This past week I was with an auto dealer client, and we spent some time evaluating the progress of one of his children in the family business. It quickly became apparent that this heir doesn’t know his way to the bottom line of the financial statement. In the car business, razor thin profit margins are the norm. In fact, in a well-run store, for every one dollar that comes in, only about three cents finds its way to the bottom line. That’s a remarkable statistic, but even in other industries where the margins are higher, a deep understanding of how much makes its way to the bottom line should be drilled into the heads of all employees, especially family members seeking to take over someday.
Here’s the story. This 29-year-old successor candidate, who, unfortunately, has been fast-tracked into a management position by his father, is enamored with status and image management. As a part of the family’s portfolio of auto dealerships, they have an ultra-high-line franchise that only the wealthy can afford. The son has decided that if they purchase a sky box at the stadium where the local NFL team plays, they will be able to leverage that into more sales among the rich and famous. Sounds reasonable, right? This successor candidate is showing some signs of leadership, innovation, and determination, right? Maybe. But here’s the problem. The sky box costs $180,000 annually.
Why may the skybox purchase be a problem? Well, how many of these high-line vehicles need to be sold in order to add more than $180,000 to the bottom line, therefore, providing a positive return on investment? With the 3% profit margin mentioned above, they’d need $6 million in sales. With their current average sales price at $200,000 per vehicle, that would equate to an additional 30 vehicles annually to break even on the sky box purchase. Historically, this store has averaged 50 new car sales per year and has not been profitable. It has been propped up by the other businesses the family owns. So the question here is: how realistic is it to see a 60% increase year over year in units sold based on this one move alone? And that’s just to break even on the investment and not lose more than they’re already losing.
There is however, the chance that the son may have less selfish motives and be thinking of this purchase as a marketing initiative. The team’s players and executives are the target market for these luxury vehicles and buying a sky box may be a great way to connect with them. The potential for this extravagant purchase to benefit the bottom line does exist, however the son needs to present a strong case for how he plans to maximize this opportunity for the benefit of the dealership and not just his image.
So if your successor candidate is showing a tendency toward making business decisions motivated by status and image management alone and not by informed sound business principles and a thorough understanding of the Return on Investment, then you have some work to do.