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Right-Sizing the Business (Powersports)

July 27, 2009
Filed under Dealer Consultants

John SpaderMost powersports dealers have had a great run in the past 5-10 years. While business can’t ever really be called “easy,” it has, for the most part, been a friendly marketplace up until this year. This year with the mortgage crisis. Banks tightening. Stock markets dropping, etc. Not exactly ideal conditions for success in the powersports industry. As dealers face these tough situations, many for the first time, there seems to be two paths being taken.

  • 1. Some dealerships feel they are almost helpless to the markets’ ebbs and flows.
  • 2. Other dealerships are being very proactive and doing what they can to adjust with and/or ahead of the market.

No matter how good a manager and marketer a dealer is, there are times in today’s world when the market is going to force some tough adjustments on a business, especially those who handle discretionary big-ticket products like powersports.

Adjusting to Market Forces

As dealers tackle these market forces, there are three main areas of adjustment to address: A) financial B) organizational structure C) people/emotions.

•A) Financial – When looking at the financial statements, we see three main areas to be managed. These areas are all integrated and affect one another, but they are easier to manage if they can be separated and tackled one at a time.

  • 1. Profitability: A monthly profit and loss statement that is accurate and timely is critical. The key management objective monitored from this statement is the ability to forecast and adjust expenses as the sales and gross profits fluctuate.

Question to ask: Do you currently have monthly, quarterly and annual forecasts for sales, gross profit and expenses that you are using for good decision making and adjustment decisions?

  • 2. Proper Capitalization: While many dealers may feel the balance sheet is a mystery, there are some key numbers and issues to be monitored and managed on the balance sheet, such as warranty receivables, work in process, accounts payable and how much of the cash in the bank is really mine (vs. customer deposits, sales tax payable, other payables, etc.).

One very important number that often drives the mentality and decision-making of the owner and general management is the debt-to-equity ratio. Often, when the debt (what is owed to creditors outside the ownership group) to equity (the money the ownership has put into the business as well as the profits that were left in the business) ratio goes above 5:1 or 6:1, we see a significant change in the focus and energy of general management to primarily shorter-term cash flow management, versus thinking about and managing the business with an equal focus on short- and long term. When the debt-to-equity ratio climbs, we often hear statements like, “I know what would be best for the longer term, but this is what we are going to do now because we need to dump that inventory and/or make payroll next week.”

Question to ask: What is your current debt-to-equity ratio?

A debt-to-equity ratio of 5:1 or 6:1 and greater often means pressure on management, and not a lot of wiggle room or room for mistakes.

3:1 or less usually translates to a well-capitalized business; this is where we see many of the consistently highest-performing dealers position their business to allow for longer-term planning, as well as the ability to take a hit from the market and not cause crisis management.

  • 3. Ongoing Cash Flow: This issue can become complex when addressing all the details. Keep it simple with a single question: Is the business currently generating cash or consuming cash?

We have seen dealers with high profits who also had a large negative cash flow and had to borrow money to help fund the expense of their growth. We also have seen dealers whose profit and loss statements showed a loss, but who were generating more cash than they were losing through things like selling owned inventory or collecting on accounts receivables, etc.

Question to ask: Do you have a written monthly, quarterly, annual game plan for managing your cash flow through these tougher times and the slower seasons?

•B) Organizational Structure - Effective management of your organization simply means having the right people in place, with the right job descriptions for the sales volume level that your business is currently achieving. Many dealers we have seen who have grown successfully and are currently successful in adjusting their organizations to the tougher markets use what we call the Business Plateaus Model as a guide for growing or downsizing. The plateau model is made up of several key variables, such as sales volume, number of employees, number of layers of management, etc. As a guideline to help you follow the model’s basic principles, we will use the following single variable:

Each of these plateaus needs a different type of organizational structure to be highly effective.

Plateau

# of Employees

1

1-12

2

10-30

3

25-60

4

50+

Note that these ranges overlap. The other variables must be applied to more specifically identify a dealership’s current business plateau.

Here are some key insights to gain from using the Business Plateaus Model:

  • 1. You make the most money when you are positioned in the top of your plateau.
  • In the top of any plateau, net profit is usually 6-10 percent of sales. This is achieved through maximizing people, facilities, etc.
  • A dealership operating at the top of its plateau can potentially lose 25 percent-40 percent of its sales volume and still be profitable.

  • 2. If you are in the bottom of your plateau, you can do everything “right,” and still lose your shirt.
  • In the bottom of any plateau, net profit is usually negative (loss) up to a maximum of 2 percent of sales.

  • 3. In the middle of a plateau, most dealers keep 2 percent-4 percent of sales as net profit.
  • If a dealership is operating in the middle of its plateau and then loses 10 percent-20 percent of its sales volume, it will generally lose money.
  • 4. You should shrink the same way you grow:
  • A fast-growing business usually adds many people at a time, so, when shrinking fast, a business must lay off many at time (versus one or two at a time).
  • 5. Don’t fall into the trap of, “Because I have a larger facility, I have to keep it full of people and inventory.”
  • 6. Often, when a business needs to shrink a plateau, there may not be the resources available to continue to offer all the services and perks that were there at a higher plateau.

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  • 1. Growing from the top of one plateau into the middle of the next usually requires a 30 percent-50 percent increase in sales volume to cover the expenses of the extra infrastructure (people, facilities, inventory, etc.). If this volume increase is not achieved, the top line sales go up, but profitability as a percentage of sales drops significantly, and that can quickly destabilize the business if there is not a strong balance sheet.

Most dealerships that are in plateau 2, 3 or 4 who are losing money because they are in the bottom of their plateau have the option of reorganizing themselves into the top part of a lower plateau. If they put themselves into the right organizational structure, they can very quickly have a stable and profitable business. We have seen dealers who have grown from $5 million-$6 million up to $30-plus million and then reduced back down to below $7 million, remaining profitable all the way up and back down again, using these tools and concepts.

C) People/Emotions – At a recent 20 group meeting, I asked the group what they thought would be a good subject for my next article. “Right-sizing the business” was their answer and, when I asked them their thoughts on what was appropriate for the people/emotions section, they said, “Give us the three or four key things you believe we need to focus on in this area.” We all know it is one of our toughest jobs when we have to let people go. So, for the context of this article, we are going to focus mainly on the emotions and a few of the key principles important for the leaders of the organization to focus on for the rest of the organization.

The People Side of Right-Sizing Your Dealership

If you have to downsize your dealership:

  • 1. Create a clear plan that you believe in (for both the financial side and organizational structure) to back you up and give you confidence that you are doing the right things for the business and the people. The financial plan should be created for at least six months into the future, month by month.
  • 2. When deciding who to move forward with on the people side, here is a tip from my father that I have seen help hundreds of dealers:

Don’t think of this in terms of who am I going to fire or lay off. Instead, put it in this context in your head: Market forces larger than us have created a situation where we must adjust to survive. So, we are closing the dealership we currently have, and everyone is laid off. Tomorrow we are going to start a new, smaller dealership. Knowing what I know now, who will I hire back?

  • 3. It is OK to let the people know that this is a painful, emotional and gut-wrenching process for you as well. We have seen too many dealers who believed they were not supposed to show the employees their emotions. This makes the people believe you don’t care. Tell them the truth of what is happening, why you are making the changes, let them see your emotions and move on. (I realize this is easier said than done, but it is really what your employees want also.)

Thoughts on Right-Sizing

A couple of final thoughts from watching and helping large numbers of dealers go through a downsizing process in the last few months:

  • 1. No one said they did it too soon and most wish they would have done it sooner.
  • 2. Most said they did not realize how big the weight was on their minds and attitudes – and once they made the adjustments there was an instant refocus and new energy.
  • 3. Most said the employees may not have liked it, but they respected the decision, and most knew it was coming – it was just a matter of when.

One dealer who went from a Plateau 3, with 40-plus people, to a Plateau 2, with people in the mid 20s, in one adjustment shared with me, “I can’t believe how fast and dramatically it changed my attitude and energy level as well as the employees who were still with me. We went from losing money and having people standing around looking for things to keep them busy and talking about how bad things were, to (after the adjustment) making money. We were all busy, buried in work and the days once again started going fast for us. I know this attitude change in me and my people is what caused some of our margins to go up. We started getting some of the deals we were losing before because of our ‘new’ positive energy and attitude.”

Gen. Douglas MacArthur said it best: “We are not retreating. We are advancing in another direction!”

If you have a question or suggested topic for my next blog, please email us at articles@spader.com.

I wish you all the best in these trying times.

John Spader

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