How to Maximize Profit as a Car Dealership, with Max Zanan, MZ Dealer Services and Author of the Perfect Dealership Series (How To Sell a Business Podcast, Episode 11)
Max Zanan, owner of MZ Dealer Services and author of Perfect Dealership, a four book series dedicated to helping car dealership owners adapt and thrive in their business, joined host Ed Mysogland. They discussed the industry as a whole, how dealers make their money, where the profit actually is, why dealerships are not likely to stay in the owner’s family, the role of the service department, how to keep qualified employees or train them, why buying a car takes so long, and much more.
How To Sell a Business Podcast is produced and broadcast by the North Fulton Studio of Business RadioX® in Atlanta.
MZ Dealer Services
Max Zanan is an automotive industry leader offering a comprehensive automotive consulting service for car dealers nationwide. His goal is to improve customer experience and retention while increasing dealership’s profits.
Contact Max today to build a better dealership including automotive compliance, F&I optimization, sales strategy, and more. He welcomes phone calls at 917-903-0312.
Perfect Dealership Books by Max Zanan
Remember travel agencies? They were a thriving business not so long ago. Then online services transformed the industry, and brick-and-mortar travel agencies died—and died quickly.
Today, traditional car dealerships are facing much the same threat. Innovative and convenient digital startups and services threaten to disrupt the traditional car-sale process, egged on by consumers who aren’t happy with the existing sales process. If car dealerships don’t adapt, they too will face an industry-wide extinction.
Perfect Dealership offers help and hope for dealerships struggling to adapt to this digital-based paradigm shift. Consultant Max Zanan applies fifteen years of automotive-industry experience to the future of the car dealership. Arguing that dealerships must make significant changes if they are to survive the coming storm, Zanan takes a close look at every department within the business, including
- human resources,
- business development centers,
- information technology,
- parts and service, and
- finance and insurance.
By improving the role of each department and transforming them from individual echelons into a cohesive whole, Zanan offers a road map for the creation of a perfect dealership—the only way to remain relevant and solvent in the digital age.
Find all of Max’s books here: Perfect Dealership
Max Zanan, Owner, MZ Dealer Services, and Author of the Perfect Dealership Series
Max Zanan is the author of four best-selling books on automotive retail management: Perfect Dealership, Car Business 101, The Art and Science of Running a Car Dealership, and Effective Car Dealer. Each book is a top-ranked Amazon category leader and have received many 5-star reviews from prominent car dealership owners and managers. Max’s success as an author, general manager and entrepreneur has helped to cement his position as a preeminent voice leading the charge for modernization of the auto retail industry.
Max Zanan is a seasoned automotive industry expert with 20 years of experience in sales, F&I, compliance, and dealership management consulting. His goal is to help car dealers improve profitability while increasing customer satisfaction and retention. Zanan is a thought leader, organizer of the Perfect Dealership Conference, keynote speaker, and frequently quoted in trade publications such as Automotive News, Fixed Ops Journal, and Auto Dealer Today.
Ed Mysogland, Host of How To Sell a Business Podcast
The How To Sell a Business Podcast combines 30 years of exit planning, valuation, and exit execution working with business owners. Ed Mysogland has a mission and vision to help business owners understand the value of their business and what makes it salable. Most of the small business owner’s net worth is locked in the company; to unlock it, a business owner has to sell it. Unfortunately, the odds are against business owners that they won’t be able to sell their companies because they don’t know what creates a saleable asset.
Ed interviews battle-tested experts who help business owners prepare, build, preserve, and one-day transfer value with the sale of the business for maximum value.
How To Sell a Business Podcast is produced virtually from the North Fulton studio of Business RadioX® in Alpharetta. The show can be found on all the major podcast apps and a full archive can be found here.
Ed is the Managing Partner of Indiana Business Advisors. He guides the development of the organization, its knowledge strategy, and the IBA initiative, which is to continue to be Indiana’s premier business brokerage by bringing investment-banker-caliber of transactional advisory services to small and mid-sized businesses. Over the last 29 years, Ed has been appraising and providing pre-sale consulting services for small and medium-size privately-held businesses as part of the brokerage process. He has worked with entrepreneurs of every pedigree and offers a unique insight into consulting with them toward a successful outcome.
Connect with Ed: LinkedIn | Twitter | Facebook
TRANSCRIPT
Intro: [00:00:00] Business owners likely will have only one shot to sell a business. Most don’t understand what drives value and how buyers look at a business. Until now. Welcome to the How to Sell a Business podcast where every week we talk to the subject matter experts, advisors and those around the deal table about how to sell at maximum value. Every business will go to sell one day. It’s only a matter of when. We’re glad you’re here. The podcast starts now.
Ed Mysogland: [00:00:36] On today’s show, I get the opportunity to interview Max Zanan. Max is the author of four bestselling books on automotive retail management, and they’re entitled Perfect Dealership, Car Business 101, The Art and Science of Running a Car Dealership, and Effective Car Dealer. Each book — and I did this in my — reviewed them in my research for this interview. Each book has plenty of stars right next to it. So each book is a top-rated Amazon category leader and certainly has received many five-star reviews from prominent dealership owners and managers.
Max’s success as an author, general manager, and entrepreneur has helped position himself as the premier preeminent voice of leading the charge for modernization of the auto retail industry. He has 20 years of experience in sales, compliance, dealer management, consulting. And everywhere I looked, his name kept popping up. So I hope you enjoy my conversation with Max Zanan.
I’m your host, Ed Mysogland. And on this podcast, I interview buyers, sellers, dealmakers and other professional advisors on what creates value in a business and then how that business can be effectively sold at a premium value. So as I — in the introduction, you heard me talk about Max. And Max Zanan of MZ Dealer Services is literally the authority on automobile dealerships. I looked high and low for my research, during my research, and he is just that guy. And so I’m so grateful to introduce to you Max Zanan. So welcome to the show.
Max Zanan: [00:02:34] I mean, Ed, thank you for this wonderful introduction and the opportunity to be part of your podcast.
Ed Mysogland: [00:02:41] Well, I’ll tell you, I’ve been looking forward to this because it’s a different animal. And like I said in my research and all the things that, all the different pieces that go into making a successful dealership, there’s a lot going on there. But before we get into my questions, can you talk a little bit about MZ Sealer Services?
Max Zanan: [00:03:07] So MZ Dealer Services is me. There’s nobody else.
Ed Mysogland: [00:03:12] That’s the MZ part.
Max Zanan: [00:03:14] Right. There’s nobody else. Meaning literally, I do not even have an assistant.
Ed Mysogland: [00:03:19] Okay.
Max Zanan: [00:03:20] And my job is to help dealers make money. And it sounds easy, but car business is so complicated and complex that there’s a reason why a lot of dealers do not make money. So again, there are different ways where you can make money. And I tried to bring all the options to the table, so the dealer doesn’t become a one trick pony. They can maximize profit opportunities in every single department because oftentimes, dealers make a mistake, and they obsess over the sales department, right, because they’re convinced that you can sell your way out of any trouble.
But when you buy a dealership, a franchised dealership, you’re not just getting a new car department. You’re getting a used car department. You’re getting a service department. You’re getting parts department. Sometimes you get in the body shop. So unless you’re maximizing every single opportunity that you paid for, you’re literally leaving money on the table.
Ed Mysogland: [00:04:37] Yeah. Some of the research that I had found was that you look at each of those respective divisions as almost their own business within a larger business and each has their own various attributes that contribute to value. One of the things that — you know, I’ve been appraising companies for 30 years or so. And the funny thing is that everybody says business valuation, it’s both an art and science. And the funny thing was in the research, I saw the same thing about what you do. So can you talk a little bit about the art and science of what you do?
Max Zanan: [00:05:16] So the science is easy, right? Because there are certain KPIs. Right, whether it’s profit per car, number of line items on the repair order, number of hours worked per repair order, stuff like that. But the art part is the hard part, right, because you’re right, sometimes and actually most of the times, each department operates in a silo. To a degree, where there’s zero communication with other departments. And the art is actually to bring them all together and make sure that they work towards a common goal. Because the common goal is to sell cars and then to service cars and then to sell cars again. So if the sales department and the service department are in silos, you will never get that full circle.
Ed Mysogland: [00:06:20] I get it. So is it a people issue? For the art part, is it a people issue? Is it a technology issue or is it an all of the above issue?
Max Zanan: [00:06:36] You know, it’s all of the above, plus lack of professional training issue. So the problem that we have is that I don’t think you’ll ever run into a Harvard MBA at a car dealership. Car dealers fail to attract talent the way Wall Street does.
Ed Mysogland: [00:06:58] So why is that?
Max Zanan: [00:06:59] Or the way Silicon Valley does.
Ed Mysogland: [00:07:00] Yeah. Why is that?
Max Zanan: [00:07:02] Well, because people think of car dealers — you know, car dealers have a terrible reputation, right, up there with Congressman. Right?
Ed Mysogland: [00:07:10] Right.
Max Zanan: [00:07:13] So, when there is this stigma attached to the industry, nobody is growing up saying that Ed, I can’t wait to grow up and get into car sales. But let’s say Wall Street doesn’t have that stigma and you do have kids finishing school, going to college with a goal of getting into Wall Street. Whether as a trader, as a broker, as an analyst, they just want to be part of that institution.
Ed Mysogland: [00:07:47] I get it. Well, the funny thing you would think, like, isn’t it John Elway? Doesn’t he own like a portfolio of —
Max Zanan: [00:08:00] Everybody wants to be a car dealer. John Elway, you know, Mark Wahlberg. You know, everybody. I mean, Warren Buffett.
Ed Mysogland: [00:08:09] Sure. That’s what I’m getting at. So you would think that with that kind of notoriety, that it would garner attention for more people to get into it, but it doesn’t seem to be the case. Maybe it’s a best kept secret in entrepreneurship.
Max Zanan: [00:08:27] Maybe, but it works against the dealer, right, because you cannot attract talented people.
Ed Mysogland: [00:08:34] I see.
Max Zanan: [00:08:35] You don’t even get an opportunity, right? You literally get the bottom of the barrel.
Ed Mysogland: [00:08:41] So how do you offset that? I mean, yeah, that’s a big problem.
Max Zanan: [00:08:45] The only way to offset it is to grow your own talent internally.
Ed Mysogland: [00:08:49] Okay. And then that begs, how do you keep them? How do you keep them from going to the — is it all economics or is there something else that keeps the tech, keeps whoever there?
Max Zanan: [00:09:03] There is definitely something else because it’s not just money. Right. It’s the organizational culture.
Ed Mysogland: [00:09:10] Okay.
Max Zanan: [00:09:11] So, and again, I think a lot of dealerships fail at that. You know, for example, if you talk about organizational culture, the best example I can give you is probably Zappos.
Ed Mysogland: [00:09:25] Okay. Oh, sure. The shoe company. All right.
Max Zanan: [00:09:27] That’s right. I mean, there’s a reason why Amazon paid billion dollars for a shoe company. Right. It was the culture.
Ed Mysogland: [00:09:35] I see.
Max Zanan: [00:09:36] And it’s that culture that keeps the people, you know, allows you to retain talent and attract talent so you can be the highest paying dealer on the block. But if the organizational culture is terrible, people will go elsewhere and work for less money and be happy.
Ed Mysogland: [00:09:57] Yeah. Yeah. And certainly — and I’ve got a question that I found. This is a statement from CDK Global. I don’t know who CDK Global is, but it said that, and I’ll just read it. So it says, CDK said that there are a lot of assumptions made about Gen Z loosely defined as individuals born between 1997 and 2012, the need for instant gratification from simple online purchase experience to real time social media engagement. However, when it comes to buying a vehicle, CDK discovered that Gen Z seems to be more thoughtful and spend more time weighing decisions while the experience of buying new and used cars, of buying a newer used car more frustrating than any other generation. With Gen Z, the most interested in understanding all of their options. So that was 81 percent compared to Millennials of 73 percent, Gen X of 60 percent, and Baby Boomers 45 percent. The need for education, both online and from knowledgeable representative at the dealership proves to be critical according to the study.
So that, my point to you is it’s exactly what you were saying regarding employees and the people that are representing the dealership that the expectation of those that are now buying it has to be a better experience. And those people have to be able to have the education and communication. Right or no?
Max Zanan: [00:11:35] You know, to me, the most frustrating part about the statement is the fact that CDK Global made it. Right. I don’t think they have any place to make that statement because CDK Global makes an operating system that dealers use.
Ed Mysogland: [00:11:52] Well, then that makes sense.
Max Zanan: [00:11:54] So I don’t know how much CDK Global knows about car buying, car selling or the demographics of buyers. But to be honest with you, this is what they say about every generation. I mean, if you look back, I mean, they were saying the same thing about Millennials, that Millennials are different. I’m a Generation X, right, the best generation.
Ed Mysogland: [00:12:13] Yeah, it is.
Max Zanan: [00:12:15] Yeah. And everybody was saying, oh, my God, you know, Millennials, everything’s going to change. They will not be buying cars. They will be using rideshare. They’ll be Uber, this, lifting that. But at the end of the day, this is what happens in the real world. You become an adult, regardless of your generation. And as an adult, you know what happens? You move to suburbs. You know what happens in suburbs? You can’t live there with Uber. You need a car. You become an adult, you get married. You become an adult, you have kids. Right. You can use rideshare if you got to take your kid to the soccer practice. Right. So at the end of the day, you become like the generation before you and you buy cars exactly the same way as the generation before you.
Ed Mysogland: [00:13:08] And it’s such a great point. And you’re exactly right. And I didn’t think of it until you said it. But the same thing, the same concerns that I have put in my kids in cars and such are the same ones certainly my parents had, and your parents had.
Max Zanan: [00:13:25] That’s it.
Ed Mysogland: [00:13:27] So, as you know, I mean earnings drive business value. In reviewing the comments about all four of your books, it was a repeated theme that your tips led to increased profitability. Do you have any favorites that you could share without selling out?
Max Zanan: [00:13:50] Listen, the beauty of this business is there’s nothing I can trademark.
Ed Mysogland: [00:13:57] I get you.
Max Zanan: [00:13:57] The secret sauce is really understanding how every part of the business operates. And I’ll give you the easiest example. For example, when you buy a car, at the end of the transaction, you’re going to go into the office where they’re going to try to sell you an extended warranty or gap insurance or tire and wheel protection. And this is the true profit center for any car dealership. That’s the finance department. So you can make money selling this product. And that’s what probably 99 percent of car dealers do. But you can probably double your profits as a dealer if you reinsure these products.
By reinsuring, I mean you open your own insurance company. And you buy a contractual liability insurance policy for each policy that you sell from the insurance company. So that’s why it’s called reinsurance. A real insurance company is reinsuring your business. And then if the premium dollars that you pay to your own insurance company exceed the claims dollars that you pay out, you will enjoy underwriting profit like any other insurance company. And the crazy part is that the underwriting profit is not taxed. That’s the beauty of insurance business as opposed to car business.
Ed Mysogland: [00:15:35] I get it. Okay.
Max Zanan: [00:15:37] So think about it. You can have, if you reserve properly for each policy that you sell, and you control your claims because you recondition your used cars before you sell them, you make sure you do the right thing by the customer. That underwriting profit is definitely there to be had. On top of it, this money, they don’t sit dormant, right? There is investment income that grows on these dollars. That’s how insurance companies make money.
Ed Mysogland: [00:16:13] Sure, sure. No, I get it.
Max Zanan: [00:16:15] And the investment income is subject to tax. But again, at capital gains rate, not an ordinary income rate. So it’s a phenomenal, phenomenal opportunity for any car dealer to build an asset outside of the dealership.
Ed Mysogland: [00:16:33] Got it.
Max Zanan: [00:16:33] Not be dependent on the factory and build generational wealth. And unfortunately, a lot of these dealers do not do it.
Ed Mysogland: [00:16:44] No, I mean, I can totally see that the synergy between the businesses that support the dealership are where the profit is, which literally blows the next question right out of the water, but I’m still going to ask it. So I’m told that in valuing a dealership, it’s made up of four components, the market value of the parts inventory, the market value of the equipment, the market value of the real estate, and then a multiple on the goodwill. Is that a fair assumption?
Max Zanan: [00:17:25] So think of it this way. You can ignore parts inventory and inventory because it just comes with the building, right? You can buy a dealership and say, you know what Ed, I’m only going to take the dealership, but you keep the parts. It doesn’t work like that, right? Yes, you can definitely put a dollar amount on the parts inventory. But at the end of the day, you still have to buy it. You can say, well, you take the parts inventory with you, I’m going to start fresh. Just doesn’t work like that.
Same thing with cars. If you’re selling, let’s say Nissan dealership to me and you have brand new Nissans on the lot. I mean, I can tell you Ed, I’m going to buy the dealership on the parts department, but you keep the cars, right? It just doesn’t work. We’re going to have to work out a number, how much I’m willing to pay for these cars, but the real crux of the issue is the blue sky. Blue sky is the value of the franchise. And the value of the franchise is something that market dictates. It’s not dictated by the dealer.
Ed Mysogland: [00:18:35] Really? So where does the market get its multiple or factor to apply to the goodwill?
Max Zanan: [00:18:46] Well, you see most corporations in America report their earnings on a quarterly basis. Of course, car dealers are different, they report every month. So this information is public. And every manufacturer, so let’s say you are a Nissan dealer or you are a Chevy dealer, doesn’t matter. When the month is over, let’s say January is over, within the first week of February, your factory expects a complete financial statement electronically sent to them. They know the profitability of –.
Ed Mysogland: [00:19:29] Of the franchise.
Max Zanan: [00:19:30] Exactly. So I think that’s how the –.
Ed Mysogland: [00:19:34] Really?
Max Zanan: [00:19:35] Gets established. But then again, listen, a lot of it is common sense. For example, I’m sure there are more KIA dealers than Porsche dealers.
Ed Mysogland: [00:19:45] Sure.
Max Zanan: [00:19:46] And you sell more KIAs, but you make less money per KIA sold as opposed to Porsche, right. You sell a few of those, but you make a lot more per car sold. And then let’s say, usually the high line brands have a higher multiple. Porsche being the highest multiple. Last time I checked, Porsche was selling for 11 multiple.
Ed Mysogland: [00:20:13] 11 times what?
Max Zanan: [00:20:15] Earnings.
Ed Mysogland: [00:20:16] Okay.
Max Zanan: [00:20:17] But these are crazy earnings.
Ed Mysogland: [00:20:19] Sure, sure. No, I get.
Max Zanan: [00:20:20] Because you see what happens with the high line dealership, whether it’s Porsche or Mercedes, not only that you get to make money selling the car, right, because it’s a desirable product and people are willing to pay for the service and the car. But let’s assume for a second that you bought that Porsche, you’re not going to Jiffy Lube for an oil change. You’re not.
Ed Mysogland: [00:20:44] Yeah, I know. You’re right.
Max Zanan: [00:20:46] So that service retention is almost guaranteed as opposed to you buying a Toyota Corolla. You can easily go to Jiffy Lube. Easily.
Ed Mysogland: [00:20:58] You’re right.
Max Zanan: [00:20:59] So that service retention is basically guaranteed and the amount of money that you are charged in a service department. I think Mercedes, Porsche dealerships right now are over $200 an hour for labor. I mean these are almost like doctors.
Ed Mysogland: [00:21:23] Right. No, no, you’re right. You’re exactly right. Oh, man. So you said, so there’s, let’s just say the Porsche dealership, you have an 11 multiple on earnings. Is that all in? Like you were talking about like the reinsurance company, is that all dumped in? All right.
Max Zanan: [00:21:46] No, reinsurance company is out. It’s almost like an off of balance sheet.
Ed Mysogland: [00:21:52] Okay. So they’ll bring their own, if they want to do it, they’ll do it themselves. But that’s independent of the value of the dealership.
Max Zanan: [00:22:01] Exactly. So basically, your net profit, right, that you generated in sales, service, and parts.
Ed Mysogland: [00:22:10] I got it. So around here, there was a recent article about — and here in Indianapolis, we’re seeing some dealerships turning over. And these were family dealerships, and it doesn’t seem — the article was basically that the next generation, or I shouldn’t say that, the selling generation did not want to invest in modernization in order to make it more marketable. So then a different dealer from a neighboring town comes in and now they have a presence in Indianapolis. So are you seeing that the generation, I guess the generation before us, that’s trying to transition would rather sell than modernize?
Max Zanan: [00:23:13] So, I’m not sure because the way it works is that their brand standards that are dictated, let’s say, by Mercedes or Nissan or Toyota and they say Ed, if you are a Toyota dealer, your showroom has to look this way. That’s why they look the same regardless of whether you’re in Indianapolis or New York. And you have to spend your hardearned money to do that. It’s not open to negotiation. These brand standards are real, and I think generation is really irrelevant, right? Because whether it’s the older generation or younger generation, you just have to do what the factory tells you to do in terms of the brand standards. I think the generation that’s older than us, the baby boomers that are selling, I think they’re selling for one reason and one reason only. They’re selling because their kids are not interested in going into the business.
Ed Mysogland: [00:24:16] But why? They must have seen mom and dad print money. I mean, especially those that have been around for 20, 30 years.
Max Zanan: [00:24:25] So, unfortunately, you know, car dealers, probably like many other business owners, they don’t tell their kids to go into the same business. Right. They tell them, go become a doctor, go and become a lawyer. You know, do whatever makes you happy, and they do. Right. And they become high school teachers making $40,000 a year because mom and dad are gazillionaires, and subsidize their lifestyle.
Ed Mysogland: [00:24:58] No. You know what? That’s a great point and disappointing. But at the same time, it is what is. So you see industry consolidation more so than transfer from Gen one to Gen two. Fair statement?
Max Zanan: [00:25:19] You know, car business is extremely fragmented. I don’t think there’s another business like that because if you look you know, I mean, look at, let’s say, Internet search business, right? It’s Google or nothing. Right? Social media, it’s Facebook, Instagram, Twitter and Snapchat. There are 18,000 franchised dealers in America. The largest auto group publicly traded, it’s called AutoNation. They have 330 dealerships, out of 18,000.
Ed Mysogland: [00:25:57] Yeah. No, no. I see where you’re going.
Max Zanan: [00:25:59] So it’s super fragmented. So when we talk about consolidation, you know, even if it consolidates another 10 percent, it still be super fragmented.
Ed Mysogland: [00:26:08] Yeah. No, that’s a great point. Like I said, in communities like ours, it seems as though one family starts buying out another family. Like it seems in our community, it’s Tom Wood. It’s now, I’m trying to think of who’s buying them out but, Andy Moore. You know, he just continues to expand his market share, I guess. And it doesn’t seem — and that leads me to my next question. I mean, are individual buyers candidates for getting into this business or do you really have to, is the pedigree you really better have a real clear understanding of what you’re getting into because all the moving parts in this business is something unlike anything you’ve been accustomed to?
Max Zanan: [00:27:01] So listen, there’s this failsafe mechanism built into the buy sell process. For example, you would like to buy a Toyota dealership. Toyota will never approve you even if you have the money, because you don’t have the experience, because the factory is not interested in having dealerships failed because it’s a bad reflection on the name.
Ed Mysogland: [00:27:28] I got it.
Max Zanan: [00:27:29] So it’s not like, well, let me just have some money and become a car dealer. There’s a very thorough approval process. And if you don’t have the experience, you would have to bring in an executive manager that would probably end up being your partner.
Ed Mysogland: [00:27:47] I got it. Yeah, that’s fascinating. While I understand, like franchises, not necessarily automobile franchises, I do understand the rigors of going through the approval process. But again, I follow what you’re saying that it needs, you know, you need to have —
Max Zanan: [00:28:08] I think the difference between a Dunkin Donuts franchise and a Nissan franchise is that you and I can become Dunkin Donuts franchisees, but we will have to attend the Dunkin Donuts University.
Ed Mysogland: [00:28:21] All right.
Max Zanan: [00:28:23] It doesn’t work like that in car business. You can buy the franchise and then go to school provided by the manufacturer.
Ed Mysogland: [00:28:32] I got it. So the book you wrote during COVID. So in the book Effective Car Dealer: Selling Cars, Parts, and Labor After COVID-19, you talk about these are the silos, the sales, finance, financial and insurance compliance, service and parts. So what — and you alluded to this earlier, but I wanted to scratch the itch a little bit more on what area makes the biggest contribution to making the business saleable. I’m assuming it’s service, but I may be wrong.
Max Zanan: [00:29:12] SoSo there’s a huge problem in car business. And the problem is this, 97 percent of owners, partners, general managers all came up through sales.
Ed Mysogland: [00:29:27] Okay.
Max Zanan: [00:29:28] They don’t understand parts and service. So since 97 percent of your owners or future owners came up through sales, to them, sales department is it. So all they want to know is how many cars you sell, how much money per car you make. They don’t really understand KPIs that are in parts and service.
Ed Mysogland: [00:29:56] Got it.
Max Zanan: [00:29:57] And yes, you’re right. You know, parts and services are extremely profitable. For example, markup on labor in a car dealership is 75 percent. Markup on parts is 50 percent. You can never get these margins selling cars, ever.
Ed Mysogland: [00:30:17] Yeah. No, I get it, which leads me to my next question. So you mentioned KPIs a couple of times. So what are the leading indicators for a car dealer or are there tripwires that an owner needs to be aware of?
Max Zanan: [00:30:39] So to me, a huge indicator is service absorption. So service absorption means that the gross profit generated from parts and service covers all of your fixed expenses. For the entire operation, not just for parts and service.
Ed Mysogland: [00:31:00] Oh, okay. That’s a telling one.
Max Zanan: [00:31:03] Right. And so, for example, if your service absorption is 100 percent, that means you cover 100 percent of your fixed expenses through parts and service. Most dealers are nowhere near 100 percent. They’re below it. But there are some dealers that are above because you can be above 100 percent. You can be 110, 120 if you are a superstar. And what that tells me, if you are 100 or above, is that it doesn’t cost anything to sell cars. Right. It doesn’t cost anything. Meaning you can actually give cars away to grab market share because all of your expenses are covered, fixed expenses by parts and service.
Ed Mysogland: [00:31:52] Got it. So as the previous generation, we touched on this, and I guess I wanted to go back on how do you size up the next leader in the business? Like, for example, say the owner is going to just ride it out. I’m going to hold on to this, you know, and I’m going to leave involuntarily. They’re going to take me out in a box. So how does — I mean, are there certain attributes that you can see in dealer leadership? Like this is a man or woman that has, you know, this is the pedigree that I’m looking for that will preserve my investment?
Max Zanan: [00:32:48] You know, I wish it was that easy.
Ed Mysogland: [00:32:50] Me too.
Max Zanan: [00:32:53] So what usually ends up happening is that you have to grow your own talent. You have to invest into education. And this education is very, very limited. It’s not like you can go to school and major in dealership management. It’s not really an option. So you have to find information elsewhere. And there are good resources out there. There’s National Association Dealer — Association of Automotive Dealers, NADA. They have a university where you can enroll your employees. And it’s not cheap, but it’s worth every dollar.
And then usually a State Dealer Association would have some other courses available to its local dealer body. And again, you have to take advantage of it because these courses are available. But if you actually go there, you will see that the attendance is really, really poor. Because, you know, car dealers, as I mentioned before, they have to report every 30 days. So they live in a 30-day cycle, which really is counterproductive. It prevents you from building a long-term strategy, building a vision.
Ed Mysogland: [00:34:21] Because of the expectations to the franchise itself. So they’re not able to — they are expected to have a certain level of profit. Right or?
Max Zanan: [00:34:33] Well, it’s either profit — it’s not in profit, but let’s say if you are a Chevy dealer, right, the factory will say, well, in the month of February, we expect you to sell this many cars. So it becomes a rat race.
Ed Mysogland: [00:34:51] So does it — when does it trigger, I don’t want to say a default, but when do you — I mean, how many missed 30-day cycles can you —
Max Zanan: [00:35:04] Many. Many
Ed Mysogland: [00:35:05] Okay. So I can say, look, you know, I’m sending my best guys to this university to get educated. But as a consequence to doing that, it’s a good long-term play, but short term, I’m going to take it on the chin because I’m sending these guys to get educated. That fair statement?
Max Zanan: [00:35:28] Yeah. But again, this is a dealership specific education. They’re not going to NADA University to learn sociology and psychology.
Ed Mysogland: [00:35:37] All right. So how do you handcuff those people that you’re investing in?
Max Zanan: [00:35:43] So I think there’s a saying, like when the CEO is speaking to the CFO. And the CFO says, you know, we’re spending all this money training people, what if they leave? And the CEO says, what if we go then they stay?
Ed Mysogland: [00:36:01] I get it. That makes sense. Have you seen any noble ways to keep people? I mean, I know originally you were talking a little bit about culture, and you can go back to it. But how do I keep my best people?
Max Zanan: [00:36:20] So the hardest people to find right now are technicians. So as the dealer principal, you have to be really creative and come up with ways to keep them.
Ed Mysogland: [00:36:34] And you were saying it’s not all economic.
Max Zanan: [00:36:37] It’s not. Exactly. So, for example, what I learned is that every technician is addicted to buying tools. That’s their livelihood. They buy tools. This is what they spend their money on. Because as cars become more and more complicated, you need more and more sophisticated tools to work on these cars.
Ed Mysogland: [00:37:00] Well, it’s funny you say that, because in — so I’ve got a fellow that is coming on the podcast that specializes in the sale of automobile repair businesses. And one of the things in that research was that the technicians bring their own tools. Is that the same in dealerships or no?
Max Zanan: [00:37:28] Yes. So there’s certain special tools that are extremely expensive and they’re owned by the dealership. But your day-to-day wrenches, et cetera, are owned by technicians. So basically when you hire a technician, he shows up with his toolbox and then he keeps spending money to put more tools in his toolbox. So one of the most innovative ways, I think, to retain a technician is to go and help them buy tools.
Ed Mysogland: [00:38:02] Nice. No, that’s a great, you know, here’s X number of dollars per month for you to keep your toolbox up to date and find —
Max Zanan: [00:38:13] Another way, which is very effective, is to really come up with a formula and say for each year of service, it doesn’t matter if you’re a technician or you work in accounting and you’re selling cars for each year of service, there’ll be a bonus of X amount of dollars. So listen, if Ed is at XYZ Toyota for 15 years, right. And the bonus is $1,000 per year, you collect $15,000 around Christmas, which I think is worth it for the dealer and definitely is worth it for you. Because even if you were to get another job, you would start at zero, right?
Ed Mysogland: [00:38:58] Right. A hundred percent. Yeah. That’s a great idea. Okay. So I’ve got a couple more questions if you got some time.
Max Zanan: [00:39:10] Sure.
Ed Mysogland: [00:39:11] So, my first question is, where is the puck going in this industry? I mean, it seems as though — you know, it’s a volatile time, but yet maybe not.
Max Zanan: [00:39:24] This is a really controversial topic because as you know, this business operates based on franchise laws and we are living in the environment where every manufacturer wants to be like Tesla. And Tesla operates outside of franchise laws.
Ed Mysogland: [00:39:54] Really? How so?
Max Zanan: [00:39:55] Tesla sells direct. Tesla was able to [inaudible]. So Tesla sells direct to consumer. And now basically what happens in every boardroom, whether it’s Ford, GM, you know, there are two factions in every boardroom. There are old dogs that understand that you cannot sell cars in the United States without dealers. And then there’s another fraction that says, but wait, look at Tesla. And then they keep pointing at Tesla’s valuations. And Tesla is valued more than every manufacturer combined on planet earth. That’s a stock valuation.
Ed Mysogland: [00:40:40] Sure, sure. I get it.
Max Zanan: [00:40:41] Right. So these factories, again, whether it’s Ford or GM, they’re trying to come up with creative ways of how to cut out a dealer and sell direct to consumer. And that’s the real danger that I see. So to answer your question, where the puck is going, hopefully these manufacturers will understand that our franchise model is more than 100 years old. It has been proven and battle tested. And it’s really, really good for the consumer.
Whereas the direct-to-consumer model is extremely complicated in the sense that the manufacturer doesn’t have expertise selling cars, they have expertise making cars. So, for example, if you want to sell direct to consumer, most consumers have trade ins. Right. Who’s going to put a dollar amount on the trade in? In the car dealership, we have a used car manager for that. But if you’re doing this as direct-to-consumer online, you know, it becomes problematic.
Ed Mysogland: [00:42:02] And this is also the collapse of Carvana. Is that how that fell apart or no?
Max Zanan: [00:42:10] Well, Carvana fell apart because the math doesn’t work. You know, math is math.
Ed Mysogland: [00:42:17] Right.
Max Zanan: [00:42:17] Right. So let’s say, you know, just to use round numbers, let’s say every used car that you sell, let’s say you make $1500 on the sale of the vehicle in a dealership. And then there’s other profit by selling warranties, you know, and stuff like that. But let’s say you didn’t sell anything in that office, you only sold the car and you made $1500 dollars. It’s a very respectable number, but that’s assuming that you have a local customer. They took the car and they drove home. Let’s say Carvana made the same $1500 dollars, but they had to ship the car to Alaska.
Ed Mysogland: [00:43:00] Oh, sure. That makes sense.
Max Zanan: [00:43:03] You know, your $1500 is gone.
Ed Mysogland: [00:43:06] Yeah, I get it. I guess then the car buying experience is always brutal and everybody wants to know why it takes four hours to buy a car. I mean is that designed to car buying fatigue and I mean —
Max Zanan: [00:43:34] You know, I’ll be honest with you, it only takes four hours because of the consumer.
Ed Mysogland: [00:43:41] Oh, really?
Max Zanan: [00:43:42] Right. Because they come in not knowing what they want. All the things that you read about them doing research, all that research is gone by the time they walk into the showroom. And they’re like, “Well, I’m looking for an SUV”. Two row, three row. They start choosing the model, go on in the test drive, you know, and then let’s say the wife says, I hate it.
Ed Mysogland: [00:44:12] I get it.
Max Zanan: [00:44:13] Okay. So we start the process all over again. So let’s say, for example, you walk into a Jeep dealership, right, and you want to buy an SUV. Jeep makes SUVs of every size, right? There’s a tiny one. There’s a Cherokee. There’s a Grand Cherokee. There’s a Grand Cherokee longer version. And then there’s a Grand Wagoneer, which is like a school bus. And now, the consumer has to make a decision. And that decision making process is extremely long.
Ed Mysogland: [00:44:46] Sure. But once they’ve established price, it seems as though, the meter starts all over again waiting for financing and waiting for the opportunity to go through that process.
Max Zanan: [00:44:58] You see, this is not so clear cut because, yes, if you walk into a dealership and we pick the car for you and we settled on the price, and you don’t have a trade in, and you have excellent credit, that financing process is instantaneous, right? You are easy to get approved on. But usually, most people have a trade in, right. So now it’s the reverse because when you have a trade in, you are selling the car to the dealer.
Ed Mysogland: [00:45:31] Sure. I get it.
Max Zanan: [00:45:32] So now you negotiate on the trade in. And then what if you have some blemishes on your credit? And maybe you were hoping to get that low APR, but you don’t qualify. So the dealer has to find a different bank. And that takes time. And then you go into that office to sign the paperwork and the finance manager has to go through his presentation and present to you every protection product that’s available for sale, because you will then turn around and sue the dealership if this product wasn’t presented.
Ed Mysogland: [00:46:10] I get it. Okay. So it really isn’t a vehicle to, you know — I mean, certainly there’s some upselling that goes on, but it’s not a tactic to wear you down so you buy more.
Max Zanan: [00:46:29] It is not. And I think every dealer would want to speed up the process.
Ed Mysogland: [00:46:34] Sure.
Max Zanan: [00:46:37] If it takes me to sell a car and the process is four hours and I’m the salesperson, I cannot take another customer for the next four hours while I’m selling the car to you.
Ed Mysogland: [00:46:46] Sure. That’s what I would have thought. I get it. So at the conclusion of every podcast, I’ve always asked everyone I’ve interviewed, what is the single best piece of advice that you could give our listeners that would have the most impact on their dealership? What would that be?
Max Zanan: [00:47:08] Make sure that all of the departments in your car dealership are operating and working towards a common goal. And you have to define that common goal. And it has to be very, very specific because you can’t say our common goal is to sell cars. Right. It’s a little too vague because every dealer’s goal is to sell cars. Yet to me, the dealer, his goal was not to sell cars.
Ed Mysogland: [00:47:35] I see.
Max Zanan: [00:47:36] Right. So you have to say, well, my goal is to sell cars because, and what is the value proposition that you are bringing in your sales department? And then after, let’s say I bought a new car from you, what is the value proposition that you bring in in your service department? Because I could have had an amazing experience buying a car. And then I come for service and experience is terrible. I will never be back to buy another client, that dealership, unfortunately. Even though the sales experience was phenomenal. That’s how interconnected these silos are.
Ed Mysogland: [00:48:19] I get it. So it’s funny you say that because I, for my youngest daughter, she has a little Hyundai Santa Fe. And I took it in for a recall. And it came out and here was four pages long of all the recommended things that we do. And I mean it was like five grand of stuff. And it was like, yeah, I felt I was getting squeezed and what do you do? And so my point to you is you’re right, it left a real bad taste in my mouth that I’m not really certain — I’m all for you making money, I’m just not all for you making money only off of me. It just — there was a lot to what they gave me. And when I vetted it out, I was getting jammed. I mean, that’s the long and the short of it.
And so yeah, but back to your original comment when we first got started, you know, the reputation of the industry is a tough one to overcome. And again, it’s things like that that cause it. So I’m with you. But to your point, the good dealerships will always sell. Those that have the value proposition that have the synergy between the silos, I’m a hundred percent with you that those are the ones that you’re looking for, and those are the ones that will get the premium, you know?
Max Zanan: [00:50:08] Yeah, exactly. And the other piece of advice that I can give, it’s a tough pill to swallow. I encourage every dealership owner to mystery shop his own business. And you can really have a heart attack doing it.
Ed Mysogland: [00:50:32] Yeah, that makes sense. So what’s the best way that listeners can find you, other than all you have to do is put Max in Google and you got the first few pages? So what’s the best way we can do that?
Max Zanan: [00:50:50] I mean, listen, as I told you before, you know, I am a one man show. And the best way to get in touch with me is just call me. I actually answer the phone. There’s no answering service. There’s no secretary. I know how to use a phone. So I actually, like, hold back.
Ed Mysogland: [00:51:10] Got it. So you kick it old school. That’s –.
Max Zanan: [00:51:13] Yeah. Yeah.
Ed Mysogland: [00:51:14] Well, I will have everything we talked about as well as a link to your website and everywhere that you can find Max. Including, if you’re all right, I’ll have your phone number in the show notes. So, Max, you a hundred percent lived up to the hype I was hoping you would. It was awesome. I so enjoyed our time together.
Max Zanan: [00:51:42] Thank you. Thank you.
Ed Mysogland: [00:51:43] So thanks so much for being on.
Outro: [00:51:46] Thank you for joining us today on How To Sell Your Business podcast. If you want more episodes packed with strategies to help sell your business for the maximum value, visit howtosellabusinesspodcast.com for tips and best practices to make your exit life changing. Better yet, subscribe now so you never miss future episodes. This program is copyrighted by Myso Inc. All rights reserved.
