Some Olds dealers in a bind, no complaints though in LV

Friday, Jan. 5, 2001 | 11:03 a.m.

SUN STAFF AND WIRE REPORTS

As General Motors begins the messy process of closing the door on the landmark Oldsmobile brand, some dealers are waiting anxiously to find out just how much value their franchises have lost.

"I really have only one buyer from this point on, General Motors," lamented Joe Myers, owner of Collins Oldsmobile in Indianapolis.

But in Las Vegas, the two Oldsmobile dealerships that serve the area say they're confident that their franchises will maintain value. The reason: They sell other car brands in addition to Olds and GM is offering incentives to get buyers in the stores, drumming up enough business now to mitigate some of the future damage.

On the surface, Myers has all the ingredients necessary to command a $1 million-plus price on the franchise. Collins Olds has eager salespeople, trained mechanics, a big showroom and garage, and a reputation as Indianpolis' largest Olds dealer.

What it doesn't have, though, is a reliable long-term supply of the very product it sells: Oldsmobiles. As a result, Myers can't give away a franchise that has been selling 1,000 new Oldsmobiles a year.

This month, GM announced Oldsmobile production will end by 2004. Once the company said it would stop making Oldsmobiles, the value of Myers' dealership plunged.

"GM said they'd give Oldsmobile three more years, but the reality is Oldsmobile went out of business when GM made the announcement," said Jim Bayson, partner in the Birmingham, Mich., accounting firm Plante & Moran, whose practice includes more than 200 auto dealers in the nation.

Now, Myers and the nation's 2,800 Olds dealers are getting ready for awkward negotiations with General Motors. Few, if any, dealers or investors would buy a franchise whose vehicle line is almost extinct.

But the story is different in Las Vegas.

"GM's decision came from a business standpoint and we have a good working relationship with them," said Sean Brady, director of fixed operations at Findlay Oldsmobile at the Valley Auto Mall in Henderson.

"Our confidence in them is very high here, there's no negative speculation, which may be the case in some smaller towns where they sell only one line of car.

"Right now, they're really pushing the brand to clear out the current inventory and are offering good rates, extending warranties and offering good rebates," Brady said. "And just because the name is going out of business, they're still GM cars and can be worked on in GM stores."

Brady said because Las Vegas is a growth market, the Oldsmobile dealerships in the area aren't under as much pressure as those in other locations. Besides, he said, the local dealerships also sell and service other car brands, including Suburu and Saab at Findlay and Isuzu, Mazda and Kia at the other local Oldsmobile dealer, Courtesy Oldsmobile, 5800 W. Sahara Ave.

"The decision hasn't affected us so far," said Joe DeCollibus, sales manager at Courtesy Oldsmobile. "Our sales have been about the best they've ever been because of the incentives the company is offering, including 0 percent financing, rebates and other sales incentives that are passed along to the consumer."

"Our experience with them is that whatever agreement is reached on Oldsmobile will be mutually beneficial to us and them," Brady added.

GM intends to replace the Olds franchises with another car line -- a process not as easy as it seems -- or compensate dealers for the loss of the Olds line.

Dealers are concerned the compensation offers, expected to start this year, will be low.

Some fear the figures will reflect more of the current market value rather than the better prices on franchises when Olds was a viable car line.

As a result, Oldsmobile insiders in Detroit predict a brace of lawsuits. In Michigan, dealers in the Flint area are considering pooling money to hire a lawyer.

There's probably going to be a lot of give-and-take with GM, and perhaps the offers will wind up in arbitration, predicted Ron Smith, chairman of the Indianapolis law firm Stewart & Irwin, attorney for the state's dealers association.

"What you're going to find is this is not an overnight situation," Smith said.

GM hasn't disclosed its technique for determining the value of Olds franchises. Meetings with groups of dealers have begun, and negotiations with individual dealers will begin in earnest in the next few weeks.

GM Vice President Darwin Clark, the former Oldsmobile division general manager and current head of dealer relations for the automaker, is in charge of the team handling the negotiations. GM has allocated an estimated $1 billion to $2 billion for the deals.

"We have a strategy in place of what we think is a fair way of handling the transition," said GM spokesman Tom Kowaleski in Detroit, who said it would be unfair to dealers to publicly disclose the compensation method.

Dealers assume the automaker will use the method long in place on the open market.

Franchises usually have changed hands at a price equal to one or two times earnings before taxes.

Dealers figure GM will take an average of the last three or four years to get the sales volume prior to the shutdown announcement.

Where the concern arises for dealers is with good will or "blue sky," which also comes into play when determining the price tag on a business. The terms generally reflect the dollar value of auto parts, working capital and the buildings, machinery and tools.

Because there is no value in a mechanics' bay without cars to work on, dealers such as Myers worry the blue-sky segment of the price will be substantially eroded, even if they have just put up a new garage or built a fancy seating area for customers.

What's more, many dealers use an accounting system that allows them to defer a portion of their income tax as long as the inventory of vehicles on the property remains at a high level. Once the inventory falls, the taxes are due.

If dealers could replace Olds with another car line, they could continue to defer the taxes and not have to worry about getting compensation from GM. But laws and contracts meant to protect dealers from predatory business practices can keep them from stocking another line of new vehicles on their lots.

Myers, for example, can't stock Cadillacs, Nissans or some other car line in his Olds showroom. One neighborhood can't have, say, two Caddy dealers under franchise laws that prohibit overlap on the basis that two like franchises in one area can't thrive.

Dealers suggest GM's Clark bring forth some innovative approaches, such as putting Hummer and Saab luxury franchises in former Olds showrooms and bringing in Buick, Cadillac or GMC trucks.

Ted Evanoff of the Indianapolis Star and the Sun's Richard N. Velotta contributed to this report.