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Interpretation of the APA – as with healthcare, get a second opinion.

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By Marilou Vroman, CPA, CFE

Buying a dealership can be an exciting and stressful proposition.  Working with manufacturers, lenders, attorneys and accountants all in the interest of getting past the closing table to run your new automotive retail venture.  Many of the hurdles of acquiring a dealership can be overcome, but one area that can create a significant amount of stress between buyer and seller is negotiation and interpretation of the asset purchase agreement (“APA”) which governs the sale of the dealership assets.

For those contemplating their first acquisition, the APA will typically highlight what will be purchased (e.g. inventories, fixed assets, goodwill etc.) and the method of valuation of each type of asset.  The interpretation of the “what is being sold and for how much” can put a dealership transaction at risk if left until the date of closing to be discussed between buyer and seller.  For example, an APA will typically include new vehicle inventory with a discount to the buyer for incentives.  The language of the APA is so sensitive to a single word that the difference between incentives “earned” vs. incentives “collected” can be hundreds of thousands of dollars.  In another example, new vehicle inventory is typically valued at cost plus the cost of accessories which have been added to the vehicle.  However, some dealers may practice an ambitious and uncustomary capitalization policy where the cost of advertising, repairs, washes, packs and other items are added to the cost of vehicles in stock.  As a buyer, would you reasonably expect to pay for these items as part of the vehicle? No.  If the “adds” are not specified as “hard adds” or tangible accessories which add value, buyer could end up paying significantly more than customary to purchase the inventory.

Add some stress relief to your buy/sell and take the time to have a second set of experienced eyes review your APA in detail.  The less risk of APA misinterpretation, the greater likelihood of a smooth closing.

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