Reinsurance company ownership helps dealers build personal wealth with tax-advantaged income. But performance can’t be measured in profits and cash flow alone. Properly selected and managed, the right reinsurance structure can benefit every aspect of your dealership enterprise and your personal net worth. The benefits are many, from F&I and fixed ops to succession planning and key manager retention.
We reviewed the first five of 10 common mistakes dealers make in the November issue of AutoSuccess. Here are the last five plus one for good measure.
6. Not Leveraging Reinsurance in Your Succession Planning
I often speak at 20 Groups and ask dealers about their succession plans — is their adult child or a partner prepared to buy them out of their business?
With valuations of dealerships so high, it’s often difficult to raise the working capital to buy one. The greater a dealership’s net worth becomes, the larger the estate tax issue a dealer is going to have.
Reinsurance companies accumulate a tremendous amount of cash and deferred profits. If your children want to buy the dealership in the future, consider forming one or more reinsurance companies in their names now.
The profit and cash flow from these companies will go to them, with an agreement and restrictions that they’re to use the money to buy stock in the dealership. This way, they get a stake in the success of the business — but not the business itself — and help raising the working capital they’ll need to buy you out when the time comes.
7. Not Leveraging Reinsurance as a Key Manager Retention Tool
If you run a good operation, your competition is going to try to steal your key employees. These people are the lifeblood of your business. They are incredibly hard to replace.
The innovative dealers I work with involve their GMs, GSMs, F&I directors and other key managers in reinsurance company ownership. This gives these key players an opportunity to share a small percentage of the reinsurance premium and profits and become part of something that’s going to build long-term wealth for them.
The dealer then has control over how much is deposited in the key manager’s company, which acts like a deferred compensation plan. Best of all, forming reinsurance companies for key managers makes it much harder for other dealers to poach them.
8. Not Understanding Tax Benefits and Strategies, and Not Involving Your CPA
Many dealers don’t know that the tax structure that makes reinsurance possible has been around for nearly 40 years. It was part of the Reagan administration’s Tax Reform Act of 1986. Like all taxpayers, dealers must report and pay taxes on their earnings. But reinsurance company ownership creates a significant advantage that can help reduce your total liability.
The deferral of taxes until the money is drawn out is one of the great benefits of reinsurance. A strong provider with a proven success track record will advise a dealer and recommend involving the dealer’s CPA and attorney throughout the entire process as well.
9. Not Comparing Providers on an Equal, Side-by-Side Basis
We find there are about 30 comparative questions that need to be asked of each potential provider, so you can have a thorough understanding of what they do and don’t do.
Consider, for example, who’s going to do the best job delivering F&I and compliance training, which providers offer the most sensible and liberal loan policy (if you need a working capital) and how much involvement you will have in claims.
When you lay these questions out on a side-by-side basis, it becomes fair to everybody. You end up knowing exactly what you’re paying for. That will help you make a good, articulate, analytical decision.
10. Choosing a Provider that Restricts Your Rights of Ownership
Too many dealers choose a provider that restricts your rights of ownership. If your provider doesn’t let you have involvement with high-dollar claims, doesn’t meet with you on a quarterly basis to look at trends and losses, doesn’t have innovative products, doesn’t allow you to choose the investment manager or manage the funds, or doesn’t allow you to borrow earned and unearned premium, you may have chosen the wrong provider.
Dealers should demand all of the above as well as transparency on fees, claims and reserves and useful, understandable reporting, counseling and consulting. In short, you need to know how the reinsurance structure works and how it’s going to work for you — now and well into the future.
Extra! 11. Mistake: Not Realizing the Substantial Amount of Net Profit, Cash and Working Capital a Reinsurance Platform Will Provide You and Your Family
When I was a dealer, I made this mistake because I did not understand how reinsurance worked. Only after I sold my dealerships did I realize the massive amount of money I left on the table.
Reinsurance company ownership will help you and your family build personal wealth outside the dealership. It’s your own financial asset, separate from your retail enterprise but fueled by its success. If you have yet to take advantage, you are giving your underwriting profits away.
Make reinsurance an urgent matter. Get into the right structure with the right provider right now, and avoid the mistakes that leave tax-advantaged income on the table.
To read part 1, click here.