Finance and Insurance - The Profit Center
I would like to make myself clear on a few items of interest before I get too deep into the sales processes at any dealership, including: automobile, recreational vehicles, boats, motorcycle, and even furniture or other big ticket items. A business has to turn a fair profit in order to stay in business. I believe that they should make this profit and use it to pay better quality employees a premium wage in order to serve you better. The financial strengths or weaknesses of any business can definitely have a dramatic effect on your customer service and satisfaction. I do not, in any shape or form, wish to hurt a dealerships profitability, as it is essential for his survival. I merely want to advise people how to negotiate a little better in order to make the profit center more balanced.
Let's get right down to this! Every dealership has a finance and insurance department. This department is a huge profit center in any dealership. In some cases, it earns more money than the sale of the automobile itself. Profits are made from many things that most buyers do not understand.
You as a consumer should understand the "flow" of the sales process to understand the profit centers that are ahead of you. Most negotiating from the consumer seems to stop after the original price is negotiated and agreed upon. Let's examine just a small portion of what leads up to that point.
The first thing that every consumer should understand is that when you go to a dealership several things come into play. One of the most important things that I could point out to you is that you are dealing with a business that has been trained to get the most amount of money from you as they can. They are trained and they practice these tactics everyday, day after day, week after week, month after month, and year after year. Let me point out a couple of important facts that I have said in this paragraph. First, you'll notice that I said a dealership and not a salesman and secondly, I emphasized times of day after day, week after week, etc. etc. This was done to let you know that the salesman is working very closely with the sales managers in order to make as much money as he can. Your interests are really not their objective in most cases.
One tactic that is used heavily in the business is that the salesman says he is new to the business. This may be true or not, however; keep in mind that he does not work alone. He is working with store management, who gives him advice on what to say and when to say it. These guys or gals are very well trained on how to overcome every objection that you may have to buying from them. They have been trained in the psychology of the buyer and how to tell what your "hot buttons" are. They listen to things in your conversation that you may say to one another as well as to the salesman. They are trained to tell their desk managers everything that you say and then the desk manager is trained to tell the salesman exactly what and how to answer you. A seasoned salesman does not need as much advice from his desk and may negotiate a little more with you directly without going back and forth.
The process of negotiation begins the moment that you walk into the front door or step foot out of your car and begin to look at vehicles. Different stores display inventory in different ways. This is done for crowd control or more commonly known as "up control". Control is the first step in negotiating with a customer. Ever who asks the questions controls the situation. Let me give you an example: A salesman walks up to you and says "Welcome to ABC motors, my name is Joe, and what is yours?" The salesman has just asked the first question- you answer "My name is George." He then asks you what you are looking for today, or; the famous "Can I help You?" As you can see, step after step, question after question, he leads you down a path that he is trained to do.
Many times a well trained salesperson will not answer your questions directly. In some cases, they only respond to questions with other questions in order to avert the loss of control. An example of this could be something like you asking the salesman if he has this same car with an automatic rather than a stick shift. Two responses could come back to you. One would be yes or no, the other could very well be something along the lines of: 'don't you know how to drive a stick shift?" In the second response the salesman gained more information from you in order to close you. Closing means to overcome every objection and give your customer no way out other than where do I sign. The art of selling truly is a science of well scripted roll playing and rehearsal.
We have established that the negotiating process begins with a series of questions. These questions serve as two main elements of the sales process. First and foremost is to establish rapport and control. The more information that you are willing to share with you salesman in the first few minutes gives him a greater control of the sales process. He has gathered mental notes on our ability to purchase such as whether you have a trade in or not, if you have a down payment, how much can you afford, are you the only decision maker (is there a spouse?), how is your credit, or do you have a payoff on your trade in? These are one of many pieces of information that they collect immediately. Secondly, this information is used to begin a conversation with store management about who the salesman is with, what are they looking for, and what is their ability to purchase. Generally, a sales manager then directs the sales process from his seat in the "tower". A seat that generally overlooks the sales floor or the sales lot. He is kind of like a conductor of an orchestra, seeing all, and hearing all.
I cannot describe the entire sales process with you as this varies from dealer to dealer, however; the basic principals of the sale do not vary too much. Most dealerships get started after a demo or test drive. Usually a salesman gets a sheet of paper out that is called a four square. The four square is normally used to find the customer's "hot points". The four corners of the sheet have the following items addressed, not necessarily in this order. Number one is sales price, number two is trade value, number three is down payment, and number four is monthly payments. The idea here is to reduce three out of the four items and focus on YOUR hot button. Every person settles in on something different. The idea for the salesman is to get you to focus and commit to one or two of the hot buttons without even addressing the other two or three items. When you do settle in on one of the items on the four square, the process of closing you becomes much easier.
One thing to keep in mind is that all four items are usually negotiable and are usually submitted to you the first time in a manner as to maximize the profit that the dealer earns on the deal. Usually the MSRP is listed unless there is a sales price that is advertised (in may cases the vehicle is advertised, but; you are not aware). The trade value is usually first submitted to you as wholesale value. Most dealers request 25-33% down payment. Most monthly payments are inflated using maximum rate. What this all boils down to is that the price is usually always negotiable, the trade in is definitely negotiable, the down payment may be what you choose, and the monthly payment and interest rates are most certainly negotiable. If you do your homework prior to a dealership visit you can go into the negotiation process better armed. You still need to keep two things in mind through this process. The first item is that you are dealing with a sales TEAM that is usually highly skilled and money motivated. The more you pay the more they earn. The second item to remember is that you may have done your homework and think that you are getting a great deal and the dealer is still making a lot of money. The latter part of this statement goes back to the fact that it is essential for a dealer to make a "fair" profit in order to serve you better.
Once your negotiations are somewhat settled, you are then taken to the business or finance department to finalize your paperwork. Keep in mind that this too is another negotiating process. In fact, the finance manager is usually one of the top trained sales associates that definitely knows all the ins and outs of maximizing the dealerships profit. It is in the finance department that many dealers actually earn more than they earned by selling the car, boat, RV, or other large ticket item to you. We will break these profit centers down for you and enlighten you as to how the process usually works. Remember that finance people are more often than not a superior skilled negotiator that is still representing the dealership. It may seem that he or she has your best interests at heart, but; they are still profit centered.
The real problem with finance departments are that the average consumer has just put his or her guard down. They have just negotiated hard for what is assumed to be a good deal. They have taken this deal at full faced value and assume that all negotiations are done. The average consumer doesn't even have an understanding of finances or how the finance department functions. The average consumer nearly "lays down" for anything that the finance manager says. The interest rate is one of the largest profit centers in the finance department. For example, the dealership buys the interest rate from the bank the same way that he buys the car from the manufacturer. He may only have to pay 6% to the bank for a $25,000 loan. He can then charge you 8% for that same $25,000. The dealer is paid on the difference. If this is a five year loan that amount could very well be $2,000. So the dealer makes an additional $2,000 profit on the sale when the bank funds the loan. This is called a rate spread or "reserves". In mortgages, this is disclosed at time of closing on the HUD-1 statement as Yield Spread Premium. This may also be disclosed on the Good Faith Estimate or GFE. You can see why it becomes important to understand bank rates and financing.
Many finance managers use a menu to sell aftermarket products to you. This process is very similar to the four square process that I discussed in the beginning. There are usually items like gap insurance, extended service contracts, paint and fabric guard, as well as many other after market products available from this dealer. The menu again is usually stacked up to be presented to the consumer in a way that the dealer maximizes his profitability if you take the best plan available. The presentation is usually given in a manner in which the dealer wins no matter what options are chosen. With the additional items being pitched to you at closing, your mind becomes less entrenched on the rates and terms and your focus then turns to the after market products. Each aftermarket item can very well make the dealer up to 300-400% over what he pays for these items. Gap coverage for example may cost the dealer $195.00 and is sold to the consumer for $895.00. The $700.00 is pure profit to the dealer and is very rarely negotiated down during this process. The service contract may only cost a dealer $650.00 and is being sold for $2000.00. The difference in these items are pure profit to the dealer. You see, if you only paid $995.00 for the same contract, the dealer still earns $345.00 profit from you and you still have the same coverage that you would have had if you had paid the $2000.00. The same is true for the gap coverage. You are covered the same if you paid $395.00 or $895.00 if the dealers costs are only $195.00. The only difference is the amount of profit that you paid to the dealer. Another huge profit center is paint and fabric protector. In most cases the costs to apply the product are minimal (around $125.00 on average). In many cases the dealer charges you $1200-$1800 for this paint and fabric guard.
As you can see, these products sold in the finance department are huge profit centers and are negotiable. I also have to recommend the value of most all products sold in a finance department. It is in your best interest to get the best coverage possible at the best price possible. Always remember this: The dealer has to make a fair profit to stay in business. It just doesn't have to be all out of your pocket.
5 Kisah Benar Seram Serata Dunia Yang Difilemkan
Revenue-Based Financing for Technology Companies With No Hard Assets
WHAT IS REVENUE-BASED FINANCING?
Revenue-based financing (RBF), also known as royalty-based financing, is a unique form of financing provided by RBF investors to small- to mid-sized businesses in exchange for an agreed-upon percentage of a business' gross revenues.
The capital provider receives monthly payments until his invested capital is repaid, along with a multiple of that invested capital.
Investment funds that provide this unique form of financing are known as RBF funds.
TERMINOLOGY
- The monthly payments are referred to as royalty payments.
- The percentage of revenue paid by the business to the capital provider is referred to as the royalty rate.
- The multiple of invested capital that is paid by the business to the capital provider is referred to as a cap.
CASE STUDY
Most RBF capital providers seek a 20% to 25% return on their investment.
Let's use a very simple example: If a business receives $1M from an RBF capital provider, the business is expected to repay $200,000 to $250,000 per year to the capital provider. That amounts to about $17,000 to $21,000 paid per month by the business to the investor.
As such, the capital provider expects to receive the invested capital back within 4 to 5 years.
WHAT IS THE ROYALTY RATE?
Each capital provider determines its own expected royalty rate. In our simple example above, we can work backwards to determine the rate.
Let's assume that the business produces $5M in gross revenues per year. As indicated above, they received $1M from the capital provider. They are paying $200,000 back to the investor each year.
The royalty rate in this example is $200,000/$5M = 4%
VARIABLE ROYALTY RATE
The royalty payments are proportional to the top line of the business. Everything else being equal, the higher the revenues that the business generates, the higher the monthly royalty payments the business makes to the capital provider.
Traditional debt consists of fixed payments. Therefore, the RBF scenario seems unfair. In a way, the business owners are being punished for their hard work and success in growing the business.
In order to remedy this problem, most royalty financing agreements incorporate a variable royalty rate schedule. In this way, the higher the revenues, the lower the royalty rate applied.
The exact sliding scale schedule is negotiated between the parties involved and clearly outlined in the term sheet and contract.
HOW DOES A BUSINESS EXIT THE REVENUE-BASED FINANCING ARRANGEMENT?
Every business, especially technology businesses, that grow very quickly will eventually outgrow their need for this form of financing.
As the business balance sheet and income statement become stronger, the business will move up the financing ladder and attract the attention of more traditional financing solution providers. The business may become eligible for traditional debt at cheaper interest rates.
As such, every revenue-based financing agreement outlines how a business can buy-down or buy-out the capital provider.
Buy-Down Option:
The business owner always has an option to buy down a portion of the royalty agreement. The specific terms for a buy-down option vary for each transaction.
Generally, the capital provider expects to receive a certain specific percentage (or multiple) of its invested capital before the buy-down option can be exercised by the business owner.
The business owner can exercise the option by making a single payment or multiple lump-sum payments to the capital provider. The payment buys down a certain percentage of the royalty agreement. The invested capital and monthly royalty payments will then be reduced by a proportional percentage.
Buy-Out Option:
In some cases, the business may decide it wants to buy out and extinguish the entire royalty financing agreement.
This often occurs when the business is being sold and the acquirer chooses not to continue the financing arrangement. Or when the business has become strong enough to access cheaper sources of financing and wants to restructure itself financially.
In this scenario, the business has the option to buy out the entire royalty agreement for a predetermined multiple of the aggregate invested capital. This multiple is commonly referred to as a cap. The specific terms for a buy-out option vary for each transaction.
USE OF FUNDS
There are generally no restrictions on how RBF capital can be used by a business. Unlike in a traditional debt arrangement, there are little to no restrictive debt covenants on how the business can use the funds.
The capital provider allows the business managers to use the funds as they see fit to grow the business.
Acquisition financing:
Many technology businesses use RBF funds to acquire other businesses in order to ramp up their growth. RBF capital providers encourage this form of growth because it increases the revenues that their royalty rate can be applied to.
As the business grows by acquisition, the RBF fund receives higher royalty payments and therefore benefits from the growth. As such, RBF funding can be a great source of acquisition financing for a technology company.
BENEFITS OF REVENUE-BASED FINANCING TO TECHNOLOGY COMPANIES
No assets, No personal guarantees, No traditional debt:
Technology businesses are unique in that they rarely have traditional hard assets like real estate, machinery, or equipment. Technology companies are driven by intellectual capital and intellectual property.
These intangible IP assets are difficult to value. As such, traditional lenders give them little to no value. This makes it extremely difficult for small- to mid-sized technology companies to access traditional financing.
Revenue-based financing does not require a business to collateralize the financing with any assets. No personal guarantees are required of the business owners. In a traditional bank loan, the bank often requires personal guarantees from the owners, and pursues the owners' personal assets in the event of a default.
RBF capital provider's interests are aligned with the business owner:
Technology businesses can scale up faster than traditional businesses. As such, revenues can ramp up quickly, which enables the business to pay down the royalty quickly. On the other hand, a poor product brought to market can destroy the business revenues just as quickly.
A traditional creditor such as a bank receives fixed debt payments from a business debtor regardless of whether the business grows or shrinks. During lean times, the business makes the exact same debt payments to the bank.
An RBF capital provider's interests are aligned with the business owner. If the business revenues decrease, the RBF capital provider receives less money. If the business revenues increase, the capital provider receives more money.
As such, the RBF provider wants the business revenues to grow quickly so it can share in the upside. All parties benefit from the revenue growth in the business.
High Gross Margins:
Most technology businesses generate higher gross margins than traditional businesses. These higher margins make RBF affordable for technology businesses in many different sectors.
RBF funds seek businesses with high margins that can comfortably afford the monthly royalty payments.
No equity, No board seats, No loss of control:
The capital provider shares in the success of the business but does not receive any equity in the business. As such, the cost of capital in an RBF arrangement is cheaper in financial & operational terms than a comparable equity investment.
RBF capital providers have no interest in being involved in the management of the business. The extent of their active involvement is reviewing monthly revenue reports received from the business management team in order to apply the appropriate RBF royalty rate.
A traditional equity investor expects to have a strong voice in how the business is managed. He expects a board seat and some level of control.
A traditional equity investor expects to receive a significantly higher multiple of his invested capital when the business is sold. This is because he takes higher risk as he rarely receives any financial compensation until the business is sold.
Cost of Capital:
The RBF capital provider receives payments each month. It does not need the business to be sold in order to earn a return. This means that the RBF capital provider can afford to accept lower returns. This is why it is cheaper than traditional equity.
On the other hand, RBF is riskier than traditional debt. A bank receives fixed monthly payments regardless of the financials of the business. The RBF capital provider can lose his entire investment if the company fails.
On the balance sheet, RBF sits between a bank loan and equity. As such, RBF is generally more expensive than traditional debt financing, but cheaper than traditional equity.
Funds can be received in 30 to 60 days:
Unlike traditional debt or equity investments, RBF does not require months of due diligence or complex valuations.
As such, the turnaround time between delivering a term sheet for financing to the business owner and the funds disbursed to the business can be as little as 30 to 60 days.
Businesses that need money immediately can benefit from this quick turnaround time.