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.
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Financing a Franchise
So you want to buy a franchise. If you have all of the capital needed to make the purchase with some leftover to run the business then you do not have a problem.
The potential owner with the desire to own a franchise, but is short of money is the person this article is directed too. They have the motivation, but they do not have the needed capital to pull off the purchase. There are several ways to solve this problem assuming the potential owner is of good character and has a solid credit rating.
Franchises have been known to assist in the financing as they are always looking for people who can run the business well, but are in need of some start up money. They have sources that they deal with all of the time and this helps as they have a track record of success with picking good owners. They also may have contacts with investor groups who have capital. These groups are looking for a good place to get back a better than average return.
Where can you find the money
A house with a substantial equity may be a good place to start. A new loan could be written at a decent rate of interest and the money is found. Family and friends are the next source. Your bank may be a source if you have had a successful track record with them. Some insurance policies have very large cash value that can be borrowed against. A portfolio of stocks and bonds may make perfect collateral for a substantial loan. If your net worth is substantial you may be able to get a signature loan even though you do not have any ready cash. You can guarantee the loan to either the bank or the SBA.
If none of these are available talk with the franchise people. They may have sources that you could never approach as you would never know about them. For them finding good potential owners is their biggest concern. If they start with good people, their program will help them become successful.
Credit worthy owners and good managers
These two attributes do not necessarily go together in the same person. Good credit may be an accident of birth or result from a frugal nature. Good managers are usually very people oriented and sensitive to what their people will respond to and how they can be motivated. As you can easily see, these two human circumstances are not always found in the same person. Franchise people know this so they will put the two together which will form the bases for a strong franchise. The money is there and the management is there.
This may be a real partnership or just an investment by the money person. The franchiser will probably put the deal together.
Loans to the owner
Loans to the owner are almost always made to the business with the owner's guarantee. Seldom can the business borrow on its own without the co-signing of the owner. This gives the lender two sources of recovery of the money if the deal goes south. This is true for a bank loan and also for an SBA loan. The lender wants to make sure that they have the chance to recover 100% no matter what happens in the future.
Investor groups or individuals
There are private investors that are looking for better returns that will buy into a franchise that will have a good manager running it. They do not want any of the day-to-day responsibility of running the business. They are just looking for a better than average return on their money.
The franchiser usually has some of these people in his back pocket for a deal that he feels will do well as long as there is the money to back it at the start.
If you are short of money, talk with the franchise people about helping you find an investor to help you get started. This is a negotiated arrangement so there are no rules other than it has to work for both parties.
Using your home to finance the franchise
This is done all of the time to raise the necessary funds to buy the franchise. There is some danger though, as the owner could fail and have to sell the home to repay the debt. If it is a sound business deal then it will probably work out okay, but the owner should consider what would happen if the business failed.Losing a home and a business at the same time could be a devastating blow to the owner.
The positive aspects of this are the loan will probably have a very low rate of interest and can be paid back with ease when the business is up and running. The owner will also enjoy the freedom of no one looking over his shoulder on decisions he makes. Sometimes not having to answer to anyone is all it takes to get the business over the hump. Distractions like extra cooks in the kitchen can make a good deal hard to live with. Outside pressure can be such a distraction.
Money from life insurance policies
A loan on a life insurance policy does not have to be paid back at any certain rate or maybe not even at all. The loan would be deducted from any payment of a death benefit. This freedom of scheduled paybacks may make this kind of loan one of the best available if there is enough money in it to do the job. The best part of this loan is the lender cannot turn you down as you are really borrowing from yourself. Have your agent check it out for you and give you the details. It is a source that many people forget they have and overlook the possibility. Some times this along with family and other help is all that is needed to arrange for the needed money.
Conclusions
Once you have found the franchise of your dreams, the financing of the dream becomes a very real obstacle for some buyers. Ask for any advice and help the franchise people can provide. They face this problem on many deals each year, and they find solutions all of the time. Use them and their experience.
The Internet list many companies that make these kinds of loans for the purchase of franchises. This is a very special lending market and you need to deal with people who understand it and can provide answers quickly. These lenders know the franchise market and they have a very good handle on who will be successful and who is a high risk. As in most business deals it is always better to deal with experts in the area you need help with.
Private investors who have no interest in running the franchise are another way to get the needed funds. They will get an excellent return on their investment, but they deserve if as they are depending on you to make it work. A good manager and a good money person make powerful partners in a business. They each contribute from their strengths and together they have a better chance of success.
And now I would like to offer you free access to information on a powerful integrated system of marketing, sales & advertising so you can thrive instead of survive in today's economic environment.
Henthorn is president of Spiral Marketers, a marketing firm which includes a number of partnerships that range from cutting-edge software development, business and personal improvement coaching, online e-commerce businesses, and more.
He was formerly was president and principal broker of a resort / commercial real estate brokerage in Honolulu which specialized in representing sellers in transactions up to $50MM.
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