Interview with Ken Shilson
Update the industry on what the focus is for NABD in general? What is the primary challenge or focus or things you are doing right now?
In 1999 when I founded NABD, it was with the vision that buy here, pay here needed to be a more important part of the automotive industry because there really is a lack of mass transportation in this country. Many people cannot get to and from work without the buy here, pay here industry because they are un-bankable consumers who can't afford to buy a car, they can't get mass transportation. It is one of the most important sources of transportation in this country. I believed that in 1999 the buy here, pay here business lacked an identity. It was misunderstood. It lacked credibility and for all of those reasons it was looked at as a second or even third class part of the automotive industry. Franchise dealers weren't necessarily interested in that segment of the industry and others kind of looked down on it. There were a number of reasons for that. I felt that there was too much negative publicity about buy here, pay here and I wanted to create a format where we could showcase the good things about the industry and the good people. I found over the last 12 years that some of the best business people that I've ever known are in the buy here, pay here business. They have been successful in buy here, pay here but they would be successful in any business because they have the skill sets that are really needed to be good business people. It has been a tremendous pleasure for me to work with these people over the last 12 years and many of them helped NABD grow and prosper.
We find ourselves in a time now when everyone seems to be interested in buy here, pay here because credit impairment, lack of capital, lack of credit availability to the consumer, have become driving factors for people to migrate to the buy here, pay here industry. One word of caution: Buy here, pay here is not rocket science, but it is a science. People must know how to do it and how to do it the right way or they will fail miserably. It is a business that will either make or lose you millions. Often times, the difference between the two is just education, training and understanding what you are doing before you get into it. NABD has become a platform for showcasing the buy here, pay here industry, providing the specialized training that is needed to be successful in buy here, pay here and to create networking and educational opportunities for its members. It is not intended to self-promote any individual or people. It is intended to promote the good and betterment of an industry. That is our vision for NABD and we feel that the future is even brighter than the past. We see tremendous new people entering this business and we are very excited about it and we think the buy here, pay here business will become the most important segment of the automotive industry in the years ahead.
What is your assessment of what is going on now with dealers, consumers, and the economy overall?
The credit markets are absolutely driving what is happening in our economy in all areas -- not just the automotive industry, but with respect to automotive credit. What we have seen, particularly in the last 12 to 18 months, is a significant contraction in the availability of capital to the sub-prime auto market. I would define that as the consumer that has a 550 beacon score and above. Those people were not prime customers or even near prime because they had credit scores of less than 650, so they were below the near-prime customer. In the past several years, that market really expanded and exploded with people being granted credit very freely. What we've seen particularly in the last 12 months is a significant contraction in that credit availability. Many of those players that were in the sub-prime lending market were reaching down and taking the better customers away from the buy here, pay here segment and providing them with sub-prime financing. As that has market has contracted, it has made it less competitive in BHPH for those really good quality customers that were buy here, pay here customers before but were actually taken away by the sub-prime credit market. Those customers are now available.
In addition, buy here, pay here dealers are starting to see higher credit quality customers -- people with 600, 640 or 650 beacon scores that are unable to obtain traditional financing so they are looking to the buy here, pay here industry to provide transportation and financing they need to buy their next car. That is the exciting part of what is happening in buy here, pay here because it gives the buy here, pay here industry a bright future because of the higher quality credit customer that is going to be coming in. In addition, the less competition from these other sources is going to create more opportunity for those people that can take advantage of them. Those people that migrate into the business and have the capital to do it, are going to become extremely profitable in the days ahead because they are going to be able to capitalize on those opportunities.
What we see is an expansion in the buy here, pay here lending segment, a contraction in the sub-prime financing segment and actually a trickle down from near prime and prime into the lower credit scores because people's credit is being adversely affected by sub-prime mortgage meltdowns and other economic problems that they face in the world today -- job loss and other things. We are seeing a deterioration in the credit quality of the consumer today and that is flowing right down into the buy here, pay here segment.
Do you think Cash for Clunkers is a good idea? How will it impact buy here, pay here?
This question came up at our NABD conference in May this year and there was quite a bit of discussion on it. There has been quite a bit of discussion about this subject last night in the exhibit hall here at NIADA with a number of the exhibitors. CarMax is a player that has been very active in trying to help direct the legislation on Cash for Clunkers. I think all of us are trying to understand what the true value of Cash for Clunkers is going to be. Our concerns are that it is going to take a significant number of vehicles out of the marketplace that still provide good transportation and those are not going to be crushed, but parted out and as a result, you are taking a supply of vehicles out of the market that is workable transportation. Secondly, we think that to give someone a $4,500 credit or some credit up to $4,500 is not going to stimulate much activity because many new cars are still unaffordable even with a $4,500 credit.
We don't think it is going to affect the deep sub-prime customer but we think that it is going to stimulate some sales to the new car franchise dealers for some people but at what cost? We are really concerned. There are going to be a quarter of a million sales potentially with no trade-ins so that is not good. Secondly, we are taking usable transportation out of the market. That is not good. Thirdly, we've seen that when you give somebody a credit, it doesn't make them a good paying customer. Just look at the tax refund season where people take earned income credits and they put these refunds down to buy vehicles and then they never make any more payments. You cannot buy your way into prosperity. We feel this is the wrong program at least on what we understand. We certainly are willing to give it a chance and willing to take a look at it and understand it, but at this time, our initial view of it is that it is going to have some very detrimental effects in the auto industry and is not going to accomplish a whole lot. It will also cost the taxpayer more money.
What advice do you have for buy here, pay here dealers?
First of all, I can say with first hand experience, because just in the last week, a record number of franchise dealers have contacted me and NABD for assistance in doing just what you are asking – entering the buy here, pay here industry. They are asking, "We are interested in doing it. How do we do it?" I think all of them are looking for that magic formula that guarantees their success or that one way of doing things that is the silver bullet so to speak of success. What we tell them is that the silver bullet to success is having a well thought out plan and developing the right business model to begin with. What we start with is a projection and where we ask them to give us certain assumptions -- how many vehicles they want to sell, at what price they want to sell them, what is the cost of those vehicles, what kind of repossession or loss rate do they expect to have? We ask them for that input without giving them any input ourselves. Then we critique it for them and we go over and explain how their assumptions may differ from the industry benchmarks and say that, "We are not saying you are right or you are wrong, we are just saying this is what the industry is doing, so to the extent that your model differs, how are you going to be able to do that?" It helps shape their thinking and when we come away from creating that business model, then they have a clearer picture of what they are going to try and do, how much capital it is going to take, what cash flow they are going to have, what profitability and tax problems they are going to have and what resources they need to implement the strategy. It really crystallizes what they are trying to do and it puts them and us on the same page. I would strongly advise anybody who is entering this business, to have a well thought out carefully planned business model before they do it because they will not succeed without it. This is not a business that you can succeed by running it by the seat of your pants. You must get and do your homework up front to be successful.
What are the key things that successful buy here, pay here dealers do?
I think there are really three things that stand out. Number one, buy here, pay here is not about buying and selling cars. Certainly buying and selling cars is part of it, but first of all, you have to buy the right cars, but you have to match and sell them to the right customers which requires skill in underwriting. That is experience that most people who are first entering this business do not have. Even if they've had a background in the car business, they don't have a background in underwriting sub-prime credit customers. That is the first thing; good underwriting procedures. I think the second thing is that they have to understand how to manage credit risk. People are going to have credit problems. Even when you do a good job of underwriting, these people lack in many cases, financial capacity. When they have a life event like a divorce, a medical problem, or some other life event, they are going to struggle in being able to pay for the vehicle. You have to understand how to deal with those challenges and the effect that those challenges will have on your profitability and your cash flow. You have to allow enough flexibility to do it which requires skillful financial management. I believe those are key elements that can only be obtained through education, through networking, through doing your homework before you get into this business.
BIO: Kenneth B. Shilson, CPA, is a Principal in Shilson, Goldberg, Cheung, & Associates, LLP, a CPA firm in Houston, and President of Subprime Analytics. His CPA firm provides audit, accounting, tax, and consulting services to more than three hundred-fifty (350) subprime auto finance clients throughout the country. Subprime Analytics provides state-of-theart electronic subprime portfolio credit loss analysis. Ken has helped pioneer an IRS approved tax strategy for "Buy Here / Pay Here" dealers regarding the use of a related finance company. He has authored numerous articles on accounting, tax and other matters related to the used car industry.
EMAIL: ken@bhphinfo.com
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