Introduction
Franchise dealerships remain among the most capital-intensive businesses in the country. Rising interest rates, increased working capital requirements, facility upgrade mandates, and ongoing consolidation have made capital planning a central issue for dealer principals.
For dealership counsel, this environment raises new questions:
• What are the available alternatives to fund growth, succession, or liquidity needs?
• How do different capital structures affect governance, control, and estate planning?
• What are the legal and OEM approval implications of each approach?
This article provides an educational overview of the most common alternative capital sources available to dealers today, outlining how each works, why it is relevant, and what counsel should consider when advising clients.
Traditional Financing Options
Cash Reserves
Using cash on hand is the most straightforward form of capital. It avoids covenants, restrictions, and outside influence. However, it is the least capital-efficient strategy.
Bank or Captive Financing
Conventional financing through banks or captive finance companies remains central to dealership operations. These loans typically provide lower-cost capital and rely on established lending relationships. The tradeoff is that they are often capped by loan-to-value (LTV) limits and come with financial covenants. Lenders may restrict distributions, acquisitions, or facility decisions, creating a more constrained operating environment.
Alternative Sources of Capital
Sale-Leaseback Capital
A sale-leaseback (SLB) is one of the most effective tools for dealers seeking liquidity without giving up equity. Under this structure, the dealership sells its real estate to an investor and simultaneously leases it back under a long-term lease.
• Benefits: Can unlock 140%+ of real estate value (exceeding bank LTVs), boost ROE by redeploying capital into operations, and preserve operational control.
• Considerations for Counsel: Lease structure (term, rent escalations, assignment rights) and alignment with succession and buy-sell strategies.
Because SLBs are non-dilutive, they are particularly attractive for dealers who want to retain ownership and control while still unlocking significant capital.
Private Equity
Private equity (PE) has become increasingly active in the dealership industry. PE firms typically provide substantial equity capital in exchange for ownership stakes and governance rights.
• Benefits: Large capital infusions, access to sophisticated advisors, and institutional resources to drive growth.
• Considerations for Counsel: Requires selling equity, diluting family ownership, and ceding some decision-making authority. PE firms also often operate on defined investment timelines, which may not align with multi-generational dealership planning.
Minority or Family Office Investors
In contrast to PE, minority or family office investors typically take smaller, non-control positions. These investors may be more patient, focusing on long-term value rather than short-term returns.
• Benefits: Provides liquidity without a full sale; investors may bring strategic relationships and expertise.
• Considerations for Counsel: Governance and distribution rights must be negotiated carefully; potential for disputes down the line.
Mezzanine or Subordinated Debt
Mezzanine financing sits between senior debt and equity. It typically carries higher interest rates and may include warrants or conversion features.
• Benefits: Provides additional capital beyond traditional bank limits without diluting equity.
• Considerations for Counsel: Expensive compared to senior debt; repayment obligations can be more restrictive.
Key Considerations for Counsel
When evaluating alternative capital sources, counsel should focus on more than just cost. The implications often touch on long-term family and business strategy:
• Control: How much governance authority does the dealer family retain?
• Flexibility: Are there restrictions on distributions, acquisitions, or succession planning?
• Governance: Will partners require board seats, reporting rights, or veto powers?
• Tax Treatment: Does the structure align with estate, succession, or tax strategies?
• OEM Approval: Required for equity ownership changes, franchise transfers, or new facility obligations – but not for typical real estate sale-leaseback structures.
Conclusion
Alternative capital is no longer niche in the dealership industry. Whether through sale-leasebacks, private equity, minority investors, mezzanine financing, or OEM programs, dealers today have more tools than ever to create liquidity, fund growth, or manage succession.
For counsel, the central role is to help clients balance capital efficiency with governance and control, ensuring that financing decisions align not only with immediate liquidity needs but also with long-term family, ownership, and legacy objectives.
