Wake up, Buy Here, Pay Here people. It's a beautiful day. Go grab yourself another cup of joe and say hello to Jim and Michelle Rhodes on the Buy Here, Pay Here morning show. Take it away, you two. happy friday hey friends welcome again to the spare bedroom in western oklahoma it's such an unusual setup I've been I've been remiss on removing any of the pictures from the wall behind us just so that there's something on the wall behind us yeah so just uh you get to see the grandkids yeah all good so yeah we're still in oklahoma probably will be for a couple more weeks and so just kind of a little your regular setup. My mom, I talk to my mom like every day, every other day. And every day she asks me, when are you guys coming home? When are you guys coming home? And I'm like, I'll be home before your birthday, which is in September. Yeah. So we're just still wrapping up things after my mother's passing, we're dealing with the state matters and just kind of, you know, dealing with things here. And so it's, we feel fortunate to have the flexibility with our work to do that. And as long as we've got an internet connection, we can do most everything we do. So yeah, We're grateful about that and taking full advantage of that situation now. So in the meantime, you get a little different environment from us, but we've got two experts standing by. We've got Chad Martin and JP Bryan in the background. We'll bring them in momentarily. Do we have any announcements? No, just to make sure folks know that if you missed the V-A discovery meeting, so we've been doing those live the last Monday of each month. We'll do it again at the end of August. if you miss that and you want to have you looking for information about v-eight reach out to me we can share that as a recording so that you can get a sense of kind of how v-eight meeting works and mostly what happens there is we're able to walk people through the data points that we study and kind of help them understand the the excuse me the method that we use for having the dealers submit their data and then what the results look like once the data comes in so I had a question about like what was the topic and I said the data then whatever it is that whatever questions that dealers want to dive into around the data so there's not usually a set topic other than the data right and our v-eight uh meetings obviously the the meeting is meant to be um you know peer group conversation so obviously there's a moderator there but as far as what happens in the meetings is really up to the members and whatever questions they bring or topics they they want to discuss with one another and And as moderator, you know, I'd stand by. Ken moderated the group three meeting last time. I have some new dealers in there. So happy to see that. Hey, Tony Caldwell. Good to see you this morning or see your profile pop up. All right. Are we ready? Yeah, let's bring it. Okay. So we're going to first bring in Mr. Chad Martin. Hi, Chad. Good morning. And then also we have JP Bryan that are joining us. And you want to give them a little bit of background? Sure. So I've known Chad for... for, I don't know, gosh, Chad, we've known each other a good while, way back to your days at Autostart and that group that was Oklahoma, Kansas, Missouri, I think. You were filling a financial role with that company when you and I first met. That's been many years ago. And then got to know your business partner, JP, more recently. And I only learned before we started the broadcast this morning that you guys live in, you know, like three states apart. So, but that's the nature of the way we work these days. I love it. Yeah. Yeah. That's right. So, Chad, you want to kind of give a little bit about your background? Yeah, so I guess Chad Martin with Martin, Brian and Accounting. We're a CPA firm that does accounting and consulting in the auto dealer space. My background is working six, seven years in large buy here, pay here, lease here, pay here dealerships. Boots on the ground mixed with my accounting firm background. Started this company back in twenty twenty. And we've been assisting dealers with financials, fractional CFO type stuff, filling in for controller roles, bank financing, kind of the full gamut of accounting and consulting type work. Yeah. And I would say Chad and JP are certainly some of the go-to folks when it comes to lease or pay here. There aren't as many firms out there that are as familiar with that element as what these two gentlemen will be. So certainly if you're in that sector, you want to make sure you talk to these folks if you're looking to improve your accounting and financial and they have a very consultative approach. So JP, what about your background? Yeah, thanks, guys, for having us on. I'm excited. So my background before joining Chad was about fourteen years with a CPA firm that that serves our space, KSM, you know, one of one of the names in the industry. I did audit work and accounting consulting for BHPH, LHPH, independent dealers and got to know Chad kind of through that process with mutual clients that he was already doing a little CFO work with. And so I joined him in, uh, and we serve, you know, dealers around the country as, as CFOs and, and our team as bookkeepers, uh, ever since. So I'm, I'm loving it. This credit cycle has been tough, but I'm loving it. Yeah, I understand. Yeah. It's, uh, it's great to have you both here. I would just say that what, what prompted this conversation? I reached out to Chad when I saw he did a follow-up, uh, post in the BHP success group around, kind of the environment with lending and kind of what you were seeing, Chad. And so you'd done one some months ago, you came back recently and did a kind of a six month update. And I can paraphrase it, basically what you said was, We're not really seeing any change, any improvement, maybe seeing some people that may be exiting the lending space. We obviously won't talk about names or any of the specifics about who that might be, but we're also seeing indications that lending is, if we talk about lending just for a moment, let's think about lines of credit providers for buy here, pay here, and lease here, pay here dealers. then that environment is tightening up. We're definitely seeing, and so from my perspective, Chad, I can tell you that we've seen dealers struggle to get their renewals. They've been pressed more on profitability and some of these kind of things. So we're going to talk about profitability. I picked kind of four components of what your post really addressed for us to dig into today. But You want to just kind of give your broad overview chat on kind of why you wanted to come back and give that six month update? Well, I think the important thing is, is that, like you said, dealers are not or I'm sorry, banks are not being as gracious as they once were. We kind of got in this cycle where if you broke a covenant for a month or two, but you got back on track, they were willing to to overlook that and waive it and allow you time to work back through it. to get compliant as long as you had a plan in place. And now we're seeing that grace period is not necessarily being given all the time. Or if it's a repeat pattern, they're now either calling the note or there's fines in place now where there wasn't before. So a lot of dealers are having to pay out of covenant fines and that kind of stuff. So it's just the environment just isn't as dealer friendly as it used to be. And I think banks know that dealers don't have the ability as easily to go elsewhere. So they can be a little tougher and play a little harder right now because they're not fear of losing a client at this point. Right. I have a question for you. the financial Attitude. It seems from conversations that Jim and I have had is that it kind of has a cycle to it. And that banks and some of the other bigger financial institutions over the last twenty whatever years, they cycle in and they cycle out because, you know, they see the profitability and then it's just too hard or whatever and cycle in, cycle out. Are some of the things that you're seeing right now new to those cycles or is it just part of the cycle? Go ahead, JP. I mean, I think it is part of the cycles we see, right, where banks are interested in those higher returns that we can get by tying ourselves to a retail installment contract at twenty plus percent or lending to our to this small business who's got pretty good financial picture at twelve and fourteen percent, whereas I'm only lending at seven percent on the mortgage or six percent. So all those factors are prevalent in them getting into this space. You know, but then when the losses come, you know, the bonds on Wall Street erode, you know, that's when when the flea occurs. And so it is kind of cyclical. But as rates come down and investment occurs again, we you know, we they'll get reenticed again. Right. So I think there have been some, some bigger shocks to the system in this cycle, you know, via inflation and, you know, all the COVID programs that, that have maybe exacerbated it a little bit. Okay. But it, it, It still has felt like a credit cycle. So then the lesson just from this cycle is for those that are newer to pay attention, take notes. This is what happens. And so that they can start to track those things themselves and know when they need to expand and contract. It's so true. And I think that when we're eating well and we're fat and heavy, for using a bad analogy there, it's tough to stay lean and scrappy. Only the top X percent of our space, X percent of our dealers, I know that I say, hey, you made a hundred thousand dollars this month. Like, I'm not happy. That's not good enough. And they're still sharpening their pencil. And so when things are getting good, the landscape is always changing. That's still a time in which you have to stay lean. But one of the things I've noticed too, is that several of the larger players are coming back into the space, but we're not seeing, and you know, when I say larger, you know, they're the ones that are lending to that. You know, a minimum of million plus we're not, I'm not seeing as many of the smaller guys coming back in. And so some of these guys that are needing one, two, three million dollars, there's not as many options for that. out there and so we're not seeing those smaller players enter in in this cycle coming back in or anything good well and I've been around this business since the late nineties as a manager and then you know became a dealer myself in o five and I can say across those years you know started consulting and and coaching training in in two thousand across those twenty five years you know we've seen a couple of cycles we've seen ebbs and flows of capital and it it just is something I think dealers can expect it won't be the last right it's the nature of the the appetite for wall street in particular you know they they sometimes they can justify placing money in a subprime bucket and other times they can't and so we can expect that uh you know there will be ebbs and flows and so I think one of the things I'm seeing nobody can say this for sure I guess but I suppose except for the people that are in those agreements but it does seem like some of the providers are probably getting some pressure from the money behind them. I'm seeing big nods. You took the breath out of our lungs. Yeah, go ahead. Okay, sorry. Yeah, no, it's like that's one thing that I think we can't know because we're not a party to those discussions, of course, but I would say that it does feel like, and again, that's where the Wall Street and the big money will kind of shrink back from subprime when they see delinquencies and charge-offs getting high, then they'll retract. And so suddenly, you know, dealers who aren't prepared for that can find themselves in a difficult place. And so that's how we prepare. Yeah. So that's where our conversation goes today. Let's start first about Chad. We'll have you open on on portfolio analysis. Like, you know, this is obviously an area where we spend a lot of time working with dealers. And I would say that, you know, a lot of them struggle to get data turned around. And, you know, there's. There's different reasons for that. But let's talk about why portfolio analysis right now would be important. Not only struggle getting the stuff around, but we've seen dealers that just really have no grasp at all on what it is that's happening. Go ahead, Chad. No, I think one of the first things that banks are going to ask you is they're going to ask you about the history of the portfolio, right? And being able to show them that three to five years of history of This is how many accounts we had five years ago, and this is kind of the trend where our portfolio is going. And then they're going to be asking about delinquencies and charge-offs and what are your not only units but in dollars. What is that net? What's your recoveries? And then last and biggest is the cloud recovery rate. you know, those are probably the main portfolio, you know, numbers that they're going to be looking at and asking you for and for the trending and being able to, you know, this is for most DMSs, you can get this information and probably plug it into a spreadsheet in ten minutes if you know what you're doing or know what to go and grab. But I think it's important that you spend that time, ten, thirty minutes, whatever it is, a month and grab some of these key numbers that we're talking about here or get someone to do it for you to pull the reports and plug it into a nice summary spreadsheet. Right. And that's part of what we do, JP. And in our VA dealer groups is where we kind of see that we ask dealers to submit certain data monthly. We want to see them reconcile their principal in their portfolio to within plus or minus one percent. And that's the part Michelle's alluding to. She hears me talk about what a struggle these dealers are having. And sometimes that's that software. Sometimes it's their own lack of time and energy. And, you know, commitment to seeing that through, but, or their team's lack of experience sometimes. Either way, it's like, we feel like if I'm going to go ask a lender for a five, ten million dollar line of credit, that, you know, these are things we better have in order, don't you think, J.P. ? Yeah, it boggles my mind when folks have no idea what their delinquency is or charge off rates. In this space, we sell cars, but we're really a bank masquerading as a car company. And the banking side is your portfolio. And if you think about a bank taking a chance on us like we take a chance on a customer, you underwrite the heck out of it. You look at PTI, stability, history, they have a repo on their credit. Banks are underwriting their collateral, which is our portfolio. They're going to tie their advances to our portfolio kind of in the same way. What's the health? Are we putting good loans on the books? Were there big hiccups in the past twelve, twenty four months that we need to understand? And so I think it's paramount to a long term successful buy here, pay here is understanding the portfolio health. I think we're going to talk about it a little bit more at other points, but I think it's when you go in, there's nothing worse than a dealer going in and spouting off some numbers, then going back and putting them on paper and those numbers are completely different. A lot of my clients, when we first get to talking to them, they'll tell me all the metrics of their business, but they have those numbers pre-COVID or two or three years ago stuck in their head and not what they're actually doing now. So you really need to have that understanding and know your numbers before trying to talk to banks and institutions. Yeah, good. And you're right. We'll talk some more about those things. We can go ahead and move into this next part about projections, because obviously once we have portfolio analysis and historicals, you mentioned, you know, multiple years and V eight, we work off of a six month rolling average of the, the, the, the stats over there and to build our projections. And so I think this is something that, you know, let's start with you, JP on this one, like, What if I'm a lender, what kind of questions would you be expecting me to ask around projections? Yeah, well, I think step one is anticipating the question of what are you going to do with my money? I think many lenders, hey, I want to borrow your car for the weekend. OK, what are you going to do with it? I'm going to drive it seventy two hours straight. No, no, no, no. I want to borrow ten million dollars. I'm going to go crazy with sales. No, no, no, no. you know what are we here's here's the plan in place that we're gonna use your money for and you know what I've taken it a step further I've stress tested it if I can't hit that fifty sales a month it's really forty five here's or charge off as a percent higher than expected here's how it will still work I see forecasts in this banking conversation as a twofold benefit. One, for the bank to have a little more comfort that you have some sense of what you're going to do with this money. But two, internally, I don't know quite how you operate without a compass. Plotting out, taking your last twelve months result, putting on paper and then start making changes for how the next twelve months might go. I'm not sure how we don't operate without that compass. Yeah, and I think that's becoming even more. I want to come back to the stress test thing, Chad, but I think I think what we're seeing is dealers are they've had a little more margin for error in the past, right? And so this is now we're finding that our profitability is coming in question. We're seeing crunches in various areas that maybe weren't there two years ago. They certainly weren't there pre-COVID, but certainly these last two years, year and a half, I can say, have been different. So Chad, anything to add on that one, projections before I go back to the stress testing? I think it's important to remember that we can grow ourselves out of this business, grow ourselves out. And so we might go to the bank and say, we need three million, but we're on a path that we need five to achieve. And if you run out at three, you can actually do more damage than good during that growth cycle. So that projection helps you plan and make sure you're going in asking for the right amount of money to achieve what you need to achieve you don't put yourself in a bigger bind. Good. So I love that. I think that's something that we also see. And when we do projections, Chad probably knows this about me, JP, but I've always been a cashflow first guy. And in fact, I used to be able to say to dealers that we're entering the space. We've done a lot of work over the years with initial projections for dealers that are brand new. And and I used to be able to tell them look this is going to sound ridiculous but we can almost take profitability for granted in our space why because we have plenty of markup the customer doesn't fight us on price or for apr so we have plenty of markups so we typically can take profitability for granted and and that's not going to be true now we can't we can't say that in the same way uh certainly not for established operations but the stress test part was interesting to me because we just barely a couple months ago in our via dealer group started what I called a line of credit stress test. And what I did is I applied the same advance rate and same sort of voluntary repayment plan to dedicate a certain amount of collections toward debt reduction. And I just applied the same to all members in all groups. And wow, the conversations that came out of that were fantastic. I mean, just to let people see, you know, this dealer's portfolio will support the repayment better than this one. So let's talk about it. Why, what do you guys see as dealers? And so this is the part that I think when you talk about what are you going to do with my money? The first thing I want to know is does your projected cashflow show that you can support and repay this debt? Right? Absolutely. One of the biggest kind of covenants. So covenant being something that, you know, the bank requires of you in the loan document, I require you to, know maintain a healthy ratio of debt to equity I require you to be able to maintain a healthy ratio of debt service and that that measures your ability to pay it back it is maybe the most common financial covenant in a loan document and they'll they'll measure it monthly or quarterly, depending on your setup there. So not just in buy here, pay here, every bank deal is taking a look at that. And on the stress test front, I mean, what percentage of projections do you look at as an independent party feel a little bit rosy? And I say, I believe in you, dealer. I really do. But you know, truth serum is do you feel this is right? And so, you know, we've got to do the bad one, too, and just say, hey, here's what it could be, just so you know. And this was the pickle you'd be in. Yeah. Yeah, I think this is chatty. You know, we we use in our description of the thing. This this could be a wake up call for a lot of folks out there. And I think our dealers work with so many of them. And obviously we respect and love and appreciate the work that they do. And they're fearless entrepreneurs, as I always say. Many of the dealers we work with tend to be very sales minded. And so, you know, it'd be natural that they would step into a lending conversation and talk about if I had a line of credit, I could sell twenty percent more, fifty percent more. And and Michelle has heard me talk about it. That's almost never the answer. Right. It's like, you know, being able to sell more sometimes is is going to solve a problem. But I think what we'd like to see if I were a lender, I would want to, again, go back to what we're talking about here. Do you? regardless of how you sell and how you structure deals, I mean, does your cashflow, your history of cash flows, your projected cash flows support that? And so again, we're kind of, we're going to get into profitability week, our last topic here, but we can go ahead and move into anything to add to that chat before I move on. Well, again, I think one thing JP mentioned is the covenants and the projections that you do, you should be able then to predict what the, what your covenants would look like each month as well. And, and I think, Growth is great, but growth can also strain some of those covenants. And if you're going to break one of those covenants in the first four or five months of growth, especially with the new lender, that's not a great way to start off that relationship. So all the more reason why those projections are critical to get you out of the gate. Yeah. And we also super analyze in V-Eight. And I've done this kind of with even before V-Eight. We kind of super analyze twenty four months. Like I know people do rolling twelve and rolling twenty four or whatever. We just kind of to be consistent across the conversation. I really focus a lot on the upcoming twenty four months. So that's part of what I think what you're referring to there is the covenants are going to need to support that. And I think it's also a question of liquidity like we can't. We can't sit here and go through all of the pieces. You mentioned collateral recovery rate, Chad. I'd love to have you come back and have you guys come back and let's dig into that a little more deeply because people need to really understand that. We have our own kind of calculations that we do, kind of an index that forecast cash for twenty four months. And so it's all kind of meant to do the same thing. Right. I mean, you lost liquidation and whatever, but I think what we'd ask dealers to do is get familiar with those numbers get familiar with those calculations make sure they're able to to know what the future can look like uh you know based on their history go ahead um I I have one question either one of you um I again married into buy here pay here I I'm pretty business savvy covenants you said you know don't try to get out of your covenants or or work outside of your covenants in the first five six months um and you know we've talked about you you can you can run this business off a cliff if you're trying to grow too fast or whatever so what does when when your bank is looking at where you stand with your covenants what does it say to them when you are not within your covenants for just cells let's just say I'm selling more than what are than what is part of what my covenants are what does that say to them well I I think it's showing that you can't manage to your own expectation. If you put a budget in place and you can't manage to that, again, those budgets are great to exceed, but sometimes exceeding budgets actually, again, growing too fast, you can then, so I think you've got to, you know, if you can't manage expectations, you can't manage your own business, why am I getting into business as the bank, you know, with you? And again, growth is always good, but I think, again, going to a bank, I think JP hit on it, too, is going to a bank and being a hundred percent growth minded and telling them that you just want to add three locations and triple sales. But then if you look at your own numbers and this is kind of a real scenario here in the last few weeks for me, there was a guy, fifteen cars on his lot. He's only average, you know, thirty sales a month. And he's wanting me to put projections together, selling fifty, sixty cars a month. And we don't have the cash to get to the inventory needed to achieve those kind of sales, let alone the banking. So you really got to work within your parameters and understand your business. And when you start spouting off those kind of numbers, especially to other institutions that may or may not know your bank or your industry very well, it kind of makes you look stupid. Yeah. And like you don't know what you're talking about. Yeah. Can I add something to that? Yeah, if I may, I think dealers need to think a little bit more like their bank as their boss. Most of them don't have bosses. Your bank's your boss because that's your lifeblood. And in that, when you entered into that relationship, those covenants are your vows, your marriage vows. And no banker out, excuse me, no dealer out there knows the inside and out of their loan document. I'm not asking you to, but there are some important things in there. And the bank would love to review those with you when you close. And so when the bank is an afterthought and they come back and say, oh, I noticed that you failed a covenant, not the other way around. Hey, bank, I'm so sorry. We opened a shop this quarter. There are a lot of upfront expenses. I blew a covenant this past quarter, but here's why it will be okay. When they have to come to you and say you tripped a covenant, that's kind of a problem. Good point. So we can dive into the next segment, which is financials. I know, Chad, in your post, you referred to the thing about having good financials. And of course, we're not surprised to say that as a as a professional CPA. We know that that's going to be important and we know that lenders in particular are going to lean on those. And before you speak to that, I would say that. We also recognize about this space for, let's talk buy here, pay here in particular and kind of leave lease here, pay here aside for just a moment. With buy here, pay here, it's always been a problem in doing back to those projections that we talked about. It's like our profitability and our cash flows don't always happen at the same time, right? I mean, we've got some lag there. And so there's, we've got a good example. One of our dealers is, in particular, has reduced volume, pretty good sized portfolio, well-established business has reduced volume in recent months and their profitability has come down, but they have knocked their debt down probably by seventy five percent in the last six to eight months. And so they're just aggressively paying down debt. So it's an illustration. So, Chad, talk to me about financials. And we want to make sure our listeners understand the difference between I've got on the screen reviewed and audited But, you know, they need to understand a non-reviewed financial statement and kind of the problems that that presents. So, Chad, you want to start us off with that? Sure. You kind of got through, I guess I call it four levels of financials. You have your internal financials that you're preparing. And then the next level that you would get a CPA firm involved is a compilation. So that's going to be basically taking your numbers. The CPA is just taking your numbers, putting them onto a financial statement. making sure that the appropriate categories are there, doing very little analytical work, but just kind of making sure it's presented in a reasonable manner. You'll see a lot of banks that when you're being lent less than two million dollars, a compilation is usually acceptable. When you start to get over a two million dollar ask, a review is usually requested of you. So maybe between two and four million, maybe five million with some but two to four million you're being asked to do a reviewed financial which is deeper analytics a little bit of testing but more analytical and the auditor you know the the cpa firm's going to get deeper into your numbers and ask more questions and put a little bit larger report together those are usually something that's done too as a precursor to an audit just as a first year And then you have the audited financial. So any lender that's over five million is gonna probably ask you for an audit, which is a more invasive getting into the weeds of your numbers, but it gives that assurance to the bank that somebody else has done a deep dive into your numbers to make sure that the numbers are presented fairly and everything is presented on your financial. Is there some sort of physical check? Is it uncommon to have like a physical check of assets, like an onsite element to an audited financial as well? JP. Yeah. So with an audit, they can be done remotely. COVID taught us we can do anything. But they do stuff like inventory observations and the auditors are asking for a lot of third party and internal support around major balances. They're going to spend countless hours on the portfolio. That's the biggest thing in your financial and a lot of time on your estimated loss, you know, reserve. And so, um, so yeah, you know, they may be on site probably should, but don't have to be so. Okay. Good. Thank you. I think, um, yeah, that's all good information. I think we, uh, We recognize that it's going to be important. And I, too, am hearing most vendors ask for at least reviewed. You know, we typically, as I said, we don't we don't work with a lot of dealers that are north of that five million. You know, so so we're seeing, you know, I would say that the the the mainstream of buy here, pay here. A lot of these dealers in these in our group would be one example is like. They're mostly in the two to five million dollar portfolio size. And so, you know, a line of credit somewhere short of that. So it's, you know, reviewed financials are certainly going to be appropriate. So it's, you know, we got to get it out of QuickBooks. We got to get it to a professional. And we got to make sure that somebody has really examined those things. And then beyond that. We can move into the profitability side, Michelle. And there's an asterisk. Yeah, there's a whole lot to unpack here. So I think, Chad, let me have you start since you, again, you did the post and you were kind of suggesting and you actually opened with profitability was number one. And I kind of chose to put at the end because there's so many things to talk about here. But talk to me about what you're hearing in the dialogue with lenders on behalf of dealers. What are you hearing about profitability, especially anything that's different? I think for first and foremost, you need profitability. I mean, when I, the reason I wrote that followup post is I had just gotten off the phone with one of our lenders that we work with. And his very first question to me was, uh, were you profitable, you know, in. And are you profitable still here in and it wasn't amount being hundreds of thousands of dollars profitable. He was basically searching. Are you one dollar profitable? Or are you negative one dollar? I mean, for as crazy as it sounds, that's about the margin that we're working with right now with some of these banks. If you're negative in any way, they really don't want to talk to you. Or at least they're going to give you some some. some takeaways to say, this is what we need to see. I think that's the important part of this plan B is getting those introductions and talking to banks and understanding what their requirements are and what they need to see of you so that you can start working towards those goals. But on the profitability side, those are the first two questions. And then he asked me about retained earnings. So are you negative? Do you have positive retained earnings? So it was all about all around profitability. I was presenting two deals to him. One was profitable and one was going to show some negatives last year and then an improvement into this year, but still negative. And, you know, there was hesitation to want to proceed on that one. And so I think I think the key here is, you know, this isn't about cooking the books, you know, to make it profitable. But this is about understanding what your options are, too. Right. If you're not profitable and you haven't been for a year or two, plan B is going to be really difficult to achieve. And so it's understanding that and starting to work towards. What are the hard decisions I have to make within my business, whether that's cost cutting or, or, you know, growth, if that's what's needed to grow yourself out a little bit of, of the negative, but it's understanding what it's going to take to get profitable so that I have a bankable business. Good. So JP, I got a couple of things for you. First would be anything to add to what Chad just shared there? I just think that two quick things. One, the banker has to sell you to a senior credit committee. So he's asking questions, he or she, excuse me, is asking questions that they're going to get asked, right? And the optics of a loss is, wait, you want me to extend credit to you, but you're taking losses. Right. And two would be, you know, I see scenarios where if a loss year is bracketed by profitable years and there's a story, that's not necessarily a deal killer. You know, we tried to enter a new market. It didn't work out. We got our butts handed to us. We're out of that market. Our core operations are strong. So I don't think you know you're necessarily dead in the water if that's the case yeah and I would say I talked to a lender not long ago who said they'd only approved two of the last seventeen applicants in which case that tells you that yeah you're right it's not necessarily a deal killer that they're not profitable right now but when you got you know, you've got a long list of applicants. If you're going to cherry pick, you're probably not going to choose the ones that are in a hole. And so that just kind of stands to reason that we've got to know our own numbers. We've got to be able to manage our way, you know, into profitability for sure. And then I want to talk to you, JP, if you'll answer for us about EBITDA. You know, we don't live in that world. We don't hear a lot of people talk about EBITDA, but are lenders asking for it? And if so, why? What is the relevance of that number? yeah I mean that's kind of a universal it's meant to measure free cash flow um so you you kind of it's a universal measurement that bankers use whether that's buy here pay here you know real estate whatever and it's intended to measure um free cash flow and so you take your p l your bottom line and then you add back items that hit the p l that aren't cash items um like depreciation amortization They add back interest because that's part of the debt vehicle. And they get to this number that hopefully is positive. And then that EBITDA number factors into their conversation of can you service or pay this debt back? If that EBITDA number is better than what your annual debt service back to us needs to be, then let's have a conversation. If it's not, it stops there generally. Yeah. Yeah. And that's a hard thing to explain verbally. What I can do is we can share the link and explanation of that calculation in the comments here so people can refer to that for the details on that. It sounds like if I were your dealer, JP, and you and I were about to walk into a boardroom meeting with a bank, it'd probably be among the numbers that you would want me to be familiar with in my own business, right? Yes. Yes. I think it wouldn't be quite as important as profit and equity in the business, but it would be pretty shortly thereafter. Good. Well, I want to share with our listeners that, you know, I, I presented at, um, at the NIDA conference in Vegas and we did some DIY success tools and I want to make sure our folks know they can email me, Michelle, if you don't mind putting up the email, you can email me at, uh, jim at y at way.com and I will happily share the, the tool that we created. It's just a free, uh, success tool that will, you know, one, one sheet in the workbook does a profit. Another sheet does cashflow. And, um, so, the profit method that I started using just as a quick way for dealers to get to that number is I share with them this tool that they can basically pull together nine numbers. And if they'll plug in those nine numbers from the month of, you know, here we are having this conversation on August first, if they could, they should be able to pull together eight of these nine numbers in no time. The number that will take them longer to pull together was what was their expenses, their operational expenses for the month of July. And regrettably, that's the part that sometimes is going to delay them from knowing both their real profitability and their real cash flow results from the prior period. If we're looking at the calendar month now. So this is why I think that, you know, it's important for them to have professionals who can help them turn out timely financials so that we can get that in a quick way is part of why, you know, in VA, we work off of the most recent quarterly expenses. You know, we don't, we don't look for monthly expenses or wait for monthly expenses to come in. But in terms of dealers being able to know what was my profitability, you know, last month, it would be, it would be the other, because other things are just quick numbers from the DMS, you know, how many sold average cash and deal, you know, simple kind of numbers to get to. And so it's, it's just something that we want dealers to be able to get to it. And Chad, I would love your feedback on this part. We, I just started a couple of years ago based on feedback that I cannot really remember where I got the suggestion, but the idea was to measure first, if you think of your dealership as a lot of them have a related finance company, but with or without a related finance company, if we look at the finance side of our business and just look at interest coverage. So for those not familiar, interest coverage would just be interest collected in the period minus net charge off. Do I leave anything out, gentlemen? Is that the way you would calculate it? Basically, it's really just looking at the portfolio by itself to say, Does the interest we collect as part of the reason we charge a consumer higher interest because we've got a high risk portfolio, we anticipate losses. And so we've got that there. So one of the things we look at that just as interest coverage, this is one of the numbers that lenders used to ask me about. And so we started looking at that and just say, does the portfolio self-support right now? Does the interest that we collect in the portfolio offset those losses. And I looked it up, gentlemen, before we got started this morning, and we tracked that number on a year to date in V-Eight, and less than half of our V-Eight members are positive in terms of interest coverage. And we know that was, a lot of them showed negative in twenty-twenty-four, but I can tell you, at least with our small group of V-Eight dealers, that so far, year to date June, that was June, then year to date June, more than half of our dealers are underwater with that number below one hundred percent. OK, so so that's something that we're watchful about. And so the method that we're using over there is to say, OK, let's look at the finance side by itself. Does the portfolio self-support? And if it does, now we can go over and look at the sales side of the company and say, if if the profit on sales didn't have to go toward losses in the portfolio and it could just support operating expenses. How would that part look? So that's the way we chose to separate. It's just, it's a little easier for dealers on a day to day to get to those numbers quickly. And so this is kind of, we look at those two things separately, but we know in our, in your financials and you might have consolidated financials and you might have earned discount income and you've got a lot of things moving in your financials over there, but, for dealers we're just trying to help them get to numbers quickly and simply and understand am I profitable or not am I generating positive cash flow or not operationally speaking and so this is why this conversation becomes so important and we back to the thing before you guys um chime in there I would just say that what michelle sees me do is go through you know a bottle of aspirin at the start of each month as we are trying to help dealers figure out the reconcile their portfolio principle and it just so this is why last year in the summer of last year we asked the dms providers to create a portfolio summary report that would help dealers have a quick look at run a report that says principal in the portfolio started here. We added this much, we collected this much, we charged off this much and we closed here. And this is just, it's, this is the part that I think if I'm, if I'm looking into that boardroom JP, I want to have those numbers. I want to have confidence in those numbers. And we just have dealers that are off by big, big chunks and they don't know. And they, they try to delegate to a member of the team and the team doesn't know. And it just, it can be, it kind of underscores, a problem that we have in our our industry and the reason that it makes it a little more difficult for dealers to, you know, have numbers that they can sit and have confidence in. And I think this is part of why we kind of beat that drum a lot. Chad. So, Chad, you can speak to that. I think just, you know, obviously we talk about a lot here, but looking at the profitability, do you follow the methodology about just doing the finance company by itself and then look at the sales arm? I do. And I think there's so many ways to approach this business, to record stuff in the financials. As you were talking, my mind started going towards, you know, I have dealers who basically record a repo ACV as a for instance, and they show no charge off and they show large wholesale losses, right? And so, Or the reverse, they bring in the ACV of the car minus all of the recon that's needed to get that car back to a sellable position. And so they're understating their recoveries. So having some metrics that kind of streamline it, and as long as you're consistent in comparing those across the board amongst all dealers you're comparing yourself to, but one of the big missteps is going to a twenty group or a V eight group or whatever. And you're comparing yourself to the guy next to you, but he records things and does things differently. And you might actually be doing it and be really comparable, but you look miles apart. So it's making sure that, again, you understand how the next guy is doing it compared to yourself before you compare. Because a forty car dealer here isn't going to be comparable to a forty car dealer a few states over maybe. just by the way they have to do business or how they do business. You can get yourself into trouble really good. And I think, you know, we have reasonable expectations around that. Like, we're not naive. Sometimes, Michelle, we had conversations a couple years ago around this idea of standardization in our buyer-payer space. And I think, boy, if I had to get to standardization and buyer-payer, not only would I have an aspirin bottle, I'd have a bottle of whiskey on my desk. And, you know, I'd be headed for rehab. So we probably have reasonable expectations about all those things. But I can say that in addition to what you mentioned there, Chad, We had a dealer that we worked with that darn near did not get their line of credit renewed after twenty years in business and probably fifteen plus of those with the same capital provider. And it was really heavily around LTV. So for those listening, that would be loan to value. And my understanding that calculation has been. It's the loan to the customer, like the outstanding balance to the customer relative to the book value of the collateral. And typically that's done at the time of origination, like they're just looking at what was their financed amount compared to the book value of the car. And even though the dealers don't necessarily look at it, we have to be aware that lenders will look at it and so it's another element that we didn't talk about here clearly you guys are going to have to plan a time to come back and spend some more time with us because there's just a whole lot to look at here but it just kind of underscores this idea that we we want dealers to be familiar with all of these elements of their business and so they can uh one manage their way towards success in all these areas that we're talking about and two be better prepared for those boardroom conversations when the time comes so Chad, we can start to wind down. We've run very long today, but we typically try to keep it around thirty minutes, but I knew there was a lot of meat on the bone today. So, Chad, thoughts that we need toward wrapping up? I think I'll say again, my post was geared around making sure you've got a plan in place. Your lender, it's not guaranteed that lender is going to be around tomorrow or they're not going to go into their finance committee and the bank as a whole is just going to change direction. Or that bank is going to get bought out and that new bank doesn't like the space and wants to wind down the portfolios within this space. But the key is that you can't flip a switch overnight and get to the next bank. It's a three to six month process and that could be on the low end depending on if they're going to require you to go get a reviewed financial or an audited financial if that's what you need. So there's some other steps. I think if you had all the pieces in place, that three to four months is reasonable. But if you have to start obtaining all this other data information, get the outside CPA firm involved, it can be a lengthy process. So you can't get your letters of default or get a call letter and then expect to get a bank the next month. Yeah. Good, good, good. Yeah. And then JP, before we started, I, you know, I mentioned that as far as takeaways for dealers today, obviously we've said, we really want them to know their numbers, right? We want them to get familiar with their own numbers and make sure all these different pieces we talked about. And I know you suggested that they, they be always kind of, um, able to make new lender connections. They're actively establishing new relationships and connections so that they can begin to develop a plan B and not be faced with some non-renewal at the eleventh hour and not be starting from scratch. So I think that's among the other things. Anything else, JP, come to mind as far as action items or things we didn't cover? um I well I think that um so you hit the nail on the head there first of all you know in addition to introducing yourself to another industry bank go to your local bank that you have your mortgage with unless it's chase right or somebody really big introduce yourself and say I'm jim rhodes of rhodes motors serve the community been in business eight years here's my financials let's have a conversation down the road about a potential business line of credit. And if they're not the bank, then put your mortgage elsewhere, somewhere local that their son is on your son's soccer team, right? And then it's preserving your current bank as best you can. Transparency and relationship go a long way. If a bank has to fire a couple of dealers, they're really going to go to bat for the one that they care about and is transparent and they're in relationship with versus the one that is non-responsive and and tough to get a hold of that's that's the headache of so many dealers it's it's uh with their own customers so yes if you're having a hard time talk about it if you're if you know anything's coming up talk about it have a relationship I love that right And then it ends the long-term deals. If you can set a one year and we'll get a two year, you know, give yourself more cushion. Yeah. Yeah. Everything that said makes me think of something else, Chad, we'd be here all day. So I think, yeah, no, it's, it's all true, but, uh, uh, chatting, any closing thoughts, anything else to add before we wrap up? Um, no, I just want to say thanks for, for having us on. And, uh, obviously just like, you know, yourself and, you know, we're, we're here to help. Um, and, uh, you know, crazy enough we we actually like the auto industry of all things and so uh but we are in some in some tough times and I think it's important to to just again stay on top of stuff talk to others uh see what others are doing um and uh you know I think it's gonna be a tough go for twenty twenty five but I I think again if you're transparent with your lender uh you know, I think they'll still work with you, but it's still just tough out there. Yeah. Well, you can see on the screen there on Chad's profile, it says Martin brand accounting. You can also email me. I'll get you in touch with these folks at any time. We can just Jim at white halfway.com. And when I would say, don't wait until you have to have it to start preparing that packet, putting these financials together, get them reviewed and, and get that portfolio analysis done well and tied tight. And, You know, it sounds silly, Chad, but I would love for a dealer, if I were a banker and I had somebody walk into me and they could show me a DMS report that matched their report, that matched their financials. I would love to be able to see that. For me, we don't see enough of that as people are operational coaches. We don't see that enough. And I think our DMS providers out there could help us all more in some of those areas. And I think this is something that you can expect to kind of see this be the remainder of my career is kind of working to help tie some of these things together better for dealers so that they, one, they have good information in front of them so they can make their own good day-to-day management decisions. And then they can also, in the course of doing that, be prepared, you know, to have a better packet when they come to sit with you and start moving toward, you know, proposing a line of credit. So thanks again, gentlemen. I think, you know, we covered a lot of great ground. I appreciate you bringing your expertise to our listeners. And we'll just have you stand by for just a minute. We'll close up and just stand by. We can say a proper goodbye. All right. Thank you guys. Thanks. Thanks for all y'all are doing for the industry. Thank you. You're welcome. Alrighty. Um, so yeah, gentlemen, just stay back backstage for just a minute. Um, I, uh, as I really great information, I just, I heard an awful lot that, uh, dealers should be able to take some pretty good takeaways from, um, I, uh, mine, the big ones that I have, um, uh, was aware of one, know your numbers and three to five years portfolio. And we keep talking about you can't really have an opinion about something you're not measuring. And so with all things in business, it's a really good idea to really understand your numbers. The second one is have a plan when you go to talk to someone. about money. Have a plan. This is how we're gonna spend the money and not just we're gonna kill it, but have a plan. And then the other thing that was a big takeaway for me is about covenants. Know what your covenants are. Make sure that your team understands what your covenants are. And then do just internal audits frequently about where do we stand on our covenants? Because, you know, there probably isn't that long of a list of things that are very strong covenants. And you can do your own stress test on whether or not you're following your covenants. Right. Good stuff. Really great stuff. Thanks for tuning in, y'all. If you're interested in jumping in a VA dealer group, please reach out to me. You got my email. All right, everybody, have yourself a great rest of your day. Have a great weekend, and we will see you on Wednesday.
