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Measuring human capital in a buy-sell deal

  • July 10, 2017
  • Jamie LeReau
  • Automotive News

Employees, customers are as important as financials

About two years ago, dealer Rick Ford bought two dealerships that turned out to be his "worst performing acquisitions" due mostly to bad employees who had to be replaced.

It took Ford nearly 18 months to get the stores, in his words, "back to base level." Even now, they still fall short of their full potential, he said.

Ford, CEO of RFJ Auto Group in Plano, Texas, which owns 28 dealerships, learned a valuable lesson. "I would definitely pay to do an employee engagement survey in advance," he said. "There's that much value to it."

Buy-sell advisers and industry consultants agree that researching both employee and customer engagement ahead of making a purchase offer can be valuable — yet almost no one does it.

Sellers could potentially boost their store's value if they could prove that their employee and customer engagement is strong, experts say. Likewise, buyers, who often spend thousands to study the store's financials, are shortchanging themselves if they are not accounting for a store's human capital, too.

"It's a mistake if you don't know the relationships you're buying so that you can assign a value to them and know what to do with them once you own the business," said Jeff Tobaben, CEO of Evolve Performance Group, of Bryan, Texas, a consulting and training firm that conducts such evaluations.

In a buy-sell transaction, a dealership's human capital represents about 44 percent of the value of the assets, Tobaben said.

Tobaben's team surveyed 171 Acura dealerships. Those which ranked in the top 25 percent of having the highest employee engagement earned an additional $982 per vehicle sold vs. those with lower engagement, he said.

Further research showed that dealers able to raise their employee engagement by just a 10th of a point saw an 85 percent gain in their fixed operations' market share and 69 percent lift in new-car sales' market share, Tobaben said.

Happy employees lead to better customer service, which in turn helps to win loyal and engaged customers. Customers who are defined as "fully engaged" with the dealership are worth an average of 23 percent more in profits, Tobaben said. Meanwhile, the "actively disengaged customer" delivers a 13 percent reduction in profits, he added.

For those reasons, hiring his firm or another vendor to do a survey of employees and clients to measure engagement makes sound business sense, Tobaben said. The survey generally costs $10,000 to $15,000. Any training required typically costs about $20,000, he said.

A dealership's reputation and its employees' morale are important to many buyers, said buy-sell adviser Alan Haig, president of Haig Partners in Fort Lauderdale, Fla. But few dealers spend money to survey a target store's employees or customers before making a purchase offer, he said. Instead, they rely on local word-of-mouth, online reviews, pending litigation, customer satisfaction scores and the employee roster, which shows turnover and tenure rates, to get a sense of employee and customer engagement, he said.

In fact, some buyers prefer a fixer-upper and therefore seek an employee culture that needs repair, he said. "For some, a poor culture is an opportunity," said Haig. "That dealer thinks, 'I can bring in my processes and my people and improve the performance.'"

Of course, said Tobaben, even in that case a study will show that buyer "which dials to turn the minute they get in there. For example, they could have a highly engaged staff but bad management. Or maybe the problem is the pay plan."

Since 2010, Lithia Motors Inc. has made it a policy to at least do a leadership and employee survey after closing on any acquisition, said Chris Holzshu, Lithia's chief human resources officer.

In May, Lithia, of Medford, Ore., bought Baierl Auto Group in Pittsburgh. As part of the deal, Lithia spent a lot of time with leaders before the purchase closed to assess the group's employee culture to ensure continuity between the two organizations after it closed, Holzshu said.

"The people are 50 percent of the equation," Holzshu said. "That's part of our due diligence, spending time with the leadership of the store to get a feel for the culture that's been created."

Lithia's decentralized, entrepreneurial culture may not work for all people, he said. Holzshu recalled a time when Lithia was in talks with a dealership group "out East" and called off a deal after several visits with leaders indicated there would likely be a culture clash.

"We realized," he said, "we're just going to butt heads and waste a lot of time and energy on things that aren't going to bring value, excitement or a high-performance culture that we're looking to achieve."

If the buyer's and seller's cultures seem to mesh and the deal goes forward, then within 90 days of a closing Lithia conducts an employee and leadership survey focusing on "how that leader effectively engages employees to do their job better," Holzshu said. That's because employees might be fully engaged with the dealership, but not be productive, so Lithia is trying to "bring together a survey that combines high performance" with employee engagement, he said.

Dealer Rick Ford has not done employee or customer engagement surveys in any of his deals.

Instead, he said, he asks a lot of questions to the selling dealer, the broker, and looks at the employee roster for tenure dates. He also researches customer satisfaction scores, sales and market share.

But after buying two headaches, he is considering asking sellers to do an employee survey, which he'll fund, before closing a deal.

"The stores I've had the most success with are the ones that allow us to get involved in their stores and meet their employees once we have the purchase agreement signed so that the employees can meet us and know who we are," Ford said.

"It's made the transition better for the seller and for us."

 

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