The buy-here, pay-here business is one of the few businesses you can sell yourself out of business. Can I get an Amen on that?

This reminds me of the “six P’s” rule of business that you may have heard: Prior proper planning prevents poor performance.

Today, we are going to talk about a universal truth in the BHPH business: Cars break. No question that hurts cash flow. Then we’ll learn how this inevitable consequence can be addressed with prior proper planning.

The Inevitable

Mechanical breakdowns will stop payments, the lifeblood of this business, and cause your cash flow to suffer. Not to mention, managing an irate customer, throwing your collector in overdrive, putting a dent in your bottom- line, and a hundred other things that the ill-prepared must face, every day.

People don’t pay for cars that don’t run. And guess what? They are going to stop running. They are made on Earth, not in Heaven.

Have you driven by a repair facility lately? Unless they are total incompetents, they stay slammed. Why? Because cars — your customers’ cars — break down. It is not a matter of if, but when, they will breakdown.

When most Americans have a mechanical breakdown, it’s only an inconvenience. But, when a BHPH customer has a breakdown, it’s a crisis. They depend on that transportation to get them to work, school, church and the grocery store. They are, for the most part, hourly employees who do not get paid if they miss work. They certainly don’t have a pile of extra money lying around to pay a repair bill.

So, what’s your prior proper planning? This article is to help you grow, without hurting cash flow.

A Possible Solution

A dealer-owned reinsurance company, along with a dose of discipline, will make you “wealthy, wealthy and wise.”

Turn-key dealer-owned reinsurance companies (also known as producer-owned reinsurance companies or 831(b) corporations) are based on the Internal Revenue Code 831(b).

Reinsurance has been an effective tool within the car business for 30 years and was first used by larger dealers to reinsure credit life, accident and health insurance, and warranty/ service contract products. Reinsurance companies are formed with minimal capitalization requirements.

By setting up a dealer-owned reinsurance company, you get all the benefits of a thirdparty warranty company via claims management and accounting. You also benefit with administrator obligor, structured coverage with roadside assistance including towing, a tollfree number for customers to call and nationwide coverage with a professional claims team looking out for your best interest.

When a claim occurs, the professional claims team will decide if the claim is covered, based on the warranty language initially agreed upon with your input. This way you can custom design the coverage that is best for you and your customers.

Another important difference from the third-party warranty for the BHPH dealer is that customers can finance the cost of the warranty with your warranty company. A prorated portion of the cost of the warranty is collected and forwarded to the dealer’s reinsurance company trust account.

Are you beginning to see how proper planning could help keep customers paying?

More Plan Details & Profit Potential

Reinsurance Trust Accounts, which are located in the United States, are, just as indicated, a trust. Trusts do not have checking accounts nor do they make loans to others, like a bank, with your money.

Trusts are recognized as the safest place to keep money, and further, the dealer reinsurance trust account funds are not comingled with anyone else’s funds whatsoever. They stand alone.

The unearned premiums in a trust account can only be used as outlined in the trust agreement. In this case, unearned premiums pay any of your customers’ claims.

The monies paid by the customer for their vehicle service contract (VSC) is set aside as reserve in your trust account as I indicated. Any reserve not used to pay claims becomes profit.

As an example, let’s say you sell an average of 20 vehicle service contracts per month, and $800 goes into reserve from each customer’s VSC. Loss ratios vary, but for this example, let’s say $400, or 50 percent, of every contract on average is used to pay claims.

This figure leaves a $400 profit, which is $96,000 in additional dealer net profit per year and $480,000 additional dealer net profit at the end of five years. This amount does not include the retail profit made from the sale of the vehicle service contract.

If you sell third-party vehicle service contracts now, the earned reserve is retained by that third-party warranty company as its profit, in this case $96,000 per year.

Additional Potential Benefits

Another very important benefit to owning a reinsurance company is tax benefits.

I am not a CPA, but I know some good ones. They tell me, in layman terms, that these reinsurance companies are small property and causality companies.

Small property and casualty insurance companies with less than $1.2 million in annual net premiums may elect to be taxed only on investment income under Internal Revenue Code 831(b). Distributions are taxed at the dividend rate, currently 15 percent.

These corporations, unlike S corporations or limited liability corporations (LLC) where income flows through to the shareholders annually, are C corporations. If a distribution is not desirable, you can retain the money in your reinsurance company, or you or your other business entities may borrow money from your reinsurance company.

Earned reserve can be invested in stocks, bonds or other securities within the Trust account. 831(b) corporations make great retirement programs as well as great estate planning tools.

6 Final Thoughts

So, with a dealer-owned reinsurance company, you have:

—Nationwide warranty coverage which is paid for by your customer but accounted as a dealership expense

—Tax dollar savings on the dealership side

—A new profit center that is income tax friendly, to say the least

—Control over policy design

—Funds always available to fix any car and get the customer back on the road to continue making payments

—All the while building a capital resource.

Now that’s perfect prior planning preventing pitfalls, plus piling profit.

Tim Byrd is founder and president of Tim Byrd & Associates, a managing agency located in Gloucester, Va. An auto industry expert on dealer-owned reinsurance companies, BHPH operations and F&I development, Tim has been a trusted adviser to many dealers for more than 25 years. Tim can be reached at timbyrd@timbyrd.net or (804) 824-9533.