The modern RV dealership landscape is undergoing a noticeable evolution. While a steadfast commitment to customer service and quality products remains important, the operational and financial intricacies behind the scenes are evolving at an accelerated pace.
Leading RV dealers are taking more time to understand the critical role of wealth-building strategies, specifically participation programs, in driving dealerships’ long-term success in today’s challenging market.
Underscoring the thought is understanding that the cheapest program option is not always the best. Dealerships must emphasize participation programs’ strategic value as investments in future growth and acquisitions.
The Power of Participation
In the consolidating RV industry, where strategic acquisitions are becoming increasingly prevalent, participation programs provide a powerful wealth creation avenue. By strategically investing in these programs, RV dealers are essentially investing in their capacity to pursue future acquisitions.
The ability to identify underperforming stores and implement strategies to improve their financial performance is a hallmark of successful RV dealership groups. Participation programs provide the financial resources and strategic insights necessary to fuel this growth.
Participation programs enable RV dealers to share in the underwriting profits generated from the sale of Finance and Insurance (F&I) products. These programs allow dealers to select products that provide the most benefits to their customer base. These profits are derived from products such as Vehicle Service Contracts (VSCs), tire and wheel protection and Guaranteed Asset Protection (GAP) insurance. By partnering with established and trusted F&I providers that possess expertise in risk assessment and offer competitive products, RV dealerships can unlock significant financial rewards and enhance customer satisfaction.
Retro vs. Reinsurance Programs
Retro Participation Programs:
Retro programs serve as an excellent entry point for dealers venturing into participation programs, particularly those not yet prepared for a full reinsurance program’s complexities.
In a retro arrangement, the dealership sells a third-party provider’s F&I products. The provider assumes the product risk and shares a portion of the underwriting profits and associated investment income generated from the dealership’s F&I sales with the dealer.
The underwriting profit is typically tied to volume production and underwriting performance.
Reinsurance Participation Programs:
Reinsurance programs, by contrast, are designed for dealers seeking greater control and long-term wealth-building opportunities.
In a reinsurance structure, the dealer essentially becomes the insurer, forming a reinsurance company (often a controlled foreign corporation, or CFC) that assumes the risk on the F&I products sold.
By assuming the risk, the dealer captures a larger underwriting profit and investment income share and exercises more control over claims management, product pricing and reserve investments.
Reinsurance programs are particularly valuable for dealers with higher F&I product volume, a longer investment horizon and the desire to build a significant financial asset over time.
Choosing the Right Structure
The decision between retro and reinsurance participation is not a one-size-fits-all approach.
Dealers should approach this decision with a data-driven mindset, reviewing specific operational and financial metrics to determine which structure aligns best with their goals.
Volume of F&I product sales: Among the most critical data points is the average monthly volume of F&I products sold (including cancellations), and particularly the average number of service contracts sold.
As a general rule, dealers selling 20 or more service contracts per month, or an equivalent mix of F&I products, are often strong reinsurance candidates. The administrative costs and setup fees associated with forming and maintaining a reinsurance company are more easily absorbed at higher volumes, and the long-term profit potential is significantly greater.
Conversely, dealers with lower monthly volume may find that retro programs provide a better balance between immediate cash flow and manageable administrative burden.
Product mix and cancellation patterns: Dealers should also analyze the types of F&I products they are selling.
Are they heavily weighted toward service contracts, or is there a healthy ancillary product mix, such as tire and wheel, GAP and paint protection?
Each product has a different risk profile, cancellation rate and earn-out period. For example, tire and wheel protection tends to earn out more quickly and has lower cancellation rates. Service contracts may take longer to realize profits, but offer potentially higher overall returns.
A diversified product portfolio can help stabilize cash flow and mitigate risk, making reinsurance more attractive for dealers with a balanced mix.
Formation and administrative costs: Dealers must carefully consider participation programs’ setup and ongoing costs. For some, the $4,000 to $5,000 annual cost of forming and maintaining a reinsurance company may be negligible compared with the profits generated.
For others, particularly those with lower sales volume, these costs can erode much of the financial benefit. Such dealers should consider a retro program the more prudent choice until volume increases.
Tax and cash flow objectives: Tax strategy is another key consideration.
Reinsurance programs allow profits to grow tax-deferred within the captive structure, providing a powerful vehicle for long-term wealth accumulation. However, funds are typically not accessible until the third year or later, making reinsurance ideal for dealers who do not need immediate access to cash.
Retro programs, on the other hand, provide annual payouts that are taxed as ordinary income, offering more immediate cash flow but less long-term growth potential.
Ownership and control: Dealers must also weigh their desire for control over claims adjudication, product pricing and reserve management.
Reinsurance provides greater autonomy, enabling dealers to tailor coverage and claims processes to their customer base.
Retro programs outsource much of the control to a third-party provider, which may be preferable for dealers who want a more hands-off approach.
Revenue Diversification
A successful participation program is built upon a well-diversified F&I product portfolio.
Relying solely on service contracts exposes the dealership to volatility in cancellation rates, claim patterns and regulatory changes. By offering a broader product array, dealers can smooth out cash flow, accelerate profit realization and reduce cancellations’ impact.
For example, tire/wheel protection can typically have shorter earn-out periods and lower cancellation rates than service contracts. By bundling these products and incentivizing F&I managers to achieve high penetration rates across the portfolio, dealers can create a more resilient revenue stream.
This approach also enhances customer satisfaction, as buyers appreciate comprehensive protection packages’ convenience and value.
Optimizing Pay Plans and Sales Processes
Dealers should align F&I manager compensation with product penetration and diversification, rather than focusing solely on maximizing profits on one or two products.
For the dealer, incentivizing managers to sell multiple products per transaction encourages a more balanced portfolio and maximizes participation program returns.
For the buyer, multiple products providing great value at a reasonable markup offer consumers peace of mind and a better ownership experience.
Sales process optimization extends to menu presentation and assumptive closing techniques.
Presenting protection packages as the default option and framing ancillary products as logical complements to core offerings increases customer acceptance and reduces price objections.
For example, some customers mistakenly believe that a service contract covers tires. By proactively offering tire and wheel protection as a logical package option, paired next to the service contract on the menu and not buried further down, dealers can address the misconception and boost penetration rates.
Critical F&I Products
Certain F&I products are particularly effective in driving participation program profitability and mitigating risk.
Extended service contracts remain a cornerstone, providing protection against costly repairs and generating predictable, long-term revenue.
GAP insurance is essential in a market where RV values can fluctuate, protecting the dealer and customer from unexpected losses due to total write-offs.
Roadside assistance, while low in cost, delivers high perceived value and increases overall penetration.
Dealers should also consider each product’s cancellation and claims dynamics.
Products with shorter earn-out periods and low cancellation rates, such as tire and wheel protection, reduce exposure to mid-term cancellations. By tracking product performance and adjusting the portfolio accordingly, dealers can optimize short-term cash flow and long-term participation program returns.
The Participation Mindset
Ultimately, the most successful RV dealers view participation programs as living investments requiring ongoing attention and strategic refinement. The programs must be regularly reviewed, examining product performance data, adjusting sales processes and staying abreast of regulatory and market changes.
Having a successful participation program also means having honest conversations about financial goals, risk tolerance and investment horizons, whether the focus is on immediate cash flow or building a significant asset for future acquisitions.
Dealers should not be afraid to seek expert guidance when evaluating participation program options. Trusted F&I providers and consultants can offer valuable insights into program structure, tax implications and operational best practices.
They can also help dealers navigate the transition from retro to reinsurance as their business grows, ensuring that participation programs remain aligned with evolving goals.
A Strategic Imperative
Participation programs are no longer a niche offering for a select few. They are a strategic imperative for any RV dealer seeking to thrive in a competitive, consolidating market.
By making data-driven decisions about program structure, diversifying F&I product offerings and optimizing sales and operational processes, dealers can do numerous things.
They can unlock significant new revenue streams, mitigate risk and build lasting wealth for themselves and their organizations.
JD Baker has spent a dozen years with Protective Asset Protection, moving from a regional manager to the company’s vice president of specialty sales. Baker has over 25 years of experience in finance and sales.
