Annually, my CPA firm compiles buy here, pay here benchmarks from our database of more than 500 operators nationwide. For 2006 and 2007, these benchmarks also include operating information on sales, collections and recoveries, and inventory management which was supplied by NCM Twenty Groups based upon a composite of all of their buy here, pay here twenty group members. These benchmarks also include portfolio performance statistics, compiled electronically by Subprime Analytics, which analyzed more than three billion dollars of subprime auto loans to identify loss rates and trends. In the aggregate, these statistics provide a very comprehensive look at the financial and operating performance of the BHPH industry for the last two years, as well as some interesting trend information for prior periods. Copies of these benchmarks will be available, free of charge, at the National Alliance of Buy Here, Pay Here Dealers (NABD) Website (www.bhphinfo.com) in the News &- Views section starting in April.

At the National Buy Here, Pay Here Conference (NABD 2008) in Las Vegas, to be held on May 6&ndash-8, I will discuss these benchmarks and other important industry trends in order to help BHPH operators prosper in the very challenging economic environment which currently exists.

In 2007, industry profitability was significantly impacted by the following factors:

·- A decline in finance charges (interest income actually collected) due to earlier customer repayment defaults.

·- Controlling bad debt losses.

·- Increased selling prices made it appear that cost-of-sales percentages declined- however, actual vehicle and reconditioning costs were relatively flat during 2007 due to inflation. It also remains to be seen whether this increased sales markup will be collectible in future years.

·- Inflation also resulted in higher operating expenses in 2007, offset only by increased efficiencies from new technology.

·- Bottom line net income after operating expenses and interest expense was generally lower in 2007 for all operators surveyed.

The table below compares the changes in gross profit from 2005&ndash-2007. The numbers are compiled from our best performing dealers and are not industry averages.

Note: All percentages are expressed as a percentage of total revenues.

Source: NABD and compiled by Shilson, Goldberg, Cheung &- Associates, CPAs

Gross profit in 2007 was relatively flat compared with 2006. A more careful look at these results, however, provides some important trends that need to be discussed.

·- Financing charges for 2005 through 2007, even for the best operators, was not sufficient to offset bad debt losses.

·- Higher cash in deal makes good underwriting essential to controlling losses.

The better operators in the buy here, pay here industry are keenly aware of these economic realities and are adjusting in order to reduce and mitigate further losses. In a survey of several of our clients, they indicated plans to do the following:

·- Implement improved technologies that will enhance operating efficiencies and further reduce overhead in order to offset increased costs.

·- Reduce bad debts by tightening underwriting through a better matching of customers with appropriate vehicles they can afford.

·- Further reduce bad debts by improving collection operations and increasing bad debt recoveries.

·- Improve cash flow by increasing down payments and customer monthly payments to offset inflationary increases in costs without lengthening the term of customer contracts.

·- Find new holes to acquire the right inventory at competitive costs.

Although I agree with all of the aforementioned strategies, several new challenges have recently surfaced which also must be addressed.

Gasoline prices are now consistently over three dollars per gallon and inflationary increases are zapping the liquidity of all buy here, pay here customers. Initially, these customers react to these increases by altering their driving patterns or by eliminating other discretionary expenses. Unfortunately, however, these changes only work for a limited period of time and it now appears gasoline prices may be headed even higher, further increasing the pressure on BHPH customers. Inflation continues to rise despite interest rate cuts and the growing number of subprime mortgage defaults continues to tighten the availability of capital for subprime operators.

Prudent operators must do a better job of underwriting. They must gather more customer information at the point of sale and use it to match the customers with vehicles they can afford. Their goal should be to sell vehicles that customers can afford based upon a pre-sale analysis of their net pay and expenses. The industry must shift its emphasis from a sales-oriented to a collection-oriented approach. Operators must analyze their bad debt losses to determine what other adjustments can be made in their underwriting to reduce charge-offs and increase collections.

Success in the buy here, pay here industry in the future will be achievable only by those who understand and manage subprime portfolio risk prudently. Controlling risk and bad debt losses will determine who survives and prospers.

Kenneth B. Shilson, CPA, is president of Subprime Analytics (www.subanalytics.com) which provides computerized subprime portfolio analysis and custom credit scoring services. Mr. Shilson is the founder of the National Alliance of Buy Here Pay Here Dealers (NABD). For further information, visit www.bhphinfo.com or call 713-290-8171.