When it comes to selecting F&I products and services for your automotive dealership the more options you have the better. Thankfully, today’s market for dealership profit participation programs is huge, with several programs to choose from, all at a variety of cost structures.
This allows you to add strong ongoing revenue streams to your business – regardless of whether you specialize in new vehicle sales, used or pre-owned vehicles, or a combination of the two.
But because there are so many profit participation programs out there, it can be difficult to navigate the options available and choose the best one for your dealership. Let’s explore the various profit participation programs available and their roles in achieving future growth.
What are Profit Participation Programs?
Profit Participation Programs allow an automotive dealership owner(s) to participate in the sale and/or underwriting risk of F&I products sold in their dealership.
How Do Profit Participation Programs Work?
Profit participation programs will vary in set up or structure. Generally speaking, a dealer will decide to match their goals to either a program that pays more upfront dollars that pay at time of sale or one that provides wealth building over a longer term that could also provide tax advantages.
F&I products offer buyers additional conveniences or protections that are not calculated into the vehicle’s sales price. Service contracts, GAP products, scheduled maintenance plans, roadside assistance, and coverage for paint and body repairs are all examples of popular F&I products that can be included in profit participation programs, but there are many more as well.
Dealerships can administer profit participation programs themselves, or they may contract with an outside company to do so. However, because the sale of F&I products is highly regulated at the state and federal levels, the company providing this service must meet and uphold certain requirements.
The Role of Reinsurance in Profit Participation Programs
In an auto dealership, profit participation programs often operate through a Reinsurance Model. This means that a company that meets regulatory requirements oversees the program’s features and operates separately from the dealership itself.
The entire Reinsurance Model works like this:
- The dealership’s F&I department “issues/sells” the F&I product to a buyer.
- The underlying insurer of the product then transfers (or "cedes") the risk/underlying obligations to another insurance company (the "reinsurer").
- The reinsurer may be a totally neutral third-party provider, or the dealership/dealer group may own a separate company they control.
- The reinsurer is now responsible for paying any claims.
Within the realm of profit participation programs, there are two major categories depending on a dealer’s financial goals and risk appetite.
Non-participating (Non-Par) programs
In a Non-Par program, the dealer typically receives a fixed amount for each contract sold. These payments are not impacted by the ultimate underwriting experience of the affiliated contracts. A Non-Par program appeals to dealers who are interested in maximizing cash flow in the short term or those who are risk adverse.
Participating (Par) programs
In a Par program the dealer receives a portion of the underwriting and investment income generated by the contracts sold at his or her dealership(s). A Par program appeals to dealers who are interested in wealth creation over the longer term.
Types of Profit Participation Programs
One important aspect of profit participation programs is the flexibility dealers have in selecting a dealer program that fits their short- and long-term financial needs and goals.
For example, smaller dealership groups with a growth strategy will seek upfront cash flow to acquire additional stores, while larger more mature dealership groups are able to focus on longer-term strategies such as wealth creation and generational transitions.
Let’s review the different profit participation programs and dealer programs available.
Different profit participation and dealer programs available:
- 1+ Commission & Guaranteed Retro (GR)
- Retrospective Commission
- Producer Affiliated Reinsurance Company (PARC)
- Non-Controlled Foreign Corporation (NCFC)
- Dealer Owned Warranty Corporation (DOWC)
Non-Par Profit Participation Programs
1+ Commission & Guaranteed Retro (GR)
The 1+ Commission program is very straightforward; when the dealership sells an F&I product, they get a fixed commission for the sale of that contract, less full and partial cancellations. In a Guaranteed Retro program, the dealership is placed in a scaled model to earn more per contract based on the volume of contracts sold, offset by full cancellations.
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.
Advantages
- Provides a fixed dollar amount per contract sold
- Dealerships can accurately calculate their earnings and program cash flow accordingly
- Ideal for increasing cash flow during the current period
Considerations
- May not provide as much revenue compared to a Guaranteed Retro (see below).
- May reduce a dealership’s motivation to prioritize higher-value F&I products, as the commission remains constant regardless of the product's price or incremental benefits.
- Less emphasis on tailoring F&I products to individual customer needs
- Fluctuations in sales volume could impact on the dealership's financial stability
Participating Profit Participation Programs
Retrospective Commission
A retrospective commission can be considered an introduction to reinsurance. This is a lower-risk program where dealers can participate in the underwriting and investment income generated by designated contracts. The annual commission payment is based on earned reserves less incurred claims, loss adjustment expenses, a participation fee, plus investment income.
Advantages
- Commission driven by underwriting performance of contracts sold
- Includes investment income
- No out-of-pocket expense should poor underwriting performance generate a negative retrospective commission
Considerations
- Some uncertainty in commission payments is due to external factors such as inflation and financial market performance
- Other profit participation programs may offer greater after-tax returns, albeit with the assumption of additional risk
Producer Affiliated Reinsurance Company (PARC)
A PARC program (also known as CFC) is when a dealer establishes a foreign or tribal-domiciled reinsurance company to assume the risk of contracts sold by affiliated dealerships. This program appeals to dealers who are looking for a tax benefit and willing to wait a longer term for a potential of a greater payout per contract.
Advantages
- Favorable tax treatment on distributions
- Income recognition is at the discretion of the owner/dealer
- Can appoint investment managers to manage PARC assets
Considerations
- Owner expected to recapitalize PARC if negative underwriting performance reduces funds required in trust below the minimum level
- Based on the dealership’s size and ownership structure, there may be a premium limit annually
- Changes to the Internal Revenue Code and/or interpretations thereof could jeopardize the preferred tax status enjoyed by the PARC
Non-Controlled Foreign Corporation (NCFC)
Similar to a PARC, the NCFC offers, among other things, tax efficiency on the underwriting and investment income generated by designated contracts.
The program is geared towards larger dealer groups unable to use a PARC for participation. With approval from the NCFC’s Board of Directors, the dealer will participate in ownership of the NCFC via issuance of participating preferred shares of stock in the company.
Underwriting income is generated by contracts sold by affiliated dealerships and investment income is allocated to the participating share series based on corporate bylaws.
Advantages
- Favorable tax treatment on distributions
- Risk of loss limited to initial capital and undistributed surplus
- Potential for larger investment returns due to a larger investment portfolio and a more robust investment policy statement than a PARC
- No annual premium limit
Considerations
- Limited control over the NCFC’s operations
- Subject to the NCFC Board of Directors’ decisions and strategies
- Unaffiliated loss-making positions may impact surplus
- Reinsured premiums are subject to Federal Excise Tax of 1.0%, and additional disclosures are required on a shareholder’s personal income tax return filing
- Changes to the Internal Revenue Code and/or interpretations thereof could imperil the preferred tax status enjoyed by the NCFC
Dealer Owned Warranty Corporation (DOWC)
A DOWC allows a dealer to participate in the underwriting and investment income generated by designated contracts via ownership of an administrative corporation that serves as the obligor for certain F&I products such as service and road hazard tire contracts. This program appeals to dealers who are in growth mode and do not require upfront cash.
Advantages
- Full participation in underwriting and investment income with no volume limitations
- More control and flexibility over the design and management of the F&I products sold by the DOWC
- More robust investment policy statement and lower collateral requirements than a PARC
- Income tax deferral for the first five to seven years of operation
- No premium or federal excise tax paid by the DOWC
- Risk limited to initial capital and undistributed surplus
- Reasonable formation fee and ongoing operational costs
Considerations
- Program requires increased administrative involvement on behalf of the dealer
- DOWC earnings are subject to double taxation once the tax deferral is exhausted
- Complexity, as a DOWC, is difficult to both establish and wind down; forms management is a key consideration and expense
- Potential for negative CSI, as a DOWC is on the front line of the transaction
Customizable/Hybrid Programs
This approach is not a single structure type but rather a scenario in which a dealership or dealer group utilizes multiple participating profit participation programs to fit their needs—permitting the design of a program with a tailored blend of benefits. This provides the flexibility to adapt to changes as the dealer group grows.
Advantages
- Allows the dealer to select elements from different F&I programs that better match the dealership’s needs and goals
- Create synergy by combining the strengths of different structures to maximize benefits
- Can be paused or adjusted to accommodate changing market conditions and business strategies
Considerations
- Involves additional complexity compared to adopting a single program
- Requires a deeper understanding of various F&I programs
- Predicting the combined benefit(s) requires careful analysis
Best Practices for Selecting the Right Profit Participation Program
Setting your dealership up for success with any profit program means understanding the full spectrum of how the auto dealership business works, where revenue comes from, the cost of doing business, and making adjustments as you go forward.
Important disciplines for dealer leadership and upper-level F&I team members include:
Strategic Alignment
Not every profit participation program is right for every business. Explore what your customers actually want before you commit to a plan that would be difficult to sell otherwise. Likewise, review the competition and see if the proposed plan gives you a competitive advantage or positions you as second best.
Delve Into the Details
In other words, read the fine print. Profit participation program agreements can be lengthy, written in legal-ese, or have confusing compensation structures. Take the time to work with your provider to ensure transparency and a complete understanding of the program you are selecting. Extra legwork at the beginning can prevent unnecessary headaches and misunderstandings down the road.
Master Commission Calculations
Not all profit participation program fee structures are created equal. Do the math to confirm short and long-term expectations. Generate multiple scenarios, even if you don’t believe you’ll meet a certain threshold or objective, especially if you think you’ll “never” have a very bad month. Create projections for several weeks or several months out to see how quickly you may need to change your plan.
Get Smart About Taxes and Fees to Maximize Profitability
Nothing hurts worse than making a whole lot of money and then having to fork it over to someone else. Taxes and fees can take a big bite out of your earnings, and you should absolutely factor them into your considerations when choosing a profit participation program.
How Do I Choose the Right Profit Participation Program for My Dealership?
When deciding on a profit participation program, look beyond the lowest cost or the easiest-looking plan. Spend time evaluating the F&I provider and what you get for your hard-earned dollars. Ideally, you want a partner that will work well with your F&I team to achieve your stated goals.
Dig into the company’s experience with performance-driving support, ongoing product training, commitment to revenue growth, and understanding of F&I profitability.
Ensure they embrace innovation and new technology to keep pace with industry changes to provide you with the cutting-edge tools you need to stay competitive.
Transparency and a dealer-centric approach are vital, with clear communication and comprehensive reporting for your long-term success with any profit participation program.
A partner should collaborate with you, offering support for your dealership’s profitability while analyzing vital F&I performance metrics like contract sales, PVR (profit per vehicle retail), PPD (product per deal), overall F&I gross, customer satisfaction, and identifying potential growth opportunities within your dealership.
Transparency and a dealer-centric approach are vital, with clear communication and comprehensive reporting for your long-term success with any profit participation program. Look for an F&I partner staffed by knowledgeable automotive experts who prioritize strong relationships and exceptional customer service.
Making the right choice will streamline your processes, offer the best deals to customers, and align with your dealership's values and goals.
Administrating Your Own Profit Participation Program
Thinking it may be worthwhile to own and operate your own profit participation program? It definitely has advantages when it comes to retaining as much revenue as possible.
But are you ready to take on that added level of responsibility and risk?
Having provider support can be invaluable in maximizing your results due to the benefits of hands-on expertise, additional resources, and guidance, and avoiding common mistakes that happen when setting something new up from scratch.
Frequently Asked Questions
1. Why is it important to have the right profit participation program for my goals?
The right profit participation program structure sets a framework for your dealerships’ profitability. If your goal is to retain as much cash as possible, then it doesn’t make much sense to choose a program that costs you more in fees the more you sell. If you start with your end goal in mind, you’re more likely to choose a program that improves dealership profitability.
2. How do different profit participation programs impact tax liabilities?
Each profit participation program is subject to a different set of laws and regulations affecting profit, operations, and reporting. Failure to correctly comply with legal and regulatory provisions could result in financial penalties for your business, so be sure you know your responsibilities or engage an expert who does.
3. What role do vehicle service contract companies play in profit participation?
Vehicle service contracts are just one of many types of F&I offerings that fall under dealership profit participation plans. Dealerships who sell service contracts to customers earn revenue for their sales and then pay the administrator an admin fee, commission, or other compensation in return for overseeing the claims and operational aspects of the program.
Knowledge is Power When it Comes to Profit Participation Programs
The more you know about profit participation programs and how they can help your dealership bring in more revenue and enhance overall profitability, the better equipped you will be to remain agile and competitive in an increasingly tough industry.
To see if your current F&I profit participation programs are lining up with your goals, start by taking our free assessment.
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