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GM and Chrysler are Closing Dealerships, But How Does it Affect You?

By Liz Opsitnik
Wednesday, May 13 2009 10:35

GM and Chrysler are going to close dealerships. The U.S. government says they have to do this to become viable companies. But how do these two automakers decide which dealerships they’ll close? And how does a dealership closing affect you, the consumer?

Consumers may think that because Chrysler is in bankruptcy court, there will be a huge liquidation sale on the vehicles so they can get rid of the inventory before they close the dealerships. Unfortunately for bargain hunters, this is not what goes on in Chapter 11 bankruptcy, or reorganization bankruptcy. Chapter 11 bankruptcy allows the debtor (ie: Chrysler) to restructure its debt in court.

closed Chevrolet dealership

A relocated Chevrolet dealership in St. Paul, Minn. shows what many towns may look like once dealers start closing.

“The point of bankruptcy is an effort to streamline the ship to have a viable entity when they come out,” says Scott Silverman, partner at McCarter & English Attorneys at Law. “They can’t have that without the dealers.”

Editor’s Note: Silverman concentrates in the areas of automotive franchise regulation and litigation, business trade practices and commercial contract disputes, and represents all vehicle brands, not just GM and Chrysler franchisees.

Silverman says that GM and Chrysler can’t just close all their dealers because they, the manufacturers, haven’t invested in the dealers. The dealerships’ owners, or franchisees, are the ones who initially paid the money to open the dealership.

“If they removed all the dealers, the OEM (manufacturer) would have to put all that money back in,” Silverman says.

Although GM says it is likely it will file bankruptcy, it hasn’t yet, so the rules are different. GM announced recently it will close 42% of its dealers. The automaker said it will start informing dealers of the closings this week.

“Outside of bankruptcy, GM has to comply with the franchise contract and the law,” Silverman says. “The minimum they have to do is repurchase inventory and parts and provide real estate termination assistance, which means GM has to help the dealers get out of their lease.”

Silverman explains that since GM is not in bankruptcy, it has to follow the franchise laws. And each state has different rules when it comes to franchise agreements.

“In bankruptcy, state franchise laws don’t protect the dealers,” Silverman says. “There are not a lot of people sticking up for the little guy. It’s sort of a horror show.”

Outside of bankruptcy, the OEM (manufacturer) is required to repurchase the unsold inventory if they decide to close a dealership, Silverman says. The manufacturer has to repurchase the cars and parts for the price that the dealer paid. This means there is really no incentive for the dealer to discount the cars.

So that fantastic ‘going out of business’ sale some consumers think may happen probably won’t. While Chrysler may go into liquidation bankruptcy, that is still a long time from now. And even then, liquidation would mean that Chrysler would be sold off for its parts and individual brands may be purchased by other automakers.

Which Dealers Will Be Closed?

How do Chrysler and GM decide which dealerships they will close? GM has said it will reduce the number of dealers it has by 42%. Chrysler also said it will close dealers as well.

Since Chrysler and GM are in two different situations, there are different ways to determine which dealers will be closed.

GM said it will look at customer satisfaction surveys, profitability, dealers’ access to outside financing and location of the dealership to determine which ones to keep, the Wall Street Journal reports.

Silverman (pictured left) says that in speaking with dealers, he’s found that the location and the brands are more important factors. Access to outside financing isn’t as important because dealers can always come up with financing, he explains.

In Chrysler’s case, will the court look at dealers that have a loyal customer base or have been around for years?

“Customer loyalty is considered, but in bankruptcy, it’s more focused on what’s the best case scenario for the debtor (ie: Chrysler),” Silverman says. “The court will use business judgment.”

“The debtor (ie: Chrysler) has a right to choose which (franchise) agreements it continues to honor and which it wants to cancel, subject to approval by the court.”

Silverman, who works in the Boston area, says that Massachusetts has about 400 dealerships across all brands, domestic and foreign.

“Unfortunately in the Northeast, we’re very congested with dealers and domestic dealers,” he says. “The number of dealerships closed is probably going to be higher here.”

Silverman explains that if a dealer owns more than one brand, each brand would be looked at separately, since the dealer’s owner probably has a separate franchise agreement for each brand of vehicles he sells.

So it is possible that a franchisee who owns several brands may not close entirely. The dealer owner may be forced to close certain brands and be able to keep other brands.

If a GM dealer is told they have to close, can they keep servicing vehicles until they are closed?

“This depends on the deal struck with GM and the state franchise laws,” Silverman says. “In Massachusetts, the manufacturer must repurchase the inventory in 60 days. The manufacturer can arrange almost anything with each dealer.”

Dealerships and the Community

In many parts of the country, dealerships have been family-run for decades. Many dealers are heavily involved in their local community. For example, dealers sponsor the local little league baseball team and are involved in local charity and philanthropic events, among many other things.

Another way a car dealer impacts the local community is with its advertising revenue. Car dealers advertise in the local newspaper, TV station and radio station. When they close, there will be a lot of ad dollars lost, which can lead to a trickle-down effect on those local media outlets.

closed car dealership showroom

This empty showroom floor of a closed dealership is an example of what a lot of consumers will soon see in their towns.

Although there is a perception that car dealers are only out to make money on your car purchase and don’t care about you as a customer, that’s not always the case. Many dealers are local business men and women who also face bankruptcy and closure if they can’t pay back their debt, just like the local restaurant or grocery store, for example.

“The dealers need to obtain financing to buy inventory,” Silverman says. “Some need to sign a personal guarantee.”

Silverman says a personal guarantee puts the dealership owner’s personal assets up as collateral for the inventory financing. So, for example, if a Chrysler dealer had to sign a personal guarantee and couldn’t make his inventory payments, Chrysler Financial could come after him and he could lose his house.

“Dealers owe $3 million on average for their inventory,” Silverman says. “They probably will owe that amount, even if the cars drop in value. The dealer still owes that money.”

Dealers receive money from the manufacturer to help sell inventory. This is known as dealer holdbacks, sales bonuses and dealer cash incentives, for example. Will GM and Chrysler still make these payments to the dealers?

“If they aren’t in bankruptcy, they still owe the money,” Silverman says. “With Chrysler, some dealers may receive the payments, some may not. It’s quite up in the air.”

So, if a consumer is shopping for a car, should he or she buy one from a dealership that is going out of business? Is this a bad purchase or investment?

“Consumers can’t know what each dealer’s financial situation is,” Silverman says. “I’d give a car shopper the same advice I’d give to someone who is worried about the swine flu. Do your research and don’t always believe the media hype.”

UPDATE 5-14-09: Here is a PDF listing of the dealers Chrysler will close. (via CNN)


Copyright © 2009 AutoLoanDaily.com. All rights reserved. This material may not be published, rewritten or redistributed without permission.

Top image via publicradio.org. Bottom image via The Baltimore Sun.


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21 comments on this story so far.

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Comment By: Fred McGillis on Wed, May 13 2009 at 10:51 AM
It's really messed up that Chrysler financial can go after these people's homes when they can't pay their loan after Chrysler shuts the dealerships down.
Comment By: Sara C. on Wed, May 13 2009 at 11:10 AM
I agree. These dealers are going to lose everything. And who's fault is it? Chrysler and GM make bad decisions and these small business owners have to pay for their mistakes. Something in our government is not right here.
Comment By: Steve Stuart on Wed, May 13 2009 at 11:41 AM
Obama got the union vote. So guess what the unions win, the business people lose. What real concessions were there from the unions.
Comment By: ImpatientGirl on Wed, May 13 2009 at 3:10 PM
Everyone who wanted to vote in the dems are getting exactly what they asked for here.
Comment By: allen on Thu, May 14 2009 at 9:23 AM
I am an employee of a chrysler dealer and unsure if i will have a job tomorrow.How is the pres going to help the million people this will effect from the parts stores to the car wash to the small towns that are next to the dealership hundreds of people will be effective as of today.
Comment By: watwat on Thu, May 14 2009 at 1:05 PM
cnn has teh dealership listing
Comment By: Keith McK on Wed, May 13 2009 at 11:31 AM
The dealers are not costing GM and are not responsible for its woe. It is the other way around. Having a franchise costs the dealer a lot of money each year as they are forced to by all the special tools that each model year requires etc. If they close all of the dealerships that they are talking about, they are shooting themselves in the foot.
Comment By: Melissa H. on Wed, May 13 2009 at 11:52 AM
Really sad, most people can't get a car loan, Chrysler is gone as an option to get a car of finance it. So what we will have left is the big Mega Dealers will get bigger and richer. The little guy loses again.
Comment By: Jeff Ske on Wed, May 13 2009 at 12:21 PM
The dealers are the customer here... as soon as Gm releases the car from the factory.. bam ..the dealer pays for it.

Then up to the dealer to sell it GM and Chrysler are going to shoot themselves big big time!! couldnt agree more with you Keith McK
Comment By: David Depreo on Wed, May 13 2009 at 12:27 PM
Buyers beware. I know of a local dealer who just closed his doors. There were several customers with trade ins with payoffs who made purchases from him the previous week. He told managers to tell customers to come pick their trade ins up as he was not paying them off. The consumer could get stuck with 2 car notes. Fortunately, conscienious managers were able to wholesale the tradeins and believe no one got screwed. BUYER BEWARE IN THESE SHAKY TIMES!!!!!!!!!!
Comment By: Jay Taylor on Wed, May 13 2009 at 5:58 PM
Thank you so much for that post.... coming from a Chevrolet Salesperson with five kids to support!!! Your comment just took food off my table.
Comment By: David on Wed, May 13 2009 at 12:32 PM
Yahoo Finance reports that GM is targeting dealers who have a lack of working capital to shut down. What a joke this is. GM is living on a multi-billion government loan (bailout) and they are going to close small dealers with a lack of capital.
Comment By: Mark on Wed, May 13 2009 at 1:23 PM
Smackdown of the American entreprenuer. It's an Obamanation.
Comment By: The Timinator on Wed, May 13 2009 at 3:21 PM
I pass by several of these closed down or moved places daily on my ride too and from work. So sad...
Comment By: Dan on Thu, May 14 2009 at 7:49 AM
You yuppie punks all want to blame Union this Union that. The market was messed up when President Bush was in office. The last I heard AIG is NON-UNION how much money did they get. Last I heard, the big CEO's of these companies made alot of money but you yuppie punks who never really got your hands dirty in life do not understand. These CEO'S want to work for 1 dollar a year. Hey, if I made 10 million a year for 15 years, I can afford to work for 1 dollar. I was raised on a farm where we worked 16 hour days 7 days a week for 35 years to feed you sorry idiots. We never complained! Think about what your grandparents and great grand parents went through when they were building this country.
Comment By: Michael on Sat, May 16 2009 at 1:27 AM
What the hell are you talking about? These CEOs did not structure their corporations correctly over the past 10 years, and yes, it is their fault for the financial woes that their companies are undergoing. It is terrible that they did have to contend with outrageous auto-worker benefits. My mother is a Cleveland school teacher who, arguably, has to deal with more **** than a guy pulling a lever every 2 seconds has to in a day than he in an entire lifetime at the GM plant. I'm sorry, but the Auto-workers union is a money-grubbing bunch of bureaucratic ********* who thought Obama (and I'm not a McCain supporter; I'm a Libertarian) was going to save the world. There is no such thing as a savior, get used to it. Oh, and by the way, *******, THOSE CEOs WERE YUPPIES ONCE UPON A TIME WHEN THEY WERE YOUNG, how do you think they got there? Not straight from the assembly line; more like, straight from the baseline. That's a tennis joke if you didn't catch on, Sr. Farmer.
Comment By: will on Thu, May 14 2009 at 12:29 PM
you know what all the things in the past always come to light...no need to argue about whos fault it is its the ******* manufacters fault for building pieces of crap and selling them to the people and having low return values,poor saftey,horrible gas, and over priced!!!!!!!!! i'm a salesman and have been in the business for almost 7yrs and what i learned is these car companies reep what they sow!! nissan toyota honda these are car companies that did a great job with thier cars from the begining and thats why their sales are down but not closing any stores!!! i'm here day in and day out how dare gm,chevy,pontiac,chrslyer any of those companies charge the money that they do for their unexcusable pieces of crap when you can go buy a solid car for the same money if not less that is way more efficent stop kidding yourself this is a prime exaple of the american man cutting corners the foriegn man seeing an opportunity and taking advantage of the situation its no ones falut but their own CLOSE EM ALL DONE THEY SUCK FOR AUTOMOBILES!!! ask yourself this in this economic crunch what would you rather buy a toyota or a chevy malibu???!!!!!!!!!!!!!!
Comment By: joe on Thu, May 14 2009 at 6:17 PM
Malibu anyday it has a lot better warrenty, and its way cheaper than the foreign crackerboxes
Comment By: Billy on Thu, May 14 2009 at 12:36 PM
sales people at these shuttered dealerships should have been planning on this. hope they have other eggs in their baskets. the american dream is fading quick. i have been a loyal chrysler customer for 16 yrs. time to buy ford.
Comment By: mike hunt on Thu, May 14 2009 at 3:27 PM
i have no sympsthy for car dealerships of any kind-they areshysters imo.-they use to rob us now they are getting theyre just do.........................no more
Comment By: me on Thu, May 14 2009 at 10:20 PM
going to create 2 million jobs but cut 30 million jobs first "CHANGE"

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