Up Your Business is an exclusive GEARS Magazine feature in which I share stories, insights, and reflections about real business and life challenges. The names of individuals and businesses in the following story have been changed to honor their request to remain anonymous.
Recently, a shop owner, Doug of Doug’s Transmissions, called to discuss his plans to purchase an additional shop. He was buying out one of his competitors: Joe, who owned JT’s Transmissions and wanted to retire.
While Joe ran a good business, it did reach into Doug’s market, so Doug felt he’d gain enough added market share by combining the marketing budgets of both shops to offset whatever cannibalizing might occur. His plan was to change the name of JT’s to Doug’s Transmissions.
This is a great example of a strategic acquisition. Many times the inherent market synergy results in greater market share for the combined shops than each of them enjoyed separately… in other words, 1 + 1 = 3.
But in this case, Doug was concerned with what to do with respect to the warranties on JT’s customers’ cars. For the past several years, Joe issued a variety of warranties, depending on the type of vehicle, transmission, and work performed: minor repairs, major repairs, rebuilds, or installed remans. His warranties ranged from 90 days/4000 miles to 5 years/100,000 miles.
Doug and Joe were both looking for a solution that would eliminate or significantly minimize the financial exposure represented by the existing warranties. He asked, “If Joe were to close JT’s down for some period of time before the sale, would JT’s warranties be void?” Then Doug could reopen as Doug’s Transmissions and start with no warranty exposure.
Frankly, they seemed to be looking for some sort of a legal loophole, so I decided to turn the call into a teachable moment with respect to legal versus ethical. Bear with me as I take you through the conversation that led to a fair and reasonable solution.
A DIFFICULT SITUATION
Shops are bought and sold, shut down, and go bankrupt, and owners retire all the time — some with lots of money; others with no money at all. The one common thread is that there are always customers with warranties that are impacted in some fashion. Circumstances often dictate matters, but should customers be victims if it can be avoided?
When a shop fails financially and closes down, generally there’s no money to take care of customers with warranty problems. Depending on the legal aspects of the closure, customers may or may not be able to pursue the old owner for damages.
Bankruptcy may offer protection, but in any event, the owner’s insolvency usually nips things in the bud. It’s a bad deal for the customers, and it gives the industry a black eye. But, as Forrest Gump said, “It happens.”
It’s unfortunate, but there are also some unscrupulous operators who follow a pattern of opening and closing shops, leaving unpaid suppliers and unhappy customers in their wake. They’re like the medicine men who traveled from town to town, peddling their miracle elixirs and then moving on to the next town before anyone knew whether the stuff worked or not.
The difference between these two examples is the difference between bad business management and fraud. In the first example, there’s no intent to defraud or to cause harm to the customers. Given the choice, the insolvent owner would likely prefer not to leave his customers out in the cold.
A BETTER SOLUTION
I’ve helped insolvent shops mitigate the warranty matter with a creative approach that enlists a local competitor. It starts with pointing out that nobody wins, including the competitors, when customers have negative experiences with our industry. Additionally, the insolvent shop (Shop A) has two things of potentially high value: their customer list and their phone number.
The approach is essentially to offer a competitor (Shop B) the opportunity to send letters to all of Shop A’s customers, signed by the owners of both shops. There would be several letters, depending on the customer’s present relationship with Shop A.
For example, there’d be one for customers whose cars are presently covered by a warranty; another for customers whose cars’ warranties recently ran out; still another for customers they haven’t seen for awhile. The object of all these letters is simple: to introduce the new shop owner and persuade the customers to bring their cars to Shop B.
For customers whose cars are covered by a warranty, the letter essentially announces that, due to unfortunate, unforeseen circumstances, Shop A is closing. But Shop B has agreed to provide warranty service to Shop A’s customers.
The terms and conditions of how the customer can obtain warranty service are included in the letter but are more fully detailed in a new, written warranty. To establish a relationship, it asks the customer to contact Shop B for a complimentary recheck and to receive the new warranty certificate.
It doesn’t have to be a full warranty, but it should be of significant value, providing the customers with peace of mind while mitigating the exposure for Shop A.
Assigning Shop A’s phone number to Shop B adds value to the arrangement for Shop B.
On the other hand, some shops close simply because the owner wants to retire and he can’t find a buyer. Unlike Joe, he might have plans for the building, so selling the business isn’t in the cards. For instance, he may plan to convert it into income property as part of his retirement plan.
In this situation, if the retiring shop owner has a good shop, the customer list and phone number are of even greater value to a competitor. The retiring shop owner might actually be able to sell them to a competitor for cash and an assumption of a warranty program.
SHARING RESPONSIBILITY
Well, the deal with JT’s and Doug’s presented an even greater incentive to keep customers happy. Why would Doug want to start an uphill battle with JT’s customers? They would, at the very least, be confused by the transition, but it’s certain that many would be upset if their warranties were rendered valueless.
Doug and Joe ultimately agreed to issue the marketing letter with a new modified warranty. At the same time, Joe set aside a portion of the proceeds from the shop purchase in a joint (escrow) account for five years.
Whenever Doug’s had to spend more than an amount stipulated in the agreement, a payment would be made to Doug’s from the escrow account. After five years, any money left in the account would go to Joe.
This solution was fair, reasonable, and balanced for all concerned.
WHAT CAN WE LEARN FROM THIS STORY?
In a nutshell, I think the lesson here is to step back and look at the big picture. Put the interests of all parties on the table, including the customers, because those customers are technically parties to the sales agreement, by default.
If Doug and Joe had gone forward with their idea to void JT’s Transmissions’s warranties, Doug’s might not have retained as much market share as he bargained for, and Joe might have found himself in legal hot water. Customers might have had a valid claim that JT’s issued warranties in bad faith, beginning from the date that Joe decided he was going to sell or close his shop.
Had Doug and Joe done what they were thinking of doing, wouldn’t they have joined the ranks of the “medicine men”?
Share Your Stories
If you’ve personally experienced a weird or unusual customer dispute and wouldn’t mind sharing it to help your industry, please contact me. You just tell me the story and I’ll do all the heavy lifting to write it.
We can make it an article about you, or you may remain anonymous. The main thing is we want to share stories that will help others avoid similar problems. Call me at 480-773-3131 or email me at coachthom@gmail.com.
About the Author
Thom Tschetter has served our industry for nearly four decades as a management and sales educator. He owned a chain of award-winning transmission centers in Washington State for over 25 years.
He calls on over 15 years of experience as a certified arbitrator for topics for this feature column.
Thom is always eager to help members of our industry and continues to be proactive in pursuing ways to improve your business and your life.