Incentivizing Key Employees: Practical Ownership Structures That Protect Dealership Value
May 28, 2026
CADA Bulletin
In today’s dealership environment, finding and retaining the right people is critical to the near-term and long-term success of your stores. Whether operating a single store or multiple rooftops, often a small group of key employees making daily decisions directly impacts profitability, culture, growth, and long-term enterprise value. The right team may allow the dealer principal to take a step back from daily intensive operational control, but the wrong team can set back a dealership for years.
The industry backdrop is shifting: dealerships have historically been family-owned, but there is more private equity in the market and public companies today making business more competitive and even more important for family groups to retain and motivate their talent that drives performance and continuity.
Accordingly, dealers need to be thoughtful in their approach to employee retention and succession planning to ensure that the dealer’s actions align with their goals, succession plan, and the future of the dealership. Dealers have many options to incentivize and retain key employees, but below we discuss: (1) purchased ownership; (2) profits interests; and (3) phantom ownership, which many dealers consider when planning for their future and the future of their dealerships.
The Reality Dealers Face
If you are like most dealership owners, you did not build your business alone. Over time, trusted general managers, dealer principals, and executive team members became critical in the success of each individual store or the growth of the group. Yet, in many cases, these key employees are compensated primarily through salary and bonuses, which reward short-term performance but do little to encourage long-term commitment.
This creates several risks:
- Key employees may leave for competitors offering more upside.
- Performance could stall once compensation ceilings are reached.
- Short-term profitability decisions may impair long-term growth and value.
- The dealership becomes dependent on your direct involvement.
- There is no clear plan if you become incapacitated or pass away.
In growth and succession planning discussions, we discuss options dealers have to mitigate these risks. Specifically, we discuss options to help align incentives so key contributors think and act like owners, instead of merely employees. By incentivizing key employees through ownership or “ownership-like structures,” you align your employees’ motivation with the dealership’s long-term success, thus directly addressing these risks.
Ownership Structures Used to Incentivize Key Employees
Dealers have several options to incentivize key employees through ownership or ownership-like structures. The appropriate approach depends on the dealership’s entity structure, tax considerations, desire to retain control, long-term succession goals, and each particular employee.
- Direct Ownership Purchase
Voting or non-voting minority interest in the dealership or dealership group - Profits Interest Award
An ownership interest in the future appreciation of the dealership or dealership group - Phantom Ownership Agreement
Compensation structure to pay key employees as-if they were owners, without actually granting them an ownership interest in the dealership or dealership group
Direct Ownership Purchases
The first and most straightforward approach is granting key employees the right to purchase actual equity in the dealership. If sale or transfer of an equity interest is best for your dealership and employees, dealers need to also consider:
- Will ownership be purchased by the employee at fair market value or book value
- Will the key employees have voting rights
- What restrictions will be imposed on the transferability of the employee’s ownership, upon death, termination, and voluntary or involuntary transfers
- What are the dealer’s and employee’s rights if the employee ceases to be an employee
- What happens if the dealership sells while the employee is an owner.
Creating clear and straightforward terms, control, and resolution is critical to any transfer of ownership.
The most common plan for employee ownership involves the sale of an ownership interest in the dealership or dealership group to an employee at “book-value” or “book-value-plus”. With today’s dealership values, often a purchase price based on fair market is prohibitively high for an employee purchase, so to provide a price that an employee can afford, the ownership interest may be at book-value. However, if priced below fair market value, the discount may be treated as compensation to the employee, with corresponding tax implications; aligning any repurchase right to the same formula can mitigate issues if structured properly in coordination with tax advisors.
As an alternative, if the dealer feels like it is necessary, important, or otherwise warranted, some portion of all of the dealership goodwill can be included in the purchase and buy-back formula. We call this “book value-plus” where the purchase price is calculated at book value and some portion of goodwill. Sometimes a dealer feels like a sale at book value is too low based on the dealership or circumstances and wants their employee to pay something for the goodwill, even if not fair market value.
The employee’s purchase can be paid for over time either by seller financing, where the employee pays the dealer for the ownership over time, pursuant to a promissory note and a pledge of the employee’s stock as collateral, or third-party financing, often financed by a lender with a relationship with the dealership. This can help the employee use the ownership distributions received to help buy in over time, reducing the financial burden on the employee and/or help to incentivize the employee to stay with the dealership for years to pay down the debt.
As with any minority ownership interest, the dealer or dealership should retain control over this ownership and include certain ownership restrictions as part of the agreement with the employee, including:
- Limitations or prohibition on transfer of ownership.
- Rights of first refusal or mandatory repurchase provisions as a precondition to any transfer.
- Voting and control protections that preserve majority control.
Profit Interests (LLC or Partnership Structures)
For dealerships structured as LLCs or entities taxed as partnerships, profit interests can be an efficient incentive tool. A profits interest, according to the IRS, is a partnership interest granted to an employee that grants rights solely to future appreciation and profits, rather than existing capital of the business.
A profit interest has zero value at the time of issuance because the employee participates only in future profits and appreciation above the dealership’s value as of the grant date, often described as the “hurdle” value. The theory is that if the dealer bought back the profits interest the day after the grant, the purchase price would be zero because no appreciation has occurred. If structured properly, there are no immediate tax consequences to either party because nothing of value was really transferred.
Profit interests preserve the existing value for the owning dealer (meaning that the dealer is not giving away any of the value of the dealership as it existed on the grant date), while also rewarding employees a percentage interest in the appreciation, based on future performance. Also, from and after the date of issuance, the employee can participate in the distributions percentages, as determined by the dealership and its owner.
Typically, for profits interests, they are “awarded” to the employee, and the employee has no out of pocket costs now or in the future for the ownership. Some dealers feel that being able to award the profits interest, at no cost, is an advantage, requiring the employee to work hard to help create new value, but many feel that not having any skin in the game may not create the right immediate vested interest in the dealership operations because they really don’t have anything at risk.
Phantom Ownership Plans
A third option that some dealers may consider is phantom ownership. Phantom ownership provides a contractual right to payment and compensation that mirrors what would be received by an actual owner, but limits the employee to the financial participation without transferring actual equity ownership or other rights a shareholder or member may have by law or agreement. Since the employee is not an actual owner, the employee typically does not have voting rights, they are not allocated profits or losses for tax purposes, they do not have rights an owner may have to review the company books and records, etc. The restrictions are helpful to an owner that wants tighter control on the dealership, but often is less attractive to employees who want to be thought of as partners or owners for reasons other than the money.
Phantom ownership also may provide economic benefits similar to both annual profits distributions and net proceeds if the dealership sells, or any other economic incentive plan that a dealer desires to provide.
Although phantom ownership can be given to an employee or sold to an employee, similar to a profits interest, phantom ownership is often awarded to an employee for no additional cost. Restrictions on transfer, vesting over time, and clear rights on cessation of employment are essential. Similar to any of the other above options, this should be created with the assistance and advice of your lawyer, accountants, and financial advisors.
Phantom plans can be effective retention tools, but do not convey actual ownership rights and proceeds are generally taxed as ordinary income to the employee.
Estate Planning and Business Continuity Considerations
From an estate planning perspective, incentivizing key employees is a critical risk management strategy. You will eventually exit your dealership, whether due to retirement, incapacity, or death. Even if you intend to pass the dealership on to the next generation, the timing of the transition may necessitate a bridge between you and the next generation that key employees with deep experience with your dealership and the automotive industry can help fill. Without a committed leadership team in place, surviving family members may inherit an operating business without the expertise or desire to run it, or create a situation where due to lack of trusted and incentivized personnel, putting the heirs at risk of being leveraged or risk material losses of a valuable asset.
We see this “bridge” concept in many dealer-family planning because continuity planning isn’t separate from operations - it’s part of protecting the enterprise for the next generation.
Incentivizing key employees helps ensure continuity of operations if anything were to happen to you and a partner relationship can be very important to dealers as part of risk assessments and succession planning. Key employees in place, which have been recognized and rewarded over time for their skill and service, with their institutional knowledge and confidence from manufacturers and lenders, can help preserve your dealership value for you and your heirs. Rather than relying solely on family members or forcing a sale under pressure, a dealership with incentivized leadership provides stability during transition and protects the dealer’s legacy.
Conclusion
Incentivizing key employees is about aligning interests, managing risk, and ensuring continuity.
When properly structured and coordinated with financial, legal, and tax advisors, employee ownership incentives are a powerful tool to protect your dealership, your family, and your legacy that you have worked so hard to build.
The best outcomes tend to come when advisors work together rather than in silos. In our experience, it can be frustrating when advisors don’t understand the client’s business or approach planning like a checklist; by contrast, when a dealer has a strong team of financial advisors and lawyers, the team can talk openly about opportunities and options, and pros and cons of each.
Dealers considering the next steps may:
- Assess roles/candidates
- Consider the pros and cons of each structure for their organization and employees; and
- Implement a plan with the assistance of their lawyers, accountant, and financial advisors.
Any change of ownership will require manufacturer and state licensing approval, and may impact or be prohibited by lender covenants without approval.
If any of this resonates with you, you can reach out to us to discuss your facts, goals and options available.