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Annually, my CPA firm compiles buy here, pay here benchmarks from our database of more

than 500 operators nationwide. For 2006 and 2007, these benchmarks also include operating

information on sales, collections and recoveries, and inventory management which was supplied

by NCM Twenty Groups based upon a composite of all their buy here, pay here twenty group

members. These benchmarks also include portfolio performance statistics which were compiled

electronically by Subprime Analytics, which analyzed more than $3.0 billion of subprime auto

loans to identify loss rates and trends. In the aggregate, these statistics provide a very

comprehensive look at the financial and operating performance of the BHPH industry for the last

two years and some interesting trend information for prior periods. Copies of these benchmarks

will be available, free of charge, at the National Alliance of Buy Here, Pay Here Dealers

(NABD) website at www.bhphinfo.com in the “News & Views” section in April.

At the National Buy Here, Pay Here Conference (NABD 2008) in Las Vegas, to be held on May

6 – 8, I will discuss these benchmarks and important industry trends which will help BHPH

operators prepare for the very challenging economic environment which currently exists.

In 2007, industry profitability was significantly impacted by the following factors:

1) Finance charges (interest income actually collected) declined because of earlier customer

repayment defaults,

2) Controlling bad debt losses was an integral part of sustaining profitability,

3) Increased selling prices made it appear that cost of sales percentages below declined.

However, actual vehicle and reconditioning costs were relatively flat during 2007. It also

remains to be seen whether increased sales markup will be collectible in future years.

4) Inflation resulted in higher operating expenses in 2007, offset only by increased

efficiencies from new technology.

5) Bottom line “net income” after operating expenses and interest expense was generally

lower in 2007 for all operators surveyed.

The table below compares the resultant changes in gross profit from 2005 – 2007 (The numbers

below are compiled from our best performing dealers and are not industry averages.):

2007 2006 2005

Revenues 100% 100% 100%

Cost of vehicle sales (63%) (64%) (64%)

Subtotal 37% 36% 36%

Financing Income 16% 18% 18%

Bad Debts (19%) (20%) (19%)

Gross Profit 34% 34% 35%

Note: All percentages are expressed as a percentage of total revenues.

Source: NABD and compiled by Shilson, Goldberg, Cheung & Associates, CPA’s

As noted in the summary above, gross profit in 2007 was relatively flat compared with 2006! A

more careful look at these results provides some important trends that need to be discussed!

1) Financing charges for 2005 through 2007 (even for the best operators) was not

sufficient to offset bad debt losses.

2) Higher “cash in deal” makes good underwriting essential in controlling losses.

Although these trends are challenging, I believe the better operators in the buy here, pay here

industry are very much aware of these economic changes and are adjusting in order to reduce and

mitigate further losses. In a survey of several clients, they indicated plans to do the following:

1) Implement improved technologies that will enhance operating efficiencies and further

reduce overhead. Their goal is to offset increased costs with less overhead.

2) Reduce bad debts by tightening underwriting through a better matching of the right

customers with vehicles customers can afford.

3) To further reduce bad debts by improving collection operations and by increasing bad

debt recoveries.

4) Improve cash flow by increasing down-payments and customer payments to offset

inflationary increases in costs, without lengthening the term of customer contracts.

5) Find “new holes” to acquire the right inventory at competitive costs.

Although I agree with all of the aforementioned strategies, several new challenges have recently

surfaced which also must be addressed. Gasoline prices are now consistently over $3 per gallon

and inflationary increases are zapping the liquidity of all buy here, pay here customers. Initially,

these customers react to these increases by altering their driving patterns or by eliminating other

discretionary expenses. Unfortunately, these changes only work for limited periods of time and

it now appears gasoline prices may be headed higher! Inflation continues despite interest rate

cuts by the Federal Reserve. Subprime mortgage defaults continue to tighten the availability of

capital for subprime operators. These developments present new challenges in the months ahead.

In the interim, prudent operators must do a better job of underwriting. They must gather more

customer information at the point of sale and use it to match the right customers with affordable

vehicles. Their goal should be to sell vehicles that customers can afford based upon a pre-sale

analysis of their net pay and expenses. The industry must shift its emphasis from a sales- to a

collection-oriented approach! Operators must analyze their bad debt losses to determine what

other adjustments must be made in their underwriting to reduce charge-offs and increase


In summary, success in the buy here, pay here industry in the future is achievable only to those

who understand and manage subprime portfolio risk prudently. Controlling risk (and bad debt

losses) will determine who survives and prospers in the upcoming months. Good luck!

Kenneth B. Shilson, CPA, is President of Subprime Analytics (www.subanalytics.com) which provides

computerized subprime portfolio analysis and custom credit scoring services. Mr. Shilson is the founder of the

National Alliance of Buy Here Pay Here Dealers (NABD) which will hold its 10th annual national conference in Las

Vegas, Nevada on May 6-8, 2008. For further information, visit www.bhphinfo.com or call 713-290-8171.

Financial Solutions 2005

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