Franchise and Buy Here-Pay Here: Franchise Dealers Like the Results

There are a lot of things you don’t have when you get a buy here-pay here store versus when you own a franchised dealership. You don’t have the factory telling you what you have to sell. You don’t have someone else setting your profit margins. You don’t have any required sales and product training. You don’t have any certification mandates, no special equipment to purchase and no dealer’s sales and service agreement to sign. You also don’t get national brand marketing, not nearly as much clout in the community nor do you get immediate respect of banks and national finance companies. But you do have a shot at one thing that many franchise dealers aren’t getting right now — significant profits.

Vinje Dahl, owner of Dahl Ford in Davenport, Iowa is a fourth-generation car dealer. His great grandfather started the business in 1911. The store is relatively small. It keeps about 400 units on the lot and moves 50 to 60 new and 100 used every month.

Ford Motor Co.’s business is off and has been for some time.

“We’re consistently down from the glory years, but we’re still profitable,” Dahl said. “It’s posed some significant challenges.”

The Dahls, however, have an ace in the hole — Gold Key Auto Credit. They opened their first store in 1992, providing all the capital themselves. He said the model hasn’t changed much since first opening the store. They opened a second location in 2004.

“Our model makes money on the mark up of the car,” Dahl said. “We can charge up to 28 percent interest, but we only charge half of that. We always require a down payment of at least $500.”

Most vehicles sell for around $5,000 and Gold Key’s customers pay $60 or $70 a week for 16 months. Gold Key handles all of its own credit checks. They can do the credit check, finance the vehicle and deliver in one day.

“We do require every customer to have the car mechanically checked out at their own expense by their own person, so they know exactly what they are getting,” Dahl said. “We want our customers to have true ownership of the vehicle.”

Gold Key is also strict about payments coming in on time and fully discloses all of its policies right up front.

“We want our customers to know that we want a payment on Friday, every Friday by 6 p.m. or we will pick up the car by Saturday morning,” Dahl said. “They know that if they don’t call us to make arrangements, we will come and get the car.”

Dahl noted that there are other investments he could have made with the proceeds from the new-car store, but that he wasn’t comfortable with them.

“I know some of my friends were making investments in condos in Florida, but what do I know about real estate?” he said. “I know about cars, and while this isn’t a true car sales business, it’s a finance business, I wanted to stay with something I’m comfortable with.”

Charles and Dave Heinrich own Heinrich Chevrolet and Ontario Auto Lending, two buy here-pay here stores in Lockport N.Y., located about 15 minutes north of downtown Buffalo.

Charles said his family has owned a Chevrolet store for four generations, since 1967. The new-car store moves about 100 new and about 80 used every month. They opened Ontario Auto Lending in 1999. The two stores keep about 40 vehicles in inventory and sell about 30 units a month.

“New car sales are tough here,” Charlie Heinrich said. “This is a company town. We have about 12,000 people in this town and 3,500 work for Delphi (the former General Motors Corp. subsidiary). About 80 percent of our business comes from Delphi, and there have been layoffs. There are a lot of for sale signs and it has affected everything from small industrial shops to house and car sells. Service has held pretty good.”

The Heinrichs opened their first buy here-pay here in late 1999.

“We have a good friend in Ohio, Andy Glockner, who owns a four-store buy here-pay here group based in Portsmith, Ohio,” Charlie Heinrich said. “We saw it was a profit center and was working well. It’s a totally different business than the franchised business, because you are making loans as opposed to selling cars.”

Heinrich said in 1999 the economy was “cooking” and it was good time to make an investment. Now, however, the same local economic problems hurting new-car sales in his region are driving business to the buy here-pay here stores.

“We are paying about $2,000 to $2,500 for our inventory and selling them for about $5,000,” Heinrich said.

Russell LaFave is a third-generation franchise dealer. His grandfather started the business in the Northern Michigan community of Pinconning in 1928. It’s a small town, just 1,300 residents, but Schafer Chevrolet has done well over the years as it in the shadow of several large GM factories in nearby Saginaw and Bay City. The store also has Pontiac and Chrysler and Dodge franchises as well.

“Our is a GM saturated market,” LaFave said. “At one point, about 90 percent of our business was from GM employees. Right now, we’re moving about 40 new and 20 used vehicles a month. Our business is off. Michigan’s economy throughout the whole state is down right now.”

Like the Heinrichs, Delphi personnel surround LaFave’s store.

“They’re scared,” he said. “Most new-car stores are having to adjust their operations. They are reducing the number of employees and things are just generally tougher than they used to be.”

LaFave had the good fortune to open a buy here-pay here store, Car and Credit Connection, more than 15 years ago, long before the business model had the higher profile it does today.

“We have two stores today, one in Saginaw and one in Midland,” he said. “Saginaw has a GM auto influence and Midland has a Dow Chemical influence.”

LaFave’s said he attended a buy here-pay here business seminar in the early 1990s and saw it as a real opportunity. It was definitely a cash cow then. Dealers would find vehicles with an ACV of just $1,000 to $1,500 and get that much down and finance the profit with weekly payments of $50 for a year.

“It didn’t require a sizeable investment and it was not nearly as competitive as it is today,” he said. “Buy here-pay here was more popular in the South and it was mostly mom and pop stores.”

LaFave said now big franchise operations like J.D. Byrider and third-party lenders like Credit Acceptance Corp., are coming into his market, even in Northern Michigan.

“The amount of cash down has shrunk, ACV has increased and the length of the contracts keep getting longer to keep the payments affordable,” LaFave said. “But I can’t complain. It has been a good business, and we funded it all ourselves. Usually, if you are starting a buy here-pay here store, you need to borrow a lot. We didn’t have to because we had the franchise operation, and we’ve always held all of our own receivables.”

LaFave said he joined a Leedom and Associates Twenty Group about four years ago.

“We were growing in size and our portfolio was getting bigger,” LaFave said. “We needed a place to send our people for training. We went to some of the conferences, but it wasn’t enough. We needed people to attend classes, seminars and make sure we have all the most up-to-date information.”

Dahl said he likes the buy here-pay here model that exists for him in a smaller market.

“We are so up front with our customers that we take a Polaroid photo of them and tell them we are keeping an extra set of keys,” Dahl said. “They know we mean business.”

Dahl said buy here-pay here is a “face-to-face business.”

“If your customer has a MasterCard or Visa, if they fall behind in a payment they (the credit card companies) are just a voice in the wind,” he said. “Our customers know us by face. Having said that, we treat our customers fairly and try to have some fun.”

Every Friday and Saturday Gold Key sinks some sodas into a cooler and pops some corn for the customers as they make payments.

“If the customers pay on time, their names go into a drawing and they have a chance to win $50,” Dahl said. “In general, these are good people who just can’t handle money.”

Heinrich said he loves the buy here-pay here business. He advertises on WBLK, a Buffalo urban hip-hop radio station.

“I do the voiceovers for ‘Bling, Bling the Credit King.’” He said. “The ads pull like a freight train.”

Heinrich said Ontario Credit offers giveaways and other free stuff like food on Fridays and Saturdays and, since most of his customers have young children, they really appreciate the gesture.

“It’s these kind of marketing ideas you get from your Twenty Groups,” said Heinrich, who has been a member of a Leedom and Associates Twenty Group for several years. “We learned about how to operate profitably from our group and our moderator, Chuck Bonanno.”

LaFave said one of the mistakes he made in the buy here-pay here business was to not focus on collections as much as he should have.

“Being in the new-car business, of course, you are always focused on sales,” LaFave said. “We found our early that we were in the finance and collections business. In buy here-pay here, your margins look great when you put them on paper, but until that money is in the bank, you have just that — paper.”

LaFave said he operates at about industry benchmarks when it comes to delinquencies and charge-offs.

“We try to collect as much finance income as we can,” he said. “That is the key to profitability. If I take all my finance income and that equals or exceeds all my charge-offs then, I’m doing well.”

LaFave noted he has never tried to blend the buy here-pay here operation with the franchise store. He noted that the businesses have always had separate buildings, employees and locations.

“One of the things I learned in my Twenty Group was to have systems, processes and procedures in place and follow them meticulously,” LaFave said. “If you do that, you will be much more profitable and more quickly than if you don’t.”

Dahl, Heinrich and LaFave all say that any smart franchise dealer should seriously consider buy here-pay here.

“You control your own destiny in buy here-pay here,” LaFave said. “You control the inventory, margins, who you sell to and where you sell it from. Remember, he said, if it doesn’t work you can’t blame the factory. In buy here-pay here, there are no excuses.”

Dahl said it’s no secret. Gold Key Auto Credit is producing more net profit for him than his Ford franchise store.

“Our net profit at Gold Key is up significantly over last year,” Dahl said. “It has continued to generate profits every year, all on a core investment of about $70,000 about 14 years ago.”

Heinrich agrees with LaFave.

“We really like the business and when we are ready, we plan on expanding,” Heinrich said. “We plan on opening a few more stores and grow the business at a sustainable level. In the next couple of years, we’d like to be moving 50 to 60 units a month and doing it profitably.”