Chicago Business Litigation Lawyer Blog
The deal closed on a Friday. The selling dealer went to Naples. The buyer took the keys on Monday, and by Wednesday was staring at a floor plan audit showing twenty units short, a used-car inventory valued two hundred thousand dollars below the closing schedule, and a working-capital adjustment the seller’s accountant had, in the buyer’s view, quietly gerrymandered. The buyer calls us. So does the seller, a week later, demanding the earn-out the buyer now refuses to pay.
This pattern repeats across Illinois dealership deals. Our earlier post on the five critical clauses every Illinois dealer needs in a buy-sell agreement addressed what the agreement itself must contain. The next battleground is the one that opens after the agreement is signed. Post-closing disputes between dealer principals are where deals go to die, and they fall into three familiar buckets: working-capital adjustments, indemnification claims, and earn-outs.
Working-capital adjustments are the first and most common flashpoint. Nearly every dealership asset purchase agreement includes a true-up mechanism tied to a target net working capital figure, measured as of closing and adjusted within 60 or 90 days. The seller’s preliminary closing statement anchors the seller’s position. The buyer then issues a dispute notice identifying line-item disagreements. If the parties cannot negotiate those, the agreement usually routes the remaining items to an independent accounting firm sitting as arbitrator. The fights cluster around a short list of items. New-vehicle inventory valued at dealer cost versus MSRP less holdback. Aged used units written down or not. Contracts in transit counted as receivables. Warranty receivables from the manufacturer treated as accounts receivable. Parts inventory counted at cost or marked down for obsolescence. In our experience, the buyer who does not send a manager to physically count inventory the night before closing is the buyer who pays too much. The seller who does not require the accountant to sign off on the closing-date balance sheet before wiring the funds is the seller who litigates for the next eighteen months.
Indemnification claims are the second bucket. Nearly every Illinois dealership asset purchase agreement contains specific and general representations and warranties, a survival period, a cap, a basket, and an escrow. The seller hands over the keys and hopes the escrow is released on schedule. The buyer hands over the wire and watches for surprises. The most common surprises include undisclosed pending consumer complaints with the Illinois Attorney General or the Secretary of State, employment claims from service or sales staff terminated pre-closing, an Illinois Department of Revenue sales and use tax audit opening six months later, manufacturer chargebacks for incentive programs the seller claimed before closing, open recall work not reflected in the warranty work-in-process number, and tail exposure on prior dealer-financed transactions. Indemnification practice in Illinois follows general contract principles, but dealership deals add a procedural wrinkle. The manufacturer usually must approve the buyer, so the indemnification rights must be carefully coordinated with the framework agreement. An indemnification clause that looks bulletproof in isolation can be undercut by a manufacturer’s cooperation requirement buried in the framework.
The escrow is not just money. It is leverage. Buyers should insist on a tax indemnity sufficient to cover Illinois Department of Revenue audit exposure, and a separate indemnity sufficient to cover pre-closing consumer-facing claims under the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/1 et seq., which routinely surface in the first twenty-four months. Sellers should negotiate meaningful baskets and carve-outs, and should insist on caps that reflect the actual risk the seller took, not the risk the buyer wishes to impose. The general survival period should match the actual tail. Tax claims and intentional misrepresentation typically survive longer than operational representations for good reason.
Earn-outs are the third bucket and the one most prone to litigation. In dealership deals, earn-outs are usually tied to service and parts gross, F&I penetration, or total new-vehicle gross over a defined post-closing period. Two problems recur. The first is that the buyer controls the operations that generate the metric. A buyer who hires away the former service manager, redirects service customers to a sister store, or rebrands the F&I menu can suppress the earn-out number while running a healthy store. Illinois law implies a covenant of good faith and fair dealing in every contract. Illinois courts will not rewrite the parties’ agreement, but they enforce that covenant where a buyer’s conduct is designed to defeat the seller’s bargained-for consideration. Sellers should negotiate specific operational covenants that protect the earn-out drivers rather than rely on the implied covenant as the only line of defense.
The second recurring problem is accounting. A buyer using a different chart of accounts, applying allocation methodologies that shift cost to the earn-out period, or booking F&I differently can move the number by seven figures. The earn-out provision should lock the accounting methodology to the seller’s pre-closing practice and require the buyer to produce monthly reporting in a specified format. The seller should have inspection and audit rights, not just a right to dispute the final calculation after the measurement period closes.
A few structural points that save Illinois dealers litigation costs. Negotiate a prevailing-party attorney fee provision. Arbitration clauses should be narrow and route only designated types of disputes to arbitration. A blanket arbitration clause in an asset purchase agreement can prevent the seller from going to court for injunctive relief against solicitation of former customers, and can strand the buyer from suing for fraud in the inducement. Venue and choice-of-law provisions should name a specific Illinois county and specify Illinois substantive law. Delaware law, popular for entity governance, is usually not the right answer for Illinois dealership disputes where local regulators and local customers drive the analysis.
One last point, because it surfaces repeatedly. The framework agreement with the manufacturer imposes consent obligations and survives closing. Post-closing disputes between buyer and seller that implicate manufacturer approval, such as a rescission claim, a buyer’s refusal to honor a real estate lease, or a seller’s attempt to keep a sister-store franchise, require careful coordination with the franchise agreement. The Illinois Motor Vehicle Franchise Act protections do not evaporate because the transaction closed. See 815 ILCS 710/4(e)(6) (manufacturer’s refusal to approve a proposed sale or transfer is limited by the Act and may be protested to the Motor Vehicle Review Board).
If you are closing a dealership acquisition in Illinois, planning to sell, or watching a post-closing dispute develop into litigation, DiTommaso Lubin PC represents dealer principals on both sides of these deals. Reach us at 630-333-0333 or online.