One dealer I recently had the opportunity to speak with convinced me that it can be done and done well. Ray Lyle was a CPA for 25 years with a thriving private practice who envisioned his children joining him in his business one day. Today he is a successful BHPH dealer, with 5 locations surrounding Chattanooga, selling 400-500 units per month. Ray loves working with his family and doesn't miss the suit and tie days that he left behind when he sold his practice.

What caused this dramatic shift in careers? Ray had come to realize that his children really held little interest in his Accounting Practice. He also had several clients who were BHPH dealers so he saw the enormous potential in the industry. He did his research and found that his market had room for a BHPH dealer who would do things just a little differently and six years ago Nice Cars was born.

Ray designed his stores on a "Reverse Math Theory" that he firmly believes in. First you look at what your customers can afford to pay and you let that dictate what you will sell. For Chattanooga and the surrounding area where Nice Cars is located Textile and Carpet is the job market . 80% of the world's carpet is made in Chattanooga and the surrounding area. This means a lot of potential customers earning $11-$12 per hour. Using his reverse math theory Ray determined that is customers could afford a higher quality vehicle than most of his competitors were willing to sell.

Selling a higher quality vehicle would cause many in the BHPH industry to cringe because that decision has a ripple effect. More money in inventory, more money on the street, more underwriting issues, more collection issues, more insurance issues and the list goes on. So how did Nice Cars tackle all of these issues? Let's walk through their operation one item at a time.

Inventory-What should a dealer stock and how does it relate to customers and sales?

Nice Cars stocks 100-150 vehicles at each lot. The average selling price of a unit is $10,500. Each unit is pre-priced, with the required down payment and they have a no-negotiation policy in place. "By purchasing a better quality vehicle we have few mechanical issues, everyone knows that customers don't pay for what doesn't run" says Ray. "Our customers can afford to buy a better vehicle, we also offer a free limited warranty, 1000 miles or 30 days that covers all major components, as well as CarFax services to build more buyer confidence."

Financing-How do you fund a BHPH operation that sells 400-500 units per month?

Ray's response "Go to a national lender. The number one intelligent thing I ever did was negotiate a line of credit with a national lender. There wasn't a local bank that could loan at the level I needed." This decision is what has allowed Nice Cars the cash necessary to grow their loan portfolio to over 73 million dollars.

Employees-Every dealer knows one of the most important aspects of your business is your employees. If you treat them well, train them well, and pay them well you get your money's worth and more from them. Ray's key components here start with his family. Deuce (Ray Lyle Jr) is his collection manager and Robby Lyle is his General Manager. These two young men are responsible for keeping everything running in the right direction and all employees report to one of the two. Ray's wife and daughter also work part time for Nice Cars. "I've even been known to put the grandkids to work to show them the value of money", says Ray.

Each store has 2-4 Administrative Assistants (who is also the Credit Analyst) who handle the title work and cashier duties. There are only 10 salespeople and 4 collection specialist total for all stores. The manpower or lack there of to run this operation successfully is astonishing. 6300 accounts to manage, 400-500 units sold per month. You do the math, there has to be an enormous amount of efficiency in the organization.

Ray claims that he has almost no turnover thanks to a generous pay plan for all employees and a 5 day work week. Each employee is eligible for daily incentives, monthly incentives and a portion of the profits that are split among the employees in addition to their pay plan. Daily incentives are based on 7 units sold per day from a store with $500 split among all employees at the store. At 11 units per day it moves to $1000. The store that has the best performance in a month insures that each employee receives an extra $1000 in pay for that month. Last but not least is the 10% of the stores profits that are split among all employees. Incentives are clearly a motivator at their stores. That 5 day work week, it's unique for a car dealer, all employees work the same days Monday, Tuesday, Thursday, Friday and Saturday.

Advertising- How do you advertise to sell 400-500 units per month? "Spend a lot of money" Ray solemnly replies. We are relatively new with only 6 years of business under our belt. We still spend $60,000 per month on TV, radio and a little print. Over 80% of his ad budget is on TV. If you don't own a TV you might have missed their commercials, but it's not likely with the number of commercials they run in a month. "Our goal is to get the customer to the lot, with phone calls, and internet. We sell 4 units for every 10 individuals who come to our lot. Our repeat business is up to about 37% after 6 years and our referrals are at 20%, when we get to a combined 70% we expect to be able to cut back significantly on our advertising budget.

The first question asked of the potential customer is "What caused you to stop here?" Obviously huge portions respond with Television. To glean more details Ray's employees ask for the customer's favorite television shows late in the credit process, which usually tells them which stations they saw the commercial on.

Sales Process-Advertising has paid off and the traffic is on the lot, but how can you deliver that many vehicles? Salesmen have a single objective with a customer-"Asphalt qualification". This is the usual qualification process for most BHPH dealers, do you have a job? Are you current on your rent? Have you lived in the area for 6 months? Have you had continuous employment for 6 months? Have you had a repossession within the last year? Within the last 60 days have you consulted counsel regarding filing bankruptcy? If the customer answers all of the questions correctly they are escorted to a Credit Analyst. That is the last the salesman sees of the customer until the customer is ready for the delivery. The salesman also performs the job typically assigned to a porter. "We believe the sales staff should know everything about the vehicles, making them responsible for the test drives, cleanliness and repair transportation gives them that knowledge." Ray said. The salesman's job is really the first step in the underwriting process.

Underwriting- Delivery ration of 4 out of every 10 customers. That ratio tells you something about their underwriting skills; it's not just anyone who can buy from Nice Cars. "The credit analyst has an important job. They must determine the ability and stability of our customer. Upon determining that, a vehicle can be selected that works for what they can afford. Not necessarily what they want. 98% of all notes are weekly payments. No one is allowed a monthly payment unless they are the sole source of income and their income is paid monthly such as government or some teaching professions in the area."

After the decision is made to deliver a vehicle, the after sale and collection turmoil begins. With vehicles on the street with the larger ACV there are some significant issues to resolve. What about insurance coverage? What about mechanical issues? What about customers who don't make payments?

Insurance-BHPH dealers continually struggle with this issue. If you require full coverage insurance to deliver the vehicle the customer usually secures it then promptly drops it. Or they just can't afford the vehicle and the insurance and you don't want them to have to choose between the insurance premium and your payment. Many dealers have someone at the dealership that continually stays on top of this issue and those that don't have endured many losses caused when their customers total their vehicles. Ray has taken a different approach, he went to an insurance carrier and purchased full coverage insurance on all vehicles that he holds a note for with Nice Cars as sole beneficiary. Claims are over 70% to premiums but he gets his high end vehicles covered and insures that he won't get stuck with a non-paying customer and no collateral.

Mechanical Issues-Back to the customers who won't pay for a vehicle that won't run. How do you address repairs after the sale, especially when you do not have a service facility of your own? Ray says, "I will never have a service department. All service work is sublet out". With the sheer volume of work available he gets the service he wants from the vendors he chooses to work with. "Our policy is that the customer is responsible for the repairs and maintenance of their vehicle but we understand that sometimes that is not easy for our customers. We will arrange a repair at one of our vendors and set up a side notes for the payment. We will have to pay to repair the vehicle either way, if its repo'd we repair is so why not get it repaired and collect it from the customer?" Ray stated that all side notes are handled exactly like vehicle payments, same pay cycles, and same collection terms.

Collections-Nice Cars has had a stern collection policy in place since the beginning? "With the higher valued vehicles on the street it had to be" Ray replied "repossessions came quickly. In the beginning we used collectors to try to keep up but as we grew it became harder and harder. The average collector can only work about 300 accounts, which meant growth in manpower." As anyone who has been in collections knows it is a tough field to be in and turnover is usually high. The need to focus the collectors energy is what caused Ray to invest in starter interrupt devices and it has become his tool of choice for managing his 6500 accounts with just 4 collectors.

According to Ray there are three types of BHPH customers. First there is the good customer, who has some credit damage, but will pay you as agreed. Then there are the fence straddlers, you know the type they could be your good customer or your nightmare depending on how you handle them. It's this group of individuals that the starter interrupt devices are designed for. With the devices in place you cause this group to become Good customers. Then there are the Credit Criminals, those individuals whom nothing will help them make their payments in a timely manner. You do as much as possible in the underwriting process to avoid these individuals.

Payment protection devices such as starter interrupt devices train your customer to make payments on time. Most individuals who purchase from a BHPH lot have never been taught financial discipline. The starter interrupt devices teach that discipline.

Ray instituted the payment protection devices from PassTime in Oct of 2001, and claims it was the 2nd most intelligent decision he ever made for his stores. Ray is a firm believer in complete disclosure at the point of sale. "If you make the complete disclosure up front, explaining how the device works, you rarely have customers walk away from the sale. We have sold approximately 12,000 vehicles with these devices installed over the years and we have had probably 2 customers walk away from the sale. We probably didn't want or need those customer's anyway because they had no intention of ever paying."

The devices are really technology at its finest. All about computers and electronics technology that really wasn't available until the 1990's. Customer makes a payment and receives a 6 digit code. Customer uses their device (think T.V. remote for a visual) and enters their code. They can now drive their vehicle for the next 7 days. They also receive 2 emergency codes with each payment; these codes are only good one time and only valid until the next payment is made. So if the customer fails to make their payment on Friday when due, they could use the emergency code on Saturday and the other on Sunday, but come Monday morning they can not go to work without a new code and they can't receive that unless they make a payment.

"The added bonus is that the devices don't need pay raises, vacations, or have bad days and delinquencies were cut by 2/3 and repos went down by 25%" stated Ray.

To the negative crowd who believe customers will not purchase vehicle with these devices, Nice Cars sells between 400 and 500 units every month.

What happens when a vehicle devices is tampered with by the customer? The store has a great way of dealing with that. When they suspect it is happening they give the customer a false code, knowing that it won't work. If the vehicle starts, the vehicle is immediately repossessed.

Devices can cost less than $200 per unit installed and can be reused again and again with a simple reset of the system. Failure rate, if the customer is not tampering with it, is rare.

If you spend time with Ray Lyle of Nice Cars you walk away with the sense that anything is possible if you have all the pieces in place. Inventory, Employees, and Processes. It's all about knowing what you need to do and making sure it gets done.

This article was published in the July/August 2004 Issue of Auto Dealer Monthly

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