Wake up, Buy Here, Pay Here people. It's a beautiful day. Go grab yourself another cup of joe and say hello to Jim and Michelle Rhodes on the Buy Here, Pay Here morning show. Take it away, you two. Hello, happy Sunday afternoon. Yeah, it's like good morning. No, it's the afternoon. We wrote the morning show intro. It's a continuation of the morning show that we did on Friday. Yeah. Is it in the morning? No. It is not. And it's a Sunday too. So we're going to do this whenever we want to, I guess, you know, and then people can catch it when they catch it. We just have to adapt to us. We're still doing live because that just makes it happen. And we're here and happy to do that. And you will get us live. And are any mistakes that we make, you'll just pick them up as they go. I mean, that's kind of part of the fun. Yeah, yeah, for sure. All right. Well, we talked a little bit last time about this new index, that business model index where it's grading. um let me show the and on the screen um we're talking more about this yeah so let's take that off the screen for a minute because there's a whole lot of backstory okay well i just i just just to review this is to go into this and this is basically a dealer report card and a report card in comparison to other dealers yes Um, so, and we, you know, this is, this is something that Jim introduced to V eight. Um, and it, uh, it, so right now it's when you see when he, it's one of those together, it's just for that specific group, but this is going to be, um, this is like the, the MVP of, of, uh, this index version one version one point Oh, and we will be continuing to grow onto that. And our intent. is that we get to the point where you don't have to be in v-eight to get a light version of this yeah so okay yeah she was doing the last part first okay yeah that's all right i think um there's just so much backstory here and we talked about it already on the friday episode so obviously please go back and go back and find that episode and and uh But we'll just kind of recap the backstory on why this even becomes necessary, why it's important, and how we believe it will be of value to dealers. Because when we look at business models, and of course, I mentioned before that I've been doing this now a long time, twenty six years as a coach, you know, been around the business longer than that. The buy here, pay here specifically. And there's some lease here, pay here experience directly in there. And some regular retail experience in there. Yeah, but it's when I think about the buy here, pay here thing and I've been doing coaching all this time and especially when I think about working with new dealers, they're new to the business and they're asking me things like, which cost car works best yeah which deal structure how much should i mark it up what works best and i think what i said on friday was i can give my suggestions based on my experience i can make recommendations and i can say this is what i would recommend based on this but when a dealer says Which business model is best? I don't have an answer. I don't believe anybody else has a good one either. That's not subjective based on kind of broad bits of experience here and there, right? It's one of those things that I know we see in social media communities that someone new will ask a question and and the most accurate response is it depends yeah and yeah and and which which is because when someone tells you definitively as like this is the way um you know there's a lot of considerations but you know i found one of the things we were talking about uh is how interesting it is that dealers are always just like Give us KPIs, give us give us you know, give us the benchmarks, give us the things that that that we should be that we should be working towards. uh so but but then you know sometimes like an ego or whatever will get in the way of the answer of them you know listening to the answer it's like but that and so our point here is is you know where the dealers are always asking for um in our space, buyer, payer, leaser, payer, asking for KPIs. What are the best things that I should be doing for my business model? It still depends. This is how we address that. And we'll talk about some of the depends in there. that we can, if this thing is mitigated, then it gets that much more accurate. If this thing is mitigated, then it gets more accurate. But this is really a very, I just, my hat's off to you. I just, when I saw this, I was like, yes, it is easy to understand. And it's in a language that anyone who went through K through twelve and in education, public education. I, cause I'm pretty sure that the private did the same thing. Most of that, they understand this, that, that, you know, a letter grade that's weighted. Yeah. And there's some, there's some depth to this thing that we're going to cover today. So what I mean by that is it's easy to understand once you spit the letter grades out, but if you're, if you're one of the members in a B eight meeting, like we had on Thursday night and they were seeing it for the first time. And it's just at this stage, it's version one point O and it's, it's um it i think before we get into some of that i want to back up and tell one more piece which is the reason we haven't been able to do this before now is because as a coach over the years i've had bits of data here from one dealer and i have history for six to twelve months or whatever and then i have another chunk of data over here But V eight, when we started V eight dealer groups in early twenty twenty four, now we have by the time dealers turn in their April data, we have most of our dealers have data back to January of twenty twenty four. So twenty eight months now at the time we're recording this twenty eight months of data history. all stacked consistently month over month so that's that's something that having that sort of data pool to draw from is step one well you already know that like when when you're asking for a letter grade it's like oh my gpa my for high school is a four point no but you're a freshman You need a minimum. And so, yeah, you need you need a little bit more time. So, yes, you need that. But then the other piece that the reason that we haven't been able to answer this before now, when a dealer asked me what business model works best, what cost of car should I carry? We couldn't answer it as well as we will be able to now because. combination of the data history strung together month over month and now and we obviously hope to be able to pull in more data as time goes along here but the other piece is now we have ai in our corner that it was ai it was myself and claude that sat down and knocked this out in a matter of hours yeah a couple more hours this morning kind of stacking the waiting because the the data is the data And what I'm working to do is remove the subjectivity and to just go in there and do everybody's math the same, which is what we always do in V-Aid. And I'm also working to... I mean, here we are broadcasting live and taking everybody inside the sort of methodology that we're using behind this index because... as I said to my members on Thursday night is in, in my instructions to Claude, I said, we gotta be, we gotta structure this in a way that it's that there's visibility into the data. So this becomes important because first of all, I have to have high confidence in the numbers that I'm presenting to the group. Not anyone who's worked with you understands that it's like, Is it validated? Where did we come up with the numbers? That's something that the integrity of numbers is really, really important to you. I have a few dealers. I wish I had more. We have a few dealers who they are reaching out to me when they get the report. Hey, my numbers on line twenty seven look funky. Would you take a look at that? Right. I don't have enough of that. I wish more of my dealers looked at the thing line by line. Right. Yeah. But the reality is because I'm going to obviously try to make sure that data stacks up neatly and that it's comparative. Because when I tell dealer one, their grade is an A minus and the next dealer two is a C plus, they're going to want to understand why that's different. What are the drivers? Why does mine look different? So I think the other piece that's important here is thinking about This is all running through a GEM filter, right? It's like, what is GEM's interpretation of all the KPIs and things that we work with? Where should the decisions be made in terms of arriving at a letter grade? So this is more math. This is not essay writing. This is not like sitting in an English class and some English teacher grades it and gives some subjective sort of view of whether my essay was good. This is based on mathematics. So it's going to spit out the precise results. And I'm just going to kind of take people inside the methodology. Let's do it. Yeah, absolutely. So we can show this first one that's kind of the letter grade so people can see that one that you shared earlier. If you want to put it up there, it's got... It's got an example. This is just an example from one of our groups. The black bars at the top are where the dealer's information is blacked out. But what I think is important to see here, if you just look at that one, and for people who aren't seeing the screen, if you're just hearing this on audio. Oh, no. Well, this is only on YouTube, so everyone's going to be seeing the screen. Okay. Unless they're driving or whatever, listening. Oh, that's true. Yeah, yeah. So the first category in this one is inventory. Okay. and then turn rate, which kind of sits between inventory and sales, right? It's a combination of those two. The next one is deal structure, which is a function of sales. Sales volume is listed in there, profitability, and then portfolio cash on cash, which is really the label that it gave here, but it's really portfolio performance would be that other bucket. So when you think about, let's just back up for a minute, Michelle, and let's talk about buy here, pay here dealers. Dealer gets in the business. They're going to buy cars. They're going to price them. They're going to underwrite the deal and prove the sale. And they're going to have a certain structure that has a certain amount of profit and a certain amount of risk in it. And they're going to have a certain amount of interest and certain amount of profit in their deal. And then they're going to begin to collect on that. And so in my own waiting, I leaned heavily on, know what ken shilson said and i was in the room plenty of times you don't know who ken shilson is he's kind of like the grandfather of data and the godfather thank you godfather of the data and by trade and and uh by the way ken if you ever hear our voice i hope you're well we understand you've had some health issues and are mostly retired and and i'm grateful for the work that you've done so i refer to the work that you've done often um so ken was a guy who just said that it's not what you sell and buy here pay here it's not about sales it's about keeping them sold okay so so doing a better job of keeping them sold so my waiting is heavily on the idea if you got dealer one who sells a hundred cars a month but charges off a higher percentage of them then that's not as favorable as dealer number two, who also sells a hundred cars a month, but charges off fewer. So they end up with more profit in their deal. They end up with more cashflow. The gross profit on the front end of the sales department looks the same, potentially, if its structure is the same. But it's really, what do we bank? I've written articles in the past about banking what we book, right? You put it on the books, but how much of it lands in the bank? All right. So a lot of my metrics are driven off. Yeah. You know, and I see frequently and I've done the same thing depending on whatever it is that, you know, we're, we're getting a mortgage and we're going to make the numbers look as good as they possibly can. Right. and uh and what it all come kind of comes down to is what what you know do what's in the bank that's that's what what money is is passing because this business is it's cash is important very i took the the slide down and the images disappeared um so the uh thing that i was yeah so it's it's about how you present it yeah right and so in this case we're going to be transparent with the way that we calculate what we do okay so i want to kind of you know we you talked about it's about being sticky and so uh if we if i just show this again real quick um So, you know, the different, there's one, two, three, four, six different categories. In those categories, the things that fall under whether or not it's sticky. What do you mean by sticky? Sticky as in, do they stay sold? Oh, I see. Yeah. Do they stay sold? Do they stay sold? Which is going to be like your underwriting and, you know, and then the other part, which is. Getting inventory and the actual sales. And so when we were going through this before, it's basically split into two buckets or columns for this waiting. There's one, which is where it's sticky, and the other one, which is getting ready to get it to sell. And the getting ready to get it to sell and the actual sales number, actually not getting ready to sell. it's collecting it's you know the things you're going to collect on that's twenty percent and the rest of it is eighty percent on the weight so i put eighty percent of the measurement so far the eighty percent of the weighting is stacked on how it does after delivery why because When we buy cars and we put them on our lot, yeah, we have cash tied up in them, but we don't have the risk yet. Right? I mean, you could argue that if I turn around and sold the cars at a loss, but I'm just saying the risk is in the portfolio, supposedly. So when we decide about how to buy, how to price, how to underwrite... So I just, for right now, the version one point O has eighty percent of the weighting in how the business performs after the car is sold. And we have been huge advocates for you don't sell more to pull yourself out of a hole. True. You fix the processes, you fix your underwriting, you fix the things. I mean, that's more important because if you can get them sold, if you can still sell ten, but you're saving. through the course of a loan, three percent more, that's like selling more. It's you know, and so it's just it's not about the selling more. And what I see frequently is and this is we tell people this all the time when we're when we're working with people that are coming from like franchise into buy here, pay here. It's like we're going to beat our chests around sales. And that is not what this business is about. Right. This business is about collecting. And can you collect the money and put it in the bank? Yeah, so one of the things that I'll do, and I just propped this thing up and put a label on it and put a trademark on it and brought it out here. And let's start talking about it, right? So I'll show you what we're doing. And just kind of my point in bringing that up is that we're, we're going to work through with dealers, our V eight members, we're going to get feedback from them. And, and I'm going to hear a lot of, yeah, but what about this? And what about this? And my numbers and this and that it's like, well, first of all, we, we all, this, this letter grade is only as good as the data that we put in. Right. So it's, it's, that's part one. We got to validate the data that's coming in. We got to get our processes, our reporting processes consistent first. Right. And then one of the things we'll be working, continue to do in VA is to help dealers identify this. This will start to showcase because dealers will, it'll raise more of the question. I share one little side note because I think it's kind of relevant. One of our, one of our members who was in kind of a beginner group, we tried to do a beginner group with VA dealers that had less than a hundred accounts. It didn't work. We'll, we'll probably figure out another way to go at that in the future. Just approach it from a different direction maybe. Yeah. So that dealer shared with me though, after the department kind of conversation you'd have with some of the other members of that group. And he said, You know, when we meet, Jim kind of gets kind of deep into the numbers of the portfolio performance and some of this. He said, I just want to know how to sell more cars. One of the guys said back to him, how do I sell? I just want to know how to sell more cars. And that's fair. That's understandable. But selling more cars into a portfolio that's not collecting well is really not serving anybody. Like it's, you know, you're in fact, it feels good. Yeah, it feels good. We can we can. yeah, we can say that we had a good month, but it's like, it really doesn't stop there because we, we would need to make sure that we are actually banking whatever we're putting in the portfolio. So I think when we talk about the waiting that I'm going to show you here and what I've done so far, it's important to remember that and why, when we think about numbers like sales and inventory and rate of turning inventory, those things are become, a way to point back to when, when, when a dealer asked me and, and when we run it through Claude, it's a way to say, which performs better. Well, we first, I have to be able to ask the dealer. And I asked these dealers the other night said, am I right to ask or think that the portfolio that most of us would most want to own is is the one that generates the most cash, that I convert more of my dollars in my portfolio into cash, is item one. Item two is, If you have two dealers doing that part the same, they're both putting a portfolio out there and they're both converting it to cash at the same rate, collecting principal and interest and converting it to cash. Then the next question is, which one had more risk to create that? Which one had more cash type in that portfolio to build it? So in a lot of the deep numbers that we would look at, that's where this started to happen is We started in our V eight groups some months ago to create some business model indicators. You know, our report has KPIs in there, just like what you mentioned has lots of ratios and comparisons of different numbers and measurements. And it wasn't until I kind of got deep enough into some of the numbers and kind of was able to build on a little bit as we go that I began to see some of the numbers that were pretty strong indicators of business model and approach to the business. OK, so that started to really just show up in the numbers. So, for example, you're looking at a number that says this dealer converts X amount of money into their of their portfolio into cash across twenty four months. Mm hmm. but they may have more portfolio remaining to collect at the twenty-four month mark. Okay? So that's an indication of a different approach. They're doing a longer term contract perhaps than the other. It's a different approach. I measure a lot of stuff off of twenty-four months in V-eight. And this is probably the right time to go into why. Because a lot of the numbers that we would talk about, and I'll show some slides here in a minute, But there are two things to note. We typically work off of a six-month rolling average. So when we talk about an average unit cost or any of the numbers, I'm referring to the whiteboard again like we did Friday because I'm looking at the stuff that's sketched out up there. But if you look at an average inventory cost, we're usually looking at the average cost of units on the ground average over the last six months. okay so there's that's a pretty good amount of history why you do that because it can be up and down the longer you look at the better indication you have of the dealer's actual patterns right okay so so we're looking at six months of history of data typically when it's available and it's almost always available in the numbers we're talking about and then um the next thing would be to project months And I cut that off to say, let's look at what we squeeze out of the portfolios in an upcoming twenty four month period. And we look at everybody the same. And the nice thing about that is that encapsulates most dealers because there are some dealers that their loans or their notes are only twenty four months or whatever. And so this is this is a really good indicator. And when you talk to people that understand portfolio runoff and all of those is that if it can reach the eighteen month mark, is that it's a different it's kind of That that's most of the stuff that's going to fall off just because it's not a good note will be gone by then. Right. So, yeah. Yeah. And for me, it was just a way to make sure that we ran everything through the same filter. And I picked twenty four months for a variety of reasons. Among the others would be that I'm encouraging our members to always examine their. yield, we can say, across twenty four months because I want them to be in a position to trade their customer into another car. You know, you and I've done a whole separate podcast about that. But that's one of the reasons I went there is to say, let's look at what position we're in in the contract at twenty four months. so that we can make a better decision about whether it makes sense mathematically for us to trade. Okay. So, so there's other reasons there, but I think much of what we're going to talk about here is, is going to be based on a twenty four month projection. So let me go and share this one screen. I'll do it so we know. All right. So. What you've got there is kind of the weighting. I grouped them by color. So you can see inventory category up there, the two blue sections. I'm using reconditioned cost of the car. And then I'm using the inventory count. How many cars do we keep on the ground? What is our average cost? That's really all I'm looking at in terms of the inventory side. And then when we step into sales, that yellow section, I'm looking at volume of sales. I'm looking at the rate of turn, which is again, kind of a function of how fast do we turn over the inventory that we own? And then the next one would be deal structure. So in that one, I chose to look at the reward to risk ratio you've heard me talk about. We're looking at the amount of profit in the deal relative to the risk that we have. Our risk would be the cost in the car minus whatever down payment we get. It's like when they roll off the lot, those top five things are done. Um, correct. Yeah. Yeah. And we don't know for us to say now dealer asked me which business model works best. Well, I don't, I can't answer anything yet based on those five categories that I just gave you. Right. I don't, and a buy your payer. I mean, in a retail story, that's the whole story. That's the whole, that's the whole story. We're killing it. And this again is why when we bring franchise dealers in and it's like, you know, you want to get into this is understand that what it is that you get so excited about is such a small percentage of what really matters. Yeah, it's true. And we've talked to a lot. People can do a search on our podcast track for the paradigm shift because that is part of what she's touching on. I think this is sometimes when people are new, even if they're coming from entrepreneurship, which seems to be a lot of people that we meet, they're kind of more of an out of finance background. And so this is really just kind of helping them understand, you know, So those first categories, that yellow and blue there, the reason they're in my metric is because I'm asking Claude to tie back to those. And, and because now when I, when a dealer asks me and we can grade those things, um, When a dealer asks me which business model works best, which cost of car should I carry, I'll soon be able to say, well, the dealers, if your measurement of best is the one that I would recommend, which is the rate at which you recover cash, now I can say... those dealers have this kind of inventory and they may have this kind of the the sales volume probably but it'll tell them these dealers are doing more yeah because why why sales count well sales count volume will be able to tie that to these other metrics like adjusted gross profit and some of these other things that are happening in the kind of the heavier part of the waiting to be able to point back and say The dealers who are performing best in terms of the after delivery numbers, their profile on the front end looks like this. Yeah. Right? Yeah. You know, one of the things I see is... Um, you know, we've talked at the paradigm shift, new people coming in, all of that is that it's, that's really only the, the only thing that most entrepreneurs know, uh, it's, it's like, is the getting them in the funnel, having the right product and selling them. Um, and so most entrepreneurs understand that, um, When you're in buy here, pay here, you're also a bank and banks don't do it like that. It's not the same thing as it's now, you know, and yeah, that it's where you have to start understanding numbers. Right. That's a hard thing for entrepreneurs. It's like, I can understand this, this, and this, and this, but now let's dive into what numbers are really driving things in your business. This is like a one-on-one business thing is everything yellow-blue. And then you're getting in your two Oh ones, your three Oh ones, your four Oh ones. If you're looking at the education scale of a class, when you get into those greens, it's, it's like, these are, these are things that a lot of dealers, you know, we were talking about new dealers. It's like, I, it gets really heavy. It's like, this is the business. And so if there are ways you can learn to, these pieces and and um it it will it will help you it will pull off the the blinds of how this business works and how where you can tweak where you can fix where you can yeah um and so it's it's You know, we we again pound that beat that drum of this this other part, which is eighty percent of what you're weighing is where the meat is in this business. So it's where people like get figure out the numbers and the numbers. Yeah, as you talk about that, I'm reminded of some of the dealers. You've heard me use this example about meeting dealers who are thoroughbreds. And we see that a lot with dealers. And listen, it matters. It does, yeah. Having the mindset to be able to generate sales, acquire inventory well, create sales. It's just that in our business, it doesn't end there. we we don't just get to talk about sales and not address the collection side because the the reason that the thoroughbred thing can be a problem you've also heard me say that ours happens to be a business that it's beautiful business you can you can create almost anything you want you can create equity and create cash flow some combination you can build a heck of a business in a buy your pay here and lease your pay your business model You can also race yourself right off a cliff by just sell, sell, sell, and just keep pumping out sales and not fixing the back end, so to speak, that helps those customers stay sold, keep them on the books, get the money in the bank. We're just kidding ourselves sometimes. So what this starts to do is allow us to give dealers a letter grade that says, You might like what you're doing. You might like the approach, but the dealer sitting next to you has a better letter grade. You might want to ask them what they're doing and let's make sure we understand. So this will be obviously our coming meetings with the eight. I'll be soliciting input input from the members on what it is that we've chosen as the drivers here because it's we we want to hear from them and make sure that they agree and uh that that this is valid sort of approach to you know what is what is indicative of business model because you got you got dealers that are newer and listen there are a couple things that aren't in here i went a long time here without saying that This version one point O does not address operating expenses. We have operating expenses in V eight, but they're not validated. And so I just didn't put it in here. I'm just really looking at sort of the nuts and bolts of the thing, irrespective of what it costs them to operate that. Yeah. Operating expenses are we have seen some lean, lean, lean operations. It's like you got your wife and your husband and they're doing all the sales and collections and it's like super lean and we've seen ones where it's very fat because mother-in-law is now retired and needs a little extra money to supplement social security or one of the kids is like we want to give them a job so that they can pay for their education it's like and things that are not necessarily necessary and it's not that i'm saying that that um mother-in-law doing the books is not necessary it's that you're probably overpaying So that's an operating expense. Or like, I want to have a very pretty big corner lot. And I want a new building. And yeah, so my... my physical location and utilities that go into that and the you've got a shop and you've got like all of this budget you've done for new equipment and you know all of that kind of stuff operating expenses and they they you know we that's that that's not part of this Yeah. Yeah. So that'll be in a later version. We do we do think that's going to be a relevant indicator. But I think we started in the right place to just kind of we think about this like the machine that is the business selling cars, you know, creating sales, managing some inventory and then collecting on the paper. This is a measurement on that machine. And we'll add the operating expense side when it makes sense. And we will validate that. So you had a wheel down here. What did you... Oh, yeah. Let's go ahead. So this is the same thing. We're going to bring that in. This is the same thing. So you can kind of see it visually, like how much the green or the two darker greens, how much of this is... that the pieces that happen after the car has left the lot so the blue slippers up there there are two of them in this illustration those are the inventory related things the yellow ones would be the sales ones and they're even though they're more categories they're just they still represent a small percentage of what's happening here. Because I feel like when somebody asks me which business model is best, you've got to mean what's going to make me the most money. Yeah, and I said that I would ask questions. It's like, where does marketing come into this? It doesn't. It doesn't come into this. It's not part of this. A business model is not about how much money you're putting into marketing. Well, I could offer a caveat, a little star in there. Because some of the measurements are going to be, for example, over here, there's one on adjusted gross profit. So what I chose to measure when it comes to profitability on the front end side of the sales department, you could just look at gross profit. But what I chose to do was look at adjusted gross profit, which I don't have the thing up here, but let me just run through for our listeners what adjusted gross profit is. Basically everything in your buy here, pay here, or lease here, pay here business before expenses. So the main components would be Profit on sales, whatever you sold this month, if I'm just looking at a single month, how many I sold and how much profit, that's my gross profit on the sales that occurred this month. My interest income that I collected that month is another form of income. That one's in cash. And then the others are going to be adjustments for repo losses. So you could say it's just a net charge off. You typically have a gross charge off number and then adjust the recoveries that you brought back in for repos and that gives you a net. So that's adjusted gross profit. And what I'm choosing to do is take that adjusted gross profit and divide it by total gross profit, which will be a pretty good indication of back to what's sticking. You know, granted, the charge offs that we're doing today might be cars that we sold in months ago, but that still it's a reflection of profitability today, which is what your bank is going to be looking at is what is your current profitability? What's your P&L look like? And the other thing that's important to mention here, Michelle, is a lot of our dealers have have finance companies, right? They have a related finance company. So I should have also said, and it kind of goes back to the presentation we did at NIADA last year on profitability, because it's really just, we're just basically saying, let's keep it simple. Let's look at, let's put it all globally. Let's bring it all together globally, which is almost always the way I think about it. An RFC is simply a tax strategy. Typically, there can be some other strategies and benefits to doing it. But that's just inside, you know, an operation. You got a sales arm over here buying cars and selling cars. And then you got a finance company. But, you know, in a typical buy here, pay here operation, all of them being the same LLC or C Corp, whatever. This just happens to be two different companies. But we bring all those numbers back together. you know, in a single place. And now you've just got, you've got a global look at the thing, irrespective of whether you've got a finance company or not. So we're just being able to measure, you know, how much of this money are we able to convert into cash? And then of course, eventually we'd want to look at, what's it costing us to run the machine? You know, but right now we're just saying, which machine works better? Yeah. Yeah. Yeah. And so this is a, this is a step in that direction. And like I say, it's one point. If you're interested in joining a V-Eight group, best way to get there is go to whitehatway.com. It is a product of White Hat Way and there is one of the pages for V-Eight. It answers a few questions. You can fill out a form if you'd like that or you can reach us from that too as well. All right, everybody. Enjoy your rest of your Sunday. Tomorrow is Memorial Day. And hopefully everyone's barbecuing and doing fun family things and remembering their loved ones that have passed. So, all right, everybody. Thanks again so much for joining us. And we, you know, we know you got other things to do. We just appreciate you making us part of that. So we will see you guys on the other side. Have a great day, everybody.
