Owning and operating an automotive dealership, or group, is a demanding yet rewarding business. However, one of the most critical and often neglected aspects of owning a dealership is succession planning. While many dealers focus on day-to-day operations, few take the necessary steps to ensure long-term success through structured, transitional strategies. Succession planning isn’t just about preparing for the future or identifying a “successor;” it’s about maximizing business performance today while setting a foundation for sustained growth and stability.

At some point, every dealer principal must address key questions about the future of their business:

  1. Should I plan for growth through acquisitions?
  2. Is my business operating at its full capacity, and potential?
  3. Do I capitalize on our success and exit?
  4. Do I consider transitioning ownership to family members?
  5. Should I transition the business through an employee stock ownership plan (ESOP)?

Tackling these questions requires more than casual contemplation – it demands a structured, strategic approach supported by expert guidance.

In the first three articles of this series, I addressed the first three questions. The growth commentary can be found here, while examining your business’ capacity can be found here. An analysis about capitalizing and exiting the business can be found here.

In this final installment, I will examine the advantages and challenges of passing the dealership to family or transferring ownership to management through an employee stock ownership plan (ESOP).

Additionally, I will discuss the role of estate planning in protecting family wealth and outline the essential elements for developing a comprehensive succession plan.

The strategic imperative of succession planning

As the principal of an automotive dealership who prefers not to sell the business outright, making a strategic and informed decision regarding handing over the reins is crucial for ensuring a smooth transition and the dealership’s continued success. To develop a strong succession strategy and determine viable options, consider the following key components:

  • Long-term vision: Establish clear objectives for the dealership’s future, whether that means maintaining family ownership, expanding, or preparing for a sale.
  • Leadership risk mitigation: Unplanned leadership changes can disrupt operations. A well-defined plan ensures key roles are filled with competent individuals, minimizing uncertainty.
  • Operational continuity: Maintaining business stability during ownership transitions is critical for customer retention and employee confidence.
  • Workplace culture development: Fostering a strong, engaged workforce enhances retention and business value, making the dealership more attractive to potential buyers or future leaders.
  • Enhancing business value: A proactive succession strategy boosts the dealership’s marketability, whether for internal transition or external sale.
  • Contingency planning: Unexpected leadership changes, economic shifts, or industry disruptions require contingency plans to ensure business continuity.

Is transferring ownership to family or management team members a viable option?

Many dealership owners instinctively look to pass the business to the next generation, ensuring continuity and preserving its legacy. Family successors often bring operational familiarity and strong customer relationships, easing the transition.

However, not all heirs are qualified or interested in leadership. Without an objective evaluation, operational challenges can arise, and nepotism may impact workplace morale. A fair and merit-based selection process is crucial for a smooth and successful transition.

Management succession: Leveraging internal talent

If a strong leadership team is in place, transitioning ownership to key managers may be a viable option. Internal successors understand operations, have industry expertise, and maintain key relationships with employees, customers, the OEM, and suppliers.

However, they may lack fresh perspectives, struggle with strategic vision, or resist necessary changes in an evolving market.

A hybrid approach: Combining family and professional leadership

A hybrid approach may be an option, allowing a qualified family member to take on a leadership role while leveraging experienced managers to oversee daily operations.

Offering equity to key management personnel can also help retain top talent and align their interests with the dealership’s long-term success.

Exploring an employee stock ownership plan (ESOP)

Another option for dealership succession is transitioning ownership through an employee stock ownership plan (ESOP), which is not commonly known and used. An ESOP structure allows employees to gradually acquire percentage ownership (from 10% to 100%), preserving continuity and rewarding staff loyalty.

Key considerations for ESOP implementation:

  • Financial feasibility and valuation: Determining an accurate dealership valuation is critical for structuring the ESOP. Financing options, including loans to fund the buyout, must be carefully planned to ensure sustainability.
  • Operational and cultural impact: ESOPs foster a sense of ownership, boosting employee motivation and productivity. However, proper education and communication are essential to align employees with business objectives.
  • Tax advantages: Dealer principals of closely held C corporations who wish to diversify their holdings may find the right opportunity in a Section 1042 exchange when selling business shares to an employee stock ownership plan (ESOP). ESOPs offer significant tax benefits, including potential deferrals for sellers and tax-deferred contributions for employees. Selling your closely held business to an ESOP can offer significant benefits not only to you, but also to your employees.
  • Leadership transition: Ensuring strong leadership continuity is crucial for ESOP success. Evaluating management’s readiness to take on increased responsibilities is essential.
  • Regulatory compliance: Establishing an ESOP and electing a Section 1042 exchange requires adherence to federal laws, including compliance with the Employee Retirement Income Security Act (ERISA). Legal and financial advisors should guide you through the process and outline the pros and cons to assess if this is a viable option based on your specific circumstances.

Estate planning should be prioritized

To fully weigh your options, taking all factors discussed above fully into account, your CPA and attorney, who specialize in estate planning, should be consulted as their knowledge and experience are critical to protect assets and minimize tax liabilities.

I asked Jim Barone, a partner with Ferruzzo & Ferruzzo, a law firm with offices in California and Texas, who has represented over 200 clients in the purchase and sale of dealerships, to provide some context:

“Whether you plan to sell, pass the business to family, or transition to management team through an employee stock ownership plan, estate planning must be a top priority. My goal is to inform and thereby empower the dealer by examining all the options that should be considered. Estate planning is more than just managing tax issues and deciding who gets what; it’s about creating a plan that safeguards your assets, respects your family dynamics and maintains discretion for your affairs.”

Succession planning and securing your dealership’s future

As illustrated, succession planning is complex. To maximize your dealership’s potential and ensure its long-term success, it is essential to work with your CPA, attorney, and an M&A firm. They can help develop a plan aligned with your strategic goals. The following outline highlights key elements to consider when creating that plan:

  1. Business valuation and financial planning
  • Conduct a professional valuation to determine the dealership’s fair market value.
  • Assess revenue, net profit, real estate holdings, franchise agreements, and goodwill.
  • Plan for liquidity to cover estate taxes and future financial needs.
  1. Ownership transfer strategy
  • Family succession: Evaluate heirs’ interest and capability to run the dealership. Identify and prepare a successor (family member, management team, or third-party buyer). Consider leadership training and transition plans for a seamless handover.
  • ESOP: Establish a structured employee ownership transition while preserving management continuity.
  • Third-party sale: Position the dealership for maximum value and negotiate favorable terms.
  1. Tax planning and wealth preservation
  • Minimize estate and capital gains taxes through trusts, gifting strategies, or structured buyouts.
  • Consider tax-efficient ways to transfer ownership, such as installment sales or grantor retained annuity trusts (GRATs).
  • Explore opportunities for tax deferral if reinvesting proceeds from a sale.
  1. Legal structuring and buy-sell agreements
  • Ensure the business structure (LLC, S-Corp, C-Corp) aligns with estate and succession goals.
  • Draft or update operating agreements to define ownership transfer terms in case of retirement, disability, or death. (Buy/Sell provisions)
  • Use life insurance or key person insurance to fund buyouts and protect business continuity.
  1. Trusts and estate distribution
  • Consider establishing revocable or irrevocable trusts to manage wealth distribution and minimize probate.
  • Evaluate generation-skipping trusts to secure assets for future generations.
  • Seek out charitable trusts if philanthropy is part of your estate plan.
  1. Insurance and risk management
  • Maintain key person insurance to protect against financial loss from leadership changes.
  • Ensure life insurance policies provide liquidity for estate taxes or ownership buyouts.
  • Review liability coverage to safeguard assets against potential legal claims.
  1. Compliance with manufacturer & franchise agreements
  • Review manufacturer agreements to understand transfer restrictions or approval processes.
  • Ensure compliance with state and federal regulations regarding ownership changes.
  • Confirm manufacturer and franchise agreements allow for the planned transition.
  1. Employee considerations and retirement plans
  • If transitioning ownership, communicate clearly with employees to maintain stability.
  • Evaluate employee benefits, pensions, or stock ownership plans in an ESOP scenario.
  1. Timeline and execution strategy
  • Set a clear succession timeline and involve financial and legal advisors early.
  • Regularly update the estate plan to reflect changes in business valuation, tax laws, or family circumstances.
  • Document and communicate plans to avoid disputes among heirs, partners, or employees.

Whether transitioning to family, internal management, or an ESOP, succession planning should be a top priority for every dealer principal. Viewing it through an estate planning lens, working with experts to develop and implement a strategic plan will help preserve the dealership’s legacy, value, and culture while ensuring a smooth transition and continued operational excellence.

George Pero is an accomplished leader in the automotive industry. George began his career in the automotive retail sector, where he held various management positions. George’s career achievements include successfully launching, operating, and selling Auctions In Motion (AIM), a regional mobile auction company that brings the auction to the dealer. George has extensive knowledge and expertise in mergers and acquisitions in the automotive sector, having overseen more than $1 billion in transactions. His sales and general management experience coupled with his success in M&A activities led George to establish Mach10 Automotive, a dealer advisory firm offering a suite of services to include dealer performance improvement, succession planning, and M&A.