Every dealership has a leadership position in the organization that is tasked with “risk management” as part of the job description even if it isn’t part of the title. Too often, this type of responsibility is viewed as being limited to evaluating the appropriate levels of insurance to keep in place. But risk management is much more than that and dealers need to realize that there are things entirely within their control that can help manage risk in situations that may not be capable of being managed by insurance.
As boring as it sounds, one of the most important ways for a dealership to manage risk is to implement some basic terms in the legal documents you use with your customers. Every single one of you has some form of document you use when you sell a piece of equipment, sell parts, or perform repair services. Whether you realize it or not, these purchase orders, bills of sale, work orders, or whatever else you call them, form part of the basis of a contract relationship with your customer. The problem is that most of us don’t pay any attention to what these documents say and often don’t understand how they can help or hurt you.
We know we need some documentation to help keep track of what is being sold to a customer and the price. But beyond that, these documents are an afterthought. In fact, it is pretty likely that many dealerships are not aware of when or how the documents were created. For other dealerships, the forms may just be provided by their manufacturers, meaning that the documents contain terms that will protect the interests of the manufacturers but may not address things that can be important to you.
Fortunately for many of you, 99% of your interactions with customers are positive. Even if there are issues, they are worked out in a business-like manner that doesn’t require reliance on legal terms. But remember that “risk management” isn’t concerned about the general rule or what happens most of the time. Risk management involves planning for the uncommon issues and trying to limit the losses in those situations so they don’t cut into the profits of your positive customer interactions. One of the best and simplest ways to do this is to put some legal language in your customer documents that serve as ground rules when issues do arise.
Rules from the ground up
There are many types of “ground rules” you can use to help manage risks with your customers. Here is a list of some common ones:
- Limitation of Warranties and Liability. Most dealers address this issue when documenting equipment sales. But almost all dealers overlook this when it comes to parts and service sales. The biggest way to reduce risk is to limit the maximum exposure you have when dealing with an unreasonable customer. This type of language will not stop a customer from complaining but it will definitely be a factor that is considered before a customer files a lawsuit.
- Payment Terms. While you want to limit your downside, if a customer won’t pay you, your contract terms can also be used to create incentive for the customer to pay by imposing financial consequences
if there is nonpayment. Adding terms like late fees, interest charges, and reimbursement of attorneys’ fees are all basic things that are easy to include.
- Liens. Many dealers use repair lien laws to help recover amounts owed for service work by using the customer’s equipment as collateral. Unfortunately, these laws aren’t all the same, and sometimes the
facts don’t fit the law or dealers don’t follow all of the steps needed to use the law. As a backstop, you can include a separate security interest in your customer’s equipment so that you have some contractual rights to retrieve collateral independent of the state law. As part of the language, consider including a storage charge and a requirement for the customer to reimburse you for sale costs and attorney fees if you hold an auction to sell the collateral.
- Sales Tax Compliance. As dealers grapple with the new sales tax rules on out-of-state customer sales, don’t forget that your customer documents can help manage risk by including terms that help establish
where taxes are owed and related issues. Tracking the place of delivery, establishing where title to the equipment transferred to the customer, and customer obligations to cooperate in providing sales tax exemption information are all items that can be included in your purchase order to help manage risk in this important area.
- Customer Signature? One of the most basic and overlooked “terms” of your customer document is the signature. Did your customer actually sign the contract? Even if you do everything right with the language, if you don’t implement process changes to do a better job of capturing customer signatures, the words really won’t be worth the price of the paper they are printed on.
I would encourage each of you to take a look at your customer documents and understand what they really say (or more importantly, don’t say). Then think about the problems you have had with customers and evaluate if the customer documents cover the situation. Going through that exercise will help you understand where you have gaps that need to be filled. Don’t worry… dealers large and small have gaps in these documents. But the good news is that fixing this issue is totally within your control and can be changed quickly.
I know that risk management is not anywhere close to the top of the list of priorities for most dealers. But if you are interested in protecting profits, don’t overlook the simple things you can do to give you a leg up for those expensive customer situations that will inevitably pop up.
Article Written By Lance Formwalt
LANCE FORMWALT is the leader of the Equipment Dealer Practice Group at Seigfreid Bingham, P.C.