Category: Thought Leadership

Understanding what a DOWC is, and how it functions, may be a direct route to maximizing profit for your dealership.

Article on AutoSuccess

You’ve likely seen the term DOWC, but you may not be entirely sure what it means. Here’s an overview you won’t want to miss because understanding what a DOWC is, and how it functions, may be a direct route to maximizing profit for your dealership — a critical consideration as unprecedented challenges continue to hit the industry from all sides. 

 
What is a DOWC? 

A dealer-owned warranty company (DOWC) is a unique structure that brings the tax advantages of the insurance industry to automotive F&I, creating a true wealth-building opportunity. By successfully establishing their own DOWC, dealers gain significant tax benefits and additional advantages that help optimize their F&I program. 

Under a DOWC structure, a dealer forms a separate C-corporation that controls the entire service contract transaction and all funds, including investments. This new entity becomes the provider of the contracts, providing an alternative to using a third party to hold reserves, and is treated as an insurance company for tax purposes. 

While it may seem a complicated endeavor, its benefits can be outlined in simple terms. Consider these key benefits:

  • The tax-deferred nature of a DOWC allows the dealer to take advantage of the same tax laws that insurance companies have been operating under for decades.
  • Essentially, the company has no taxable income for an extended period of time as a result of numerous expenses: administration and acquisition costs in the current tax year; net operating losses are carried forward.
  • With the correct administration, a DOWC formation is actually very easy to manage and, most importantly, prosper from.
Why a DOWC? 

Under a traditional service contract transaction model, a significant portion of the funds is held by a third party that controls them to its own benefit.

The DOWC structure proves there’s a better way:

  • When a DOWC serves as the provider, the dealer immediately has 100% control over their F&I program, including rates, coverages, marketing materials and the company name. In addition to increasing profit potential on F&I sales, the ability to customize their offerings means a dealer can build a portfolio of products that caters to a variety of vehicles and consumer needs.
  • Underwriting profits and investment income are retained solely by the dealer’s DOWC. Compare this to other structures where premiums may be exempt from tax, but investment income returns are taxed at normal corporate rates. 
  • A DOWC is not the same as an NCFC or CFC — it is not a foreign company at all. The structure allows dealers to stay onshore and benefit from domestic formation, as opposed to having to maintain foreign companies and being forced to invest with money managers preferred by an administrator. This can provide significant cash flow and a dealer can also borrow for virtually any purpose. 
Why a DOWC? The Better Question May Be, Why Not? 

It’s easy to understand why making the switch can seem intimidating. Some dealers may not understand what a DOWC is or how it functions. Or they may find it scary to shift gears after years in a more traditional reinsurance structure or limited participation with a guaranteed retro setup. But the time is now to explore the advantages and opportunities for wealth-enhancement that are readily available to all. 

Insurance regulators are turning their attention to service contracts and raising concerns about how they are regulated and whether these products should be categorized as insurance.

Recent changes in the political landscape have landed us in an era of increased scrutiny of the F&I industry.

Early concerns about the Consumer Financial Protection Bureau overstepping its regulatory authority are somewhat curbed at this point, but a new challenge is looming. Insurance regulators are turning their attention to service contracts and, once again, raising concerns about how they are regulated and whether consideration should be given to recategorizing these products as insurance.

The National Council of Insurance Legislators Property and Casualty committee convened this summer and explored the topic of service contracts. Understanding the general differences between warranties, service contracts and insurance was discussed, as was the size of the warranty market. A point was raised about the importance of claims and loss history, followed by a state representative’s remark that states should perhaps be collecting this data on service contracts.

EDVIE M. CASTRO
General counsel and COO of DOWC, a service contract provider and administrator

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Exploring the hidden value of your existing customer data                                          

The traditional dealership model is shifting in dramatic ways. Consider Tesla’s shakeup to the time-honored showroom selling process, the pandemic shutdowns forcing a hard pivot to digital retailing, the overall consumer shift toward self-service and on-demand solutions. The good news is with change comes opportunity.  

There’s no need to stand still and watch revenue dwindle. In fact, that isn’t even an option. This is the moment to open our eyes, and our minds, to new ways of doing business. As our industry continues its somewhat lagging advance into the digital age, let’s take a close look at a revenue opportunity that is sitting right at our fingertips, but is often overlooked by dealers, F&I managers, and sales teams: customer data. 

That data – such as a customer’s name, address, email, phone number, VIN, and purchase price – holds incredible value. It provides a treasure trove of insight into that individual as a consumer, and also creates an opportunity for direct communication with them for continued engagement. With attentive management of this data, a dealership has the ability to enter the incredibly lucrative aftermarket space and gain control over revenue streams that are otherwise walking out the door with customers who decline to buy a service contract at the point of sale. 

Some might construe the use of customer data as a potential violation of customers’ privacy, akin to selling off their information to the highest bidders. That is not what we are in any way advocating. There is a significant difference between selling customer data and monetizing it through your own marketing efforts.  

The fact, which may be a shock to many, is that there is a vast industry of third-party entities that are already making use of the very data dealerships collect. On a daily basis, we are handing this information over – to the DMV, for example – and setting off a chain reaction in which that customer information is used by others for financial gain. That revenue stream, built on data that originates from a dealer’s DMS, excludes that dealer entirely. When dealers supply required customer data following a sale, they are unknowingly feeding that revenue source and, in turn, the profits generated for the entities that purchase that data. 

According to a nationwide research report, U.S. marketers and other users spent more than $11 billion on third-party audience data in 2019. The companies that buy information include address-registry and consumer-report publications, banks, auto parts suppliers, insurers, car-rental agencies, and car dealers. In some states, buyers may also include commercial data brokers, collection agencies, private billing companies, security companies, targeted advertising firms, and bulk marketers. 

One example of how customer data may be used is by competitors who employ marketing tactics to invade a dealer’s PMA to sell vehicles and extended service contracts. The obvious question to pose in response to these facts is: Can dealers take back control of this revenue opportunity without harming their customer relationships or risking privacy violations? The answer is yes. 

Examine your internal resources carefully. If you have the bandwidth, and the knowledgeable personnel, to devote some targeted effort toward direct marketing, outline a strategic plan for outreach to customers who can still benefit from purchasing a service contract or other F&I product. In tandem, you’ll need to establish a process for executing aftermarket sales for these prospects.  

Another option, should your resources be more limited in this regard, is to work with a reputable partner that can generate a branded marketing program on your behalf. With a white-labeled marketing program, you unlock the opportunity to offer existing customers access to valuable vehicle protection and bring business right back into your service center, closing the loop on your positive customer relationship.  

Selling data is exactly that: purposely providing customer information to a third party in exchange for financial compensation. Monetizing data differs in that you are making use of customer information for the purpose of direct marketing to your own customers, not sharing or exposing customer information to any third party for its own use. In the case of partnering with a service provider, your customer data is used only with your permission and only for the purposes of marketing to those customers under your brand name. Your sales opportunities are extended without added burden to your BDC or F&I department. And as the pipeline for post-sale VSCs replenishes continually (as factory warranties expire), it’s easy to see the impressive potential in this model. 

With F&I being the key source of revenue in building dealer wealth and ensuring resilience during these turbulent times, the ability to leverage your data through internal efforts or reliable dealer-branded automated marketing programs is crucial. Let 2021 be the year you take big steps forward into the future of auto retailing that’s already here. Tapping into the value of your own data is an excellent place to start.  

 

Michael LaMotta is CEO of Dealer Owned Warranty Company. He founded DOWC® with lessons learned from almost 30 years of automotive experience, many of which spent as a car dealer and nearly a decade spent on F&I administration. DOWC is one of the fastest-growing service contract providers and administrators in the United States. DOWC offers customizable F&I products and expertise in compliance, as well as a full suite of technology designed to optimize productivity and expedite claims adjustments, processing, and reporting.  

The new year is approaching, and with it the changeover to a new federal administration. Re-examination of the legal landscape and related tax implications is in order, including both fundamental automotive regulations as well as finance and insurance laws.

The year 2020 was unlike any in modern history. Disruptions to social, economic, and legal norms, caused by the COVID-19 pandemic, have shaken many institutions to the core. Within the automotive industry, challenges were met with resilience and an impressive rebound despite ongoing supply disruption, inventory shortages, and retail restrictions.

In an era of fluctuating interest rates, continued tariffs, trade war ramifications such as the unresolved dispute with China, and ever-changing statutory requirements, automotive dealers have a great deal to contend with in addition to keeping sales moving. Changes in the automotive space and related industries, combined with increased regulatory scrutiny and continued developments in trade and M&A, forced dealers to face several unique challenges this year, particularly as online retailing becomes dominant. As the new year approaches, a re-examination of the legal landscape and related tax implications is in order.

Review and analysis of not only fundamental automotive regulations but also finance and insurance laws are highly recommended. It is vital to keep these key points in mind:

  • While various overarching federal laws govern aspects of the sale of F&I products, most products are subject to the statutory framework in place in each state.
  • Regulators and policymakers seek to ensure a competitive and fair market that is first and foremost protective of consumers. As a result, disclosure and financial security requirements are ripe for action by the legislature and may be pitfalls for dealers who are unaware of changes.
  • Dealers should leverage the many resources available to them to ensure continued compliance. An F&I administrator with regulatory and tax counsel should be able to provide guidance; first-hand education is available through many dealer associations. 

As we enter 2021, conscientious risk and wealth management are also essential for the success of dealers. Familiarity with the broader tax changes affecting the industry, particularly with the incoming Biden administration that may enact policies quite different to those currently in place, will allow for informed decisions about participation in the F&I segment of the business.

In recent years, the Federal Tax Cuts and Jobs Act prompted many car dealers to consider the formation of a domestic c-corporation (a dealer-owned warranty company) to serve as the provider of their F&I products as a means of shifting away from the uncertain future tax implications of operating as a non-controlled foreign corporation and insulating themselves from newly mandated disclosures required from controlled foreign corporation owners. The tax structure and benefits afforded a dealer-owned warranty company effectively meet the wealth-building needs of dealers while satisfying regulatory compliance concerns. 

Dealers who have not explored or transitioned to this structure over the last 12 months will find it beneficial to do so prior to year-end to ensure enough time for discussion of tax benefits, formation, and registration of the entity, and to ensure all regulatory requirements are met. In fact, more than 30 tax breaks that Congress has permitted to regularly expire and then renew are currently set to expire at the end of 2020, including individual, business, and energy tax breaks. There is great profit potential and risk mitigation opportunity with a dealer-owned warranty company structure. 

That said, the dealer is the true owner and operator of the company and is responsible for compliance with all applicable laws as the provider of its F&I products. As a result, it is recommended that dealers work with a trusted DOWC administrator who has knowledgeable legal and tax departments to ensure the most prudent and effective administration as allowable by law, and protection of the benefits achieved through the structure.

 

Edvie Castro, General Counsel of Dealer Owned Warranty Company, is a dynamic leader in the automotive industry, operationalizing the DOWC® vision and driving the business forward daily. Her handling of regulatory and compliance matters earned her a nomination from NJ Biz for 2020 General Counsel of the Year. DOWC is among the fastest-growing service contract providers and administrators in the U.S., offering customizable F&I products and expertise in compliance as well as a full suite of technology designed to optimize productivity and expedite claims adjustments, processing, and reporting.

 

Insight on F&I Structure Options

You’ve likely seen the term DOWC (a safe bet since you’ve landed on our website!), but you may not be entirely sure what it refers to. Here’s an overview that you won’t want to miss because understanding what a DOWC is and how it functions may be a direct route to greater wealth for your dealership. 

Who is DOWC? 

We are DOWC®, a leading provider and administrator of F&I products and dealer services. Founded by Michael LaMotta, DOWC is a family-owned company that combines more than 30 years of automotive industry experience with cutting-edge digital process automation. We deliver a full suite of F&I purchase and protection products and solutions to dealers and their customers.  

What is a DOWC? 

A dealer-owned warranty company (DOWC) is a unique structure that brings the tax advantages of the insurance industry to automotive F&I, creating a true wealth-building opportunity for dealers. 

 

At DOWC, we help dealers create their own DOWC (see what we did there?) to gain significant tax benefits and additional advantages that help optimize their Finance & Insurance program. 

With a dealer–owned warranty company, a dealer forms a separate C-corporation that controls the entire service contract transaction and all funds, including investments. This new entity becomes the provider of the contracts, providing an alternative to using a third-party to hold reserves, and is treated as an insurance company for tax purposes. 

While it may seem a complicated endeavor, its benefits can be outlined in simple terms. And with the correct administration, a DOWC formation is actually very easy to manage and, most importantly, prosper from. Consider these key benefits: 

  • The tax-deferred nature of a DOWC allows the dealer to take advantage of the same tax laws that insurance companies have been operating under for decades.
  • Essentially, the company has no taxable income for an extended period of time as a result of numerous expenses: administration and acquisition costs in the current tax year; net operating losses are carried forward.
  • Dealers who switch to a DOWC structure are now filing the same tax returns as Property & Insurance companies, which account for the tax deferral created by the compounding net operating losses (NOLs). 

It’s easy to understand why making the switch can seem intimidating. Some dealers may not understand what a dealer-owned warranty company is or how it functions. Or they may find it scary to shift gears after many years in a more traditional reinsurance structure or limited participation with a guaranteed retro agreement. But the time is now to explore the advantages and opportunities for wealth-enhancement that are readily available to all. 

Why DOWC? 

Under a traditional service contract transaction model, a significant portion of the profit is held by a third party that controls the funds to its own benefit. (Why is that a good idea?!) 

The DOWC structure proves there’s a better way: 

  • When a DOWC serves as its provider, the dealer immediately has 100% control over their F&I program, including rates, coverages, and marketing materials, as well as the company name. In addition to increasing profit potential on F&I sales, the ability to customize their F&I offerings means a dealer can build a portfolio of products that caters to a variety of vehicles and consumer needs.
  • Underwriting profits and investment income are retained solely by the dealer’s DOWC. Compare this to other structures where premiums may be exempt from tax, but investment income returns are taxed at normal corporate rates. 
  • A DOWC is not the same as an NCFC or CFC — it is not a foreign company at all. The structure allows dealers to stay onshore and benefit from domestic formation, as opposed to having to maintain foreign companies and being forced to invest with money managers preferred by an administrator. This can provide significant cash flow and a dealer can also borrow for virtually any purpose. 

So, why a DOWC? The better question may be why not? 

And why choose DOWC® as a partner? Because we’re the only company in the market that combines the advantage of the DOWC structure with real access to cash. We bring the business of dealer–owned warranty products – customizable and compliant F&I products that can be used to your advantage – to dealers on a large scale, along with personalized service and real wealth-building power.  

 

When it comes to partnering with dealers, we provide assistance during the formation and implementation of their dealer-owned warranty company, as well as regular performance monitoring as a trusted administrator.  

DOWC: It’s our name. It’s what we do. Contact us today to learn more and take the first step on the path to greater control and greater wealth. 

Auto retailing is retailing, period. Once the pandemic hit, online shopping went through the roof for industries far beyond clothing and groceries. Auto sales made a dramatic shift while dealerships were shuttered during lockdowns across the country and shoppers turned to the internet in droves. According to a recent survey*, 60% of respondents indicated they were open to buying a car online while just 32% were willing to do so before the COVID-19 pandemic. 

Has this shift meant a magical transition to seamless digital sales across the industry? Certainly not. But the trend is moving in the right direction with more retailers shaping their strategies to move from simply using the internet as a tool to bring people into the dealership to truly offering a comprehensive virtual sales experience. In this moment of seismic change in the retail environment, it’s critical to understand that brick-and-mortar days aren’t necessarily over – but to stay relevant and competitive, physical dealerships require expansion to include a digital storefront as well. 

This expansion has to include evolution in online F&I presentation to ensure customers are being offered a full range of services and that the full scope of revenue opportunity is being captured. Unfortunately, it took COVID-19 to bring us to the inevitable, but here we are. Taking an entrepreneurial approach, and following the example of those who are leading the charge, is a great place to start. 

Now is the perfect time to: 

  • Evaluate your online capabilities. Do you have efficient and scalable e-commerce functionality? Do you have the staff or professional resources to build and manage your online offerings? 
  • Educate yourself on best practices. Make a careful study of your competitors or those in the industry that have successfully shifted to digital retailing. Carvana is one resounding example: They reported second-quarter revenues of $1.12 billion and nearly 56,000 units sold, an increase of 13% over 2019, with the number of cars sold up 25% year over year. What are they doing right and how can you translate some of their best practices to your structure? 
  • Partner wisely and train thoroughly. Invest in digital retail tools that are integrated with your CRM and website, and test for user experience improvements. Simplify and make the digital retail process consistent for all customers, providing sufficient training and documentation to your sales and BDC teams. 

While this evolution/revolution may be a dramatic change for your business, you don’t want to be left behind the pack that’s charging ahead in the digital race. You also don’t want to leave revenue on the table. Just as you wouldn’t finalize a sale without offering F&I options to a customer in person, you’ll want to integrate digitized menu selling seamlessly into your online offerings. Keeping in mind that in-house sales are not vanishing either, carrying this optimized customer experience into the back room is critical as well because these interactions will continue to be shaped by the need for a streamlined, efficient presentation to minimize time and contact. 

But in this area, it’s about much more than just automating the conversation around protection products, extensions, and add-ons. This is where harnessing the digital aspect of your platform can make an eye-popping difference.  

Look at some of the top digital retail solution providers in the industry for example. The F&I presentation software they offer have been adapted successfully by some of the largest and most prestigious automotive groups in the country because they go well beyond replicating the exact same presentation that a dealer may have been using for 20 years. These tools utilize big data and predictive analytics to create a tailored presentation based on the overall deal, vehicle, and financial situation for each customer. Pair power like that with a service contract provider and administrator committed to helping you build wealth through best-in-class F&I products and you’ll take your digital strategy way above the next level. 

Once you’ve hit all the marks in developing your online presence, amp up your marketing to make sure people know about it. Hit social media and make good use of customer data you already own to spread the word through email outreach or whatever works best for your brand.  

Online auto retailing is here, it’s vital, and it’s valuable. The best time to get started was yesterday. Don’t waste another minute. 

*https://dealers.cargurus.com/rs/611-AVR-738/images/June_Covid19-SurveyUS.pdf 

 

Michael LaMotta is CEO of Dealer Owned Warranty Company. He founded DOWC® with lessons learned from almost 30 years of automotive experience, many of which spent as a car dealer and almost a decade spent on F&I administration. DOWC is the fastest-growing service contract provider and administrator in the United States. DOWC offers customizable F&I products and expertise in compliance, as well as a full suite of technology designed to optimize productivity and expedite claims adjustments, processing, and reporting.   

 Story on AutoSuccess Online

In this webinar, you’ll learn more about the third-party industry currently taking advantage of your data and how you can take back control, directing sales right back to the products you sell. Leverage your own customer data to turn your F&I fails into F&I sales.