BSM Attorneys have been busy fielding calls from dealers who have recently received letters from one of several manufacturers which purport to provide formal notice of default under their Dealer Agreements. The communications reference alleged poor sales performance and are typically based upon a comparison of the dealer’s sales to either a region or state average. However, there are inherent flaws in using blind reliance on averages to measure dealer performance. Not all dealers can be at or above average. A percentage of dealers will always fall below average.
All dealers who receive correspondence alleging inadequate performance in any aspect of their business operations should always respond to their manufacturer or distributor in writing. There are almost always unique circumstances in the dealer’s market which may not have been considered by the manufacturer. There may have also been errors in the calculation of performance. Some dealers simply do not have enough cars to meet sales objectives.
Notices of alleged poor sales performance should always be promptly addressed. A failure to hit sales objectives or meet minimum sales responsibility requirements set by the factory can make a dealer ineligible for incentive payments and could constitute good cause for termination of the dealer agreement. The dealer’s response should outline efforts to improve performance, articulate the reasons why the dealer is not in breach of the dealer agreement, highlight challenges in the market and offer proposed solutions. Every dealer’s situation is unique. The dealer should highlight any unique challenges it is facing.
Some dealers are not offered adequate inventory to meet minimum sales requirements. Other dealers may have an assigned market area that is too large and includes areas where there is no competitive advantage. Sometimes there are parts of a dealer’s assigned market that are too far away, blocked by natural barriers (such as a river or mountain), inconvenient due to road systems and traffic, are located in a geographic area where there is some form of bias (e.g., a rival town or county), or situated near a manufacturing plant for a competing line-make, etc. There may be a brand bias in your community. We also see model bias in some communities. For example, certain metro areas favor sports cars over pickup trucks. In other areas, sports cars might not be popular.
Dealers should look at vehicle registration reports to ascertain where it is selling its product. If there are areas where the dealership is selling very few cars and trucks, it is imperative that a determination be made as to why performance is suffering in those areas. If the reasons for poor performance are within the dealer’s control, a response should outline the steps the dealer intends to take to improve performance.
However, if the apparent cause of the poor performance is beyond the dealer’s control, the response letter should put the factory on notice of this fact and firmly invite the factory to provide substantive suggestions for increasing performance. Manufacturers and distributors will rarely, if ever, jump in to provide assistance. A failure to respond by the factory to this request can hurt any attempt by the manufacturer to terminate the dealer down the road. A request to change the dealer’s assigned market area is also appropriate in some instances.
All dealers who receive a notice of default, particularly if a cure period is referenced, should immediately speak with a knowledgeable dealer lawyer about crafting an appropriate response. Promptly refute the claims of poor performance and devise a business plan to maximize performance in the questioned aspects of dealership operations.
- Factory default notices are on the rise.
- Promptly respond in writing to all claims of poor performance.
- Immediately speak with your dealer lawyer if your manufacturer claims a breach of your dealer agreement.