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J.D. Byrider disputes sale of three dealerships: Franchisees may balk at increasing cost of business

March 12, 2007

Used-car chain J.D. Byrider spent the last year recovering from the tragic death of its founder. It responded by posting its highest sales ever, $690 million.

"It's been tough emotionally," said Steven E. Wedding, chief financial officer and president of franchising for the Carmel-based company, incorporated as Byrider Franchising Inc. "But from a business standpoint, we were prepared to carry on."

Even so, the late James F. DeVoe is clearly missed. Without him at the helm, Byrider has become embroiled in a $2.5 million legal tussle with one of its earliest franchisees, local businessman Rick L. Stanley-a dispute that stems, in part, from the company's imposing higher costs on franchisees.

"We're bewildered," said Stanley's attorney, John Taylor, a partner with Bingham McHale LLP. "We have a young man now who is running their operations, and we're not sure what his vision is."

In March 2006, DeVoe and his son-inlaw Steele Gudal died when their twinengine Cessna airplane crashed near Melbourne, Fla. The cause has not been determined.

Succeeding the 62-year-old DeVoe as CEO was his son James F. DeVoe Jr., now 38, who formerly was vice president of asset management.

The elder DeVoe founded J.D. Byrider in 1989 with plans to corner a lucrative but underserved market-consumers who, because of credit problems and limited income, can afford only older used cars. It's a niche dominated by mom-andpop operators, some with unsavory reputations. DeVoe believed he could exploit that by positioning Byrider as a professionally run alternative.

Since then, the company has grown to 582 employees and a network of 126 dealerships in 30 states. Last year, it sold more than 57,000 used cars and booked profit of $13.6 million, a shade below 2005's record $14.6 million.

Stanley was along for the ride almost from the start, signing on as a franchisee in 1991. He had been a close friend of the elder DeVoe and Gudal, and his company, F.S. English Inc., operated a Byrider dealership in Fort Wayne, another in Terre Haute, and one at 3250 W. Washington St. in Indianapolis. The three collectively had 2006 sales of $18 million.

But in January of this year, English announced it was being purchased for $8 million by Dallas-based Manchester Inc., a Byrider competitor.

Byrider responded to the sale by filing a lawsuit in federal court in Indianapolis last month, charging the sale violated the non-competition clause in English's franchise agreement.

Wedding said Stanley had signed a seven-year franchise renewal in February 2006-just a month before the plane accident. Byrider said it expects Stanley to pay the estimated $2.5 million in royalties English would have paid over the next six years.

"We absolutely hate to lose a longtime franchisee, and one that has grown with us," Wedding said. "But Rick made the decision to sell to Manchester. And we have the ability to approve the transfer of the franchise agreement."

Taylor, who represents both Stanley and Manchester, stopped short of saying increased costs led Stanley to explore the sale of his dealerships. But he acknowledged they're an issue.

"Manchester and F.S. English both believe that Manchester is a better business model for a host of reasons," he said.

Byrider in recent years has been upping its franchisee requirements to improve customer service and increase customer loyalty. The changes also are designed to reduce the risk that Byrider customers will default on their car loans.

Investing in software

Such efforts come with a price. Wedding said Byrider spent $1 million to develop a proprietary software system that assesses loan risk, and another $1 million to maintain it. It's a major innovation that advances Byrider well beyond handshake deals.

"We took the brains of our underwriters who had been giving results we were comfortable with, and distilled it into a formula, which we turned into a computer program," Wedding said.

Byrider also has been encouraging dealers to offer better warranties than the 12-month/12,000 miles they're required to offer. Wedding said Byrider's system average now is 18 months/18,000 miles. The shift might cost franchisees more now, but is expected to pay off long term.

"Obviously, when you're doing more to take care of the car after the sale, you're going to keep your customers happier and your customers will pay," Wedding said.

Taylor pointed out that Byrider had allowed some of its dealerships to change ownership in the past without objection-and that Stanley was willing to continue operating his three under the Byrider name.

But Wedding said the difference is Manchester is a Byrider competitor.

"We don't allow franchisees to be a franchisee in one market and a competitor in another," Wedding said. "You're either a franchise or not, is the simple way to put it."

The English lawsuit isn't the only sign of strain between Byrider and a franchisee. Wedding said an operator in St. Louis with two dealerships chose not to renew his franchise agreement at the end of last year because it had difficulty meeting Byrider's heightened standards.

Even so, Byrider sees evidence they are paying off. Since 2004, the company has conducted hundreds of thousands of telephone calls to survey customers after they buy cars or have service work done. The initiative found Byrider has boosted its customer satisfaction indicators several percentage points.

Typical tension

Pushback is common in franchising, especially as chains mature and add costs franchisees hadn't anticipated in their business plans, said Jim Petersen, an Ice Miller LLP partner and chairman of the law firm's Franchise Practice Group.

"Having uniform systems is one of the essential characters of franchising, and allows the system as a whole to improve its sales and benefit from the advertising the franchisor does. It really does help in meeting customer expectations and build the customer base," Petersen said. "But when it imposes added cost on the franchisee, it will sometimes be resisted."

Wedding said all of Byrider's affiliates now are on board with its corporate vision. He noted that 13 of the 14 franchises with contracts expiring last year renewed them. Three of the seven with contracts expiring this year already have renewed, he said.

Byrider plans to open 24 dealerships in 2007, for a net gain of 19 locations.

"The last holdout, so to speak, was our St. Louis franchise," he said. "We don't expect any conflict with what our brand stands for."
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