsidersbringfreshperspective.

Forexample,yourauditormightsuggestawarrantyreimbursementreview, if your warranty practices vary from factory guidelines.Or the auditor may recommend a change in inventory accountingmethods tohelp loweryour taxes. (See thesidebar“Dearauditor,whatdoyouthinkofmyinventorymethods?”)

Switching to the last-in, first-out (LIFO) method may provide taxsavings, but it requires a complicated sequence of valuation stepsthatarelikelyoutsidethecomfortzoneofyourcontrollerorCFO.Yourauditorcandiscusswhichmethodwillmaximizetaxsavingsandevenprovideinterimtaxprojectionstominimizeyearendsurprises.

Auditors also may share their financial analysis tools. Here, theCPA benchmarks your store’s performance over time and againstindustryaverages.Auditorsuseanalyticstoboostauditefficiency.In turn, you can use this information to explore your store’sstrengthsandweaknesses.

You can make the most of your annual audit by smart advancepreparation. Be selective about your audit team and know whatto expect from your auditors. Check in with them throughout theyear,andfollowupontheirsuggestions.Dothesethings,andyou’relikelytoeaseyourwaythroughtheauditprocess.

READY, SET, GET AUDITED: How Your Audit Can be Easier Next Time

START PREPARING...

DEAR AUDITOR, WHAT DO YOU THINK OF MY INVENTORY METHODS?Dealershipshaveseveralchoiceswhenaccountingfornewvehicleinventory. The easy option is the specific identification method,whichexpensesthefactorybasepriceofthespecificvehiclesold.Mostdealerscurrentlyusethismethod,becauseit’sbasedontheactualflowofunitssold.

A more complicated alternative, the last-in, first-out (LIFO)method,placesthelastcostsincurredintocostofsalesandretainstheearliestcostsastheendinginventory.Essentially,thismethodremovesinflationfromyourendinginventoryandexpensesitinthecurrentaccountingperiod.

LIFO allows an indefinite tax deferral in an inflationary market.But when inventory levels and factory base prices drop, “LIFOliquidation”mayhappen—andaLIFO-basisdealermayowetaxes.Such surprises are increasingly common in today’s discounted,lean operating environment. Discuss with your auditor, and askwhichinventorymethodmakessenseforyou.

WHAT MAKES GEN Y TICK?

READY, SET, GET AUDITED Continued

– adults born after 1979 – is 77million people strong, accordingto the U.S. Census Bureau. Butthey’re wound a little differentlythan the rest of us. Dealers whounderstand Gen Y and customizetheirmarketingandsalesstrategiesaccordinglystandtoprofit.

UNDERSTANDING PREFERENCESGenYisbuyingvehiclesjustasmuchasGenXandBabyBoomers,accordingtoaDeloitte-sponsoredstudyofuniversitystudents.ButGenYhaslessdisposableincomeanddoesn’tseecarsasastatussymbolasmuchasitspredecessorsdo.

So, many Gen Y buyers select used over new cars. This is goodnewsfornotonlyusedcarsalesbutalsoforservicedepartments–ifyoucanconvinceGenYerstoreturntoyourdealershipforrepairsandmaintenance.

Gen Yalsowants technologyandconnectivity.Vehiclesequippedwithmobilemessaging,MP3/WMAplaybackcapability,andhands-freecellphoneoptionswinoverGenY.

Finally,GenYwantsavehicle thatstandsout.Forexample,MINIandToyota’sScionallowbuyerstocustomizeabasevehiclewith,say,decals,stylizedmirrorsandstereoequipment.Customizationrepresentsahugeopportunityforsellingpartsandaccessories.

MARKETING AND SALES – THE RIGHT WAYThe first generation to grow up with home computers, musicdownloads and cell phones, Gen Y has been inundated withtechnologytheirentirelives.

IfyouwanttocatchaGenYshopper’sattention,yourwebsiteneedsa searchable online inventory listing, and you should advertiseat sites like Cars.com (www.cars.com) and Facebook. Texts ande-mailblastsare the idealway to reach thissegmentaboutsalesand service promotions. Some manufacturers even offer smartphoneappsforonlinebillpayment.

OnceyougetGenYersintoyourshowroom,rememberthat,becausethey’re often significantly younger than their salespeople, theyworrytheywon’tbetakenseriously.Dealerswhocreateapositiveshowroomexperiencewithafriendly,low-pressuresalesapproachbuildbrandloyalty

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SPECIFIC IDENTIFICATION

vs

LAST-IN, FIRST-OUT (LIFO)

RANDALLHEBERT,MBA,CPA,CVA423.702.8145

RHEBERT@HHMCPAS.COM

TRAVISM.HORTON,MBA,CPA423.702.7275

THORTON@HHMCPAS.COM

CALL THE DEALERSHIP SPECIALISTS AT HENDERSON HUTCHERSON & MCCULLOUGH, PLLC

FREIGHT DEPOT | 1200 MARKET STREET CHATTANOOGA, TN 37402

423.756.7771 | HHMCPAS.COM