When it comes to reliable car dealership profits, solid F&I profit participation programs are more than just a good idea. They can mean the difference between underperforming and maintaining a robust bottom line.
However, never assume that all profit participation programs are the same. Choosing the right option for your dealership and managing it effectively are essential when it comes to achieving your dealership profitability goals.
Here we’ll go over what you need to know to make a wise decision.
What Are Profit Participation Programs in Car Dealerships?
Profit participation programs enable dealerships to collect a portion of the revenue associated with various F&I products they sell. Such programs are often key sources of dealership profit and wealth creation.
Which program is the best choice for a particular dealership depends on several factors, including but not limited to:
- Alignment with long-term business goals
- The dealership’s degree of risk tolerance
- The dealership’s current needs as a business
Understanding F&I Profit Participation Programs
Every profit participation option is unique in how it’s structured and ultimately set up. Non-participating (“Non-par”) programs pay out based on the F&I products sold. Participating (“Par”) programs offer more opportunities to build long-term wealth.
Generally speaking, smaller and emerging dealerships that are primarily focused on growth frequently choose upfront payment, as the revenue can be reinvested in the business. Larger, more established dealer groups may find more benefit in tax benefits, long-term wealth-building and more.
As dealerships’ goals change, you should re-evaluate your profit participation plan to ensure it aligns. For instance, dealerships of any size looking to expand or acquire more rooftops may prefer more on-hand capital and may wish to change to a participating model when the time is right
What are some different types of profit participation programs?
1+ Commission/Guaranteed Retro
A 1+ commission program is a relatively straightforward type of non-participating program. When your F&I department completes a sale, your dealership collects a fixed commission. This type of program is a terrific option for boosting cash flow and generating quick revenue for growing dealerships.
While the advantages and considerations of the 1+ Commission and Guaranteed Retro are comparable, the main benefit of both structures is the maximization of upfront and immediate cash flow. This is helpful for managing short-term cash flow needs.
Retrospective Commission
Retrospective commission programs let dealerships take part in the underwriting process and investment income associated with a contract. Commission payments are annual and are based on factors such as loss adjustment expenses, investment income and earned reserves.
Producer Affiliated Reinsurance Company (PARC)
With a PARC program, a dealer sets up a foreign reinsurance company to help offset some of the risk associated with affiliate dealership sales. PARC programs are good fits for dealers interested in tax benefits and can maximize payouts by deferring them.
Non-controlled Foreign Corporation (NCFC)
NCFCs have a lot in common with PARCs in that they can offer significant tax benefits and long-term investment income potential. However, they are a better fit for dealers who are unable to leverage a PARC to participate. Underwriting income comes directly from sales generated by affiliate dealerships.
Dealer Owned Warranty Corporation (DOWC)
With a DOWC program, the dealer partakes in underwriting and investment income via ownership of a separate administrative corporation. This corporation ultimately serves as the obligor when it comes to specific F&I products, such as tire protection or vehicle service contracts.
Critical Factors in Selecting an F&I Profit Participation Program
Choosing the right profit participation program for your dealership really can be the key to becoming profitable and staying that way. Let’s take a look at some best practices and key factors to consider when selecting the correct option for you.
Alignment with your business model and goals
Start the selection process with a comprehensive look at not only your current business setup but also your long-term goals. What F&I products are your customers most interested in and how can your team better support those needs? Choose a program that offers you benefits for products you’re already selling.
Commission structures that work for your business
Always go over the fine details associated with a particular program before committing. Read over your agreements carefully with your dealer counsel and ensure the admin fee and commission structure work for you.
Prioritize transparency when considering profit participation programs and providers, as well. Ultimately, you’re looking for a partner in profitability – someone you can count on to work with you in the best interests of your dealership.
Tax details and fees that support growth
Don’t forget to factor taxes and additional fees into your decision-making process when evaluating different programs. Do the math here, as well, and make sure the option you’re considering won’t take too big a bite out of your profits to be worthwhile.
Strategic Management of F&I Profit Participation Programs
It’s not just the type of program that matters. It’s who you decide to partner with. Some questions to ask yourself when evaluating potential partners include:
- Does this partner offer participation models that are comprehensive enough?
- How transparent is this partner? Do they truly have my dealership’s best interests in mind?
- How helpful is this partner during the selection process?
- How confident do I feel they’re recommending options that benefit my business?
Good partners won’t leave you in the dark when it comes to the ins and outs of their offerings. They’re transparent, helpful and informative – and have associates you feel comfortable working with. They also have a longstanding track record of success and can show you proof to back it up.
Track and analyze your results
Once you’ve selected a program to move forward with, don’t simply set it and forget it. Long-lasting profitability requires careful tracking and analysis when it comes to all of your dealership’s income streams, profit participation programs included.
Utilize your partner to review results with you, as well as tools and reports when gauging progress. Some key examples include the following:
- Cession statements
- Loyalty reports
- Quarterly reinsurance reviews
- Monthly claim detail reports
- Dealer experience reports
Adjust your approach accordingly
Even the best profit participation options sometimes take some getting used to when it comes to hitting your stride. Let the numbers be your guide when it comes to adjusting your approach. Tweak your sales strategy as needed, and measure results each time until you hit on a method that works for both your team and clientele.
Communicate, communicate, communicate
When selecting a profit participation partner, prioritize options that offer robust ongoing support for dealerships. Take advantage of educational resources, training and assistance like on-site support and process enhancement recommendations.
Need help with something specific? Don’t be afraid to reach out and ask for it. The right partners are happy to assist with anything that can help a client get where they need to be with a program.
Know when a switch might be in order
Even if you feel your current profit participation program is working well for you, it’s a good idea to reevaluate the situation periodically – at least once every couple of years.
- Are your business goals still the same as they were when you first signed up?
- Are you getting the hoped-for return on your investment in the program?
- Is the company you partnered with supportive enough when it comes to helping you reach your profit goals?
How to Avoid Common F&I Participation Program Pitfalls
The right program is essential for the ultimate success of your dealership. And with plenty of misconceptions about profit participation programs, it’s vital that you avoid common pitfalls including:
- Not choosing the right partner: If your partner isn’t transparent with you or seems to care more about meeting their own goals than helping you meet yours, trust your instincts and explore other options.
- Not choosing the right program model: Selecting the right model is imperative. For example, don’t lock yourself into a par program like a DOWC when a non-par alternative makes more sense for your dealership’s current size and growth stage
- Failing to track your results: Pay attention to what your reports tell you about your progress. Know when the answer to continued growth is a simple strategy tweak or a major departure, like a program or provider switch.
Stepping into the Future of Profit Participation Programs
Partnering with a trusted program provider, like JM&A Group, and leveraging the right options truly can take your dealership to the next level and beyond.
For example, DELLA Auto Group was able to increase PVR by an incredible 23 percent thanks to JM&A Group’s superior reliability, transparency, and robust program offerings. These results came after switching to JM&A when a previous partner failed to deliver the support DELLA needed to succeed.
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