Survival of the Fittest

To predict the future, you must understand the past, Michael LaMotta, founder and CEO of DOWC, shared during a presentation titled, “How to Survive Ongoing Industry Challenges: F&I Solutions to Save Your Dealers & Your Income.”

Awareness of prior challenges and how parties successfully overcame them will prepare the industry for the future, he says, comparing industry response in the Great Recession to action taken during the pandemic.

“In 2008-2009, we saw a shaken industry faced with banking, finance and insurance collapses,” he says. “We knew that would not end quickly. And we learned a lot.” 

LaMotta himself owned dealerships in 2008, with an international bank holding the floorplan financing. “Floorplans are demand notes and are due on demand,” he says. “We received a letter that said we had 60 days to pay off our note. We were not prepared.”

His company scrambled for 60 days to unearth funds to pay off its floorplan loan. They found a regional bank willing to advance the floorplan if they collateralized it with a large cash deposit. They then turned to their reinsurance portfolio to pull out as much money as possible. 

“We were told with all the industry was facing, they had amended their reinsurance agreements and treaties to increase the UPR requirement and introduce case reserves. We were unable to access our own money when we needed it most and that made it impossible to secure the new terms with a replacement floorplan provider. The result was we closed our doors,” he says.

When the pandemic began in the first quarter of 2020, LaMotta—though out of the dealership business by then—understandably braced for the worst, expecting a repeat performance to ripple across the industry. “The first quarter in 2020, when COVID-19 crippled the industry, we saw what I thought would become a complete repeat of 2009,” he says. 

Though some dealers were greatly impacted by the shutdowns, others, he says, came prepared with structures that let them access capital and cash to prevent furloughs and continue operations. “Any time there is economic disruption, there are victims and there are those who capitalize on these events,” he says. “F&I made a tremendous difference for dealers who were properly set up. They had options and remained resilient throughout these challenges because they had put a solid wealth-building plan in place and were able to successfully stay on that path.”

Still, the pandemic presented challenges to agents. Suggested social distancing and mask mandates limited face-to-face meetings and led to a “lack of visibility,” LaMotta says. “It’s difficult to do training and conduct lengthy meetings with a face mask on.”

But LaMotta also recognized an unseen benefit. E-commerce accelerated and became more streamlined. “Digital retailing will be almost required for dealers moving forward,” he says. “I estimate we are five to 10 years from digital retail being the primary way consumers purchase cars.” 

The drive toward digital, he says, will usher in regulatory changes and technology innovations to safeguard data online. In this climate, LaMotta stresses agencies must offer a true value proposition. In the past, agents delivered value through a focus on F&I performance, development, and building PVR and product penetrations. 

Though these efforts will continue, LaMotta says “there are new structures and admins emerging that offer dealerships new opportunities. They offer access to money, advances, earned and unearned premiums, preferential tax structures, etc. It is imperative that agents understand and stay on top of these trends, and put themselves in a position to be the ones offering fresh options.”

Become the Expert

Agents must evolve and provide solutions before someone else does, LaMotta stresses. 

“It’s critical that agents become subject matter experts who can consult and prepare dealers for the next ‘100-year-flood’,” he says. “The last thing an agent wants is for the competition to walk in and tell their dealer something he didn’t know or give him advice on structure or products.” 

This is a departure from the status quo. He explains, “Many agents set it and forget it. If it’s not broke, don’t fix it. Agents who embrace training and develop their dealerships will stand out from agents who operate business as usual.” A vital component to this, LaMotta notes, is having a solid understanding of F&I structure and participation options that allow dealers the ability to continuously build wealth.

Industry changes will force dealers to evolve, and agents can help with that. They can “make dealers aware of what’s happening in the marketplace and what’s competitive,” he says. 

He recommends agents remember dealers are in business to make money and to advise them on how to make money outside of  PVR and product sales. “They can do that through control and capital,” he says. “Most capitalized dealers choose challenging times to buy struggling stores. Dealers who had capital when I did not purchased my stores.”

Agents also need to change, he says. He explains agencies are consolidating at an explosive rate, forming much larger organizations with the infrastructure to innovate and the leadership to give dealers something new.

“Small agencies need to keep their ears open to what’s happening in the industry, what’s changing, and try to implement these changes,” he says. “They need to figure out how to evolve. If they don’t, they’ll be on the outside looking in.” 

Inventory levels will eventually return to normal, and dealers will revive a model based on return on sales created by F&I income and PVR. 

“We want to give dealers more options, not just because we know these events that shake our industry will reoccur, but because dependency on a fully functioning F&I department will become the focus again,” he says. “That’s not just the front end of F&I but the back end, the participation in their products and their ability to defer the tax implications that those products generate.” 

Access to Capital and Other Tips for Agents

Agents can help this effort by providing access to capital and investment choices. “Access to capital isn’t just for dealers who are broke … it’s quite the opposite,” LaMotta says. “Dealers with flourishing bank accounts got that way because they know how to use and invest money to make money.”

• Give greater control to dealers. Agents can give dealers control and options to invest funds or make investments as they see fit, “whether  those investments are made inside or outside their facilities, or are speculative in nature,” he says. “These dealers know how to run businesses and how to use money. Giving them control is something you’re going to hear more about.” 
• Deliver timely market information. Too often, agents regurgitate explanations they heard from someone else. “We challenge agents to become subject matter experts, not just repeat what they heard but to understand it,” he says. “Provide the opportunity to execute and make recommendations and become a wealth consultant to dealers.” 
• Pay attention to state regulations. Some administrators take a 50-state approach while others maintain a more nuanced approach. Understanding regulations state by state helps admins and agents tailor their structure and products to states where their dealers are located.
• Understand insurance concerns. Third parties like F&I Sentinel work with lenders and often dictate business requirements and insurance concerns. A number of lenders added are utilizing the Sentinel program to date. “It’s changing our products and affecting our structures,” LaMotta says. “The best admins have figured out how to be compliant without deviating from their value proposition.” He adds, “Those are the admins you want to focus on. They continue to allow access to capital and investment options. They continue to give dealers control.”
• Know the tax consequences. The two most popular structures are reinsurance and DOWC structures. There are more similarities than differences. “They both file the same tax return: the 1120PC. They both potentially make an 831(b) election, they just do it at different times,” he says. “Both structures are great and serve their purpose. Knowing which one is best for your dealer is an art and a science. You need to know when to employ each option.”
• Focus on products and technology. The best agents can provide an unlimited array of products, LaMotta says. “Make sure these products are available to your dealers in a participation style. If you don’t, the door is open for your competition,” he says. 

Remember, dealers will need more technology as time goes on. Agents must push the agenda with admins to software that experience reports, claims dashboards, remit dashboards, and the ability to sort, filter and from a tablet or phone. “Arming with the tools they need to stay relevant is key to their success and yours,” he says.

LaMotta concludes, “This economy will recover. COVID will go away. But we will see this happen again. Make sure your dealers are prepared for it. Educating yourself, and in turn educating your clients to guide their resilience and prosperity, is the key.”