Byrider banging out dents from franchisees: Repairs precede used-car chain's planned expansion

February 13, 2006

Its image dinged by regulatory actions against J.D. Byrider used-car franchisees in Ohio and Kentucky, Byrider Franchising Inc. is busy culling problem operators ahead of a planned 2006-2007 expansion.

The Carmel-based "buy here, pay here" chain with 123 stores in 28 states also said it has spent millions of dollars on vehicle repairs, customer service improvements and more sophisticated underwriting software to reduce loan delinquencies.

There were 127 franchised stores operating in 2004, plus another 13 companyowned stores, according to an offering circular the company filed with the Indiana secretary of state. The number of franchised locations was as high as 138 in 2002.

"We eliminated and parted ways with several franchisees," said William Ackermann, vice president of franchise operations.

Among them: J.D. Byrider of Louisville, operated by the father and son team of James and Marc Maguire. Last month, the Maguires agreed to pay $7.1 million to settle a lawsuit by Kentucky's attorney general, who alleged they sold defective cars at inflated prices.

The deal provides $500 in restitution to each of 14,400 customers who bought cars from 2000 to 2004.

Byrider's Carmel office is kicking in $300,000 to help pay for investigative costs. The company swiftly yanked the Maguires' franchise.

"If you have someone who doesn't play by the moral code of the business, it's tough," Ackermann said.

Just a year earlier, more than 20 Byrider franchisees in Ohio shelled out $650,000 to that state's attorney general to settle allegations they failed to follow state consumer protection laws from 2001 to 2004.

Ohio officials said the volume of complaints was small relative to Byrider's sales of nearly 80,000 vehicles over the period.

Executive Vice President and Chief Financial Officer Steven E. Wedding said some of the problems stemmed from inconsistencies in paperwork, an issue addressed by more standardized documentation.

"As we got bigger and had more people, the paperwork often was not buttoned up adequately," Wedding said.

Among the changes, Byrider has required franchisees to more clearly disclose prices before accepting credit applications from customers.

Last year, the company launched a customer satisfaction survey program similar to that used by automakers and new-car dealers. The private company said it has spent "millions" of dollars toward vehicle repairs over the last several months.

The number of vehicle defect and quality complaints filed with the Indiana attorney general was relatively low last year-19 on sales of thousands of cars in the state during 2005.

Although some of the cars the company sells are five or six years old with upwards of 80,000 miles on them, Byrider has spent years researching which cars are least likely to wear out, Ackermann said. That's in both the company and customer's best interest because some of Byrider's loans now stretch out to four years, he added.

In 2004, the company began offering limited warranties of 18 months or 18,000 miles.

Wedding said Byrider has been making a "strategic slowdown" in recent years to make the stores more customer-friendly and to bring some franchisees in line. The company also improved its financial software for franchisees, adding a new loan risk evaluation tool developed by a Boston company.

Company officials would not disclose 2005 revenue and earnings, but said they exceeded profits of $10.7 million on sales of $117.1 million in 2004.

Of that amount, $84.6 million came from car sales, $20.1 million in interest income from car loans, and $12.3 million from franchise fee and royalty income.

At its company-owned stores, Byrider earns an average of $1,276 per vehicle sold, according to its franchise offering circular on file with the state.

Byrider offers financing through its captive lending unit, CarNow Acceptance Co. In Indiana, CNAC had 3,522 loan accounts totaling $26.4 million at the time of its last evaluation by the Indiana Department of Financial Institutions, in November.

State officials said loans in this segment of the auto industry tend to carry interest rates of 21 percent to 28 percent.

With financial prospects apparently improving, Byrider estimates franchisees will open 13 more locations in 2006. Cincinnati, Newark, Minneapolis and Washington, D.C., are among the targets.

"The potential for new growth is humongous," Wedding said.

The company was formed in the late 1980s by Jim DeVoe, a Marion Cadillac and Chevrolet dealer. DeVoe had initially pondered an initial public stock offering but noted the difficulty of meeting Wall Street's aggressive growth expectations.

Excluding franchisees, Byrider and its finance arm employ about 550, including 175 people at its Carmel headquarters and collections center.
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