One of the ways you may consider increasing your dealership's bottom line is through a Dealer-Owned Warranty Corporation (DOWC) profit participation program. In a DOWC, your dealership can participate in both investment and underwriting income generated by the contracts you sell through ownership of an administrative corporation that serves as the obligor for F&I products and warranties. This structure can help those looking to utilize profits to expand.
What is a Dealer-Owned Warranty Corportation (DOWC)?
Established by a dealer or dealer group, a DOWC enables a dealer to manage and underwrite its F&I contracts, allowing them the potential to generate additional revenue through underwriting profits.
What to Know About Dealer-Owned Warranty Corporation Program Ownership
Unlike other profit participation programs where you may work with a company that underwrites F&I products and warranties, in a DOWC, you are the obligor. Therefore, a DOWC is considered to be more complex than other profit participation structures.
There are many benefits of owning a warranty corporation, including the potential for stronger dealer profits. Fully participating in the underwriting and investment income that's created from the contracts can generate increased income but is not without its risks.
The Financial Benefits of DOWC Structures
In this program, a dealer participates in underwriting and investment income via ownership of a C-corporation. This corporation serves as the obligor for admin-obligor F&I products such as service contracts, road hazard tire, and maintenance. One of the main benefits of a DOWC is its favorable tax implications.
Control Over Underwriting and Investment Income
Having ownership over the investment and underwriting income of the DOWC is among the largest financial benefits of this model. The possibility of lower collateral requirements than with a Producer Affiliated Reinsurance Company (PARC) and a more robust investment policy statement are two more reasons to consider a DOWC.
You'll also be able to manage the kinds of F&I products being sold, so you can focus on those that increase your revenue and make decisions as to what you want to offer that will meet the needs of the customers who come to your dealership.
Along with these benefits, DOWCs are not subject to premium or federal excise taxes, and your risk is limited to the original capital along with the undistributed surplus. There are reasonable operational costs and formation fees, so setting up your company and getting it operating won't require a large financial outlay.
Challenges of a DOWC Structure
Warranty program ownership comes with legal and regulatory requirements, and F&I product management is no different.
Several factors to consider:
- These structures are subject to state regulatory oversight
- Approval process of forms can be costly and time-consuming
- Once the company becomes taxable, the DOWC is subject to both federal and state income taxes
The best way to set up and manage this kind of warranty program is to have a better understanding of the programs and work with professionals who provide support along the way. Having the right dealer-centric partnerships in place will make a significant difference in the ease with which you can develop and profit from a DOWC.
Best Use Cases for DOWC in Dealerships
Dealers who are interested in significant tax advantages in the short-to intermediate-term (5-7 years on average) and more immediate access to profits generated by the structure to use for acquisition and expansion purposes, typically find this structure appealing. DOWC can be ideal for mid-size and large dealer groups looking for a proxy to a single entity reinsurance structure.
Choose the Best F&I Product Strategies for Dealerships
The level of control you have with a Dealer-Owned Warranty Corporation (DOWC) is higher overall than you'll see with other structures, which may increase the value of the program for you. If you are a mid to large size dealer group, this could be the right option for your needs.
Are you ready to take your dealership to the next level with a profit participation program, but are not sure which one to choose? Our team is happy to help provide the information you need and the support in the decision process. Don't miss maximizing your dealership’s potential with a structure that meets your unique needs.
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