BDO's Automotive Retail practice can be an invaluable part of your team in Canada during an expansion into U.S. markets, assisting you in assessing challenges and opportunities by providing transaction, financing, risk management, fraud awareness, and succession-planning services. Learn more about how we can help you.
Published: December 17, 2018
Updated: December 17, 2018
With an attractive investment landscape and potential access to a larger market, U.S. expansion opportunities are being considered more and more often by Canadian dealer principals. Factor in the growing trend toward market consolidation in Canada, and you have large dealership groups more carefully assessing the M&A landscape south of the border.
But with new opportunities come a host of new challenges—it's important not to underestimate the complexities of retail expansion across national borders. Deep industry experience in Canada may not equate to the same level of insight in a foreign market.
Here are the top eight things you should consider before a U.S. expansion play.
Develop a deep understanding of the local markets. What are local buying trends? Who are local competitors? How is the brand viewed? Audi, for example, maintains significant popularity in Vancouver, but may not in Chicago. Make sure you understand the local brand hierarchy as well as local consumer habits. Brand loyalty is an important factor in developing a return customer base; so is the customer-service reputation of the business. Be sure to assess the reputation of the existing business in the local community.
Disruptive trends looming on the automotive-industry horizon will also have different effects on buying habits in different markets. Consider how electrification, ride-sharing, and automation might impact the local market. Review how the given dealership will adapt both operationally and strategically to sell and service these types of vehicles.
The market value of a dealership's real estate in a large city centre could outpace the dealership's business value by a factor of 10 to one, and your long-term strategy for this kind of investment would look very different from one in small-town U.S.A. What is the value of the real estate versus the business, and what is the long-term play? Who is the property owner, and what are the lease terms? Is it a real-estate investment and a business? Is it a business with a lease? Ensure that you explore all aspects of the opportunity.
Management, back office, sales and service teams: What does the existing workforce look like, and is the whole operation self-sustaining? If you plan significant changes to the workforce, consider how these shifts may affect both morale and employee buy-in during the leadership transition, as well as how they could impact the reputation of the business in the local community.
Brands require an updated storefront on a periodic basis—where is the store you're considering in the renovation cycle? Will you be required to devote significant capital investment to infrastructure in the first couple of years of your ownership? Ensure you have factored in all of the investment costs that will be required in the first five years of your operations, and work these into your ROI calculations.
Where is the money coming from, and where do you want it to end up? If the dealership has an excellent existing relationship with a local bank, it may make sense to leverage the relationship to secure a U.S. source of funding rather than a Canadian one. However, if the ultimate goal is to repatriate the funds back to Canadian shores, you will need to structure the business carefully to avoid the potential for significant tax liabilities.
Never take sales claims at face value—dig into operations. The due-diligence process is arguably the most important step in determining the viability of your potential investment, so ensure you have the right team in place to assess past performance thoroughly.
The U.S. tax regime can be more complicated than the Canadian one—it is important to understand both state and federal income tax as well as state and county sales tax. Consult an expert to ensure the transaction is structured properly for U.S. and Canadian tax regulations to avoid significant tax issues.
Among the biggest miscalculations when reviewing the total cost of expansion plans is underestimating the amount of time a new business will require from you. Consider the time investment you made to build your current business: What did your first five years as a dealer principal look like? Although your market expertise and business acumen will have grown significantly from your early days, entering a different market in a different country will present different challenges than you faced earlier in your career. Consider what the shift in focus will mean for your existing operations in Canada, and ensure you have a management team both capable and empowered to successfully steward your existing business.