When resale prices soften, there is a pendulum-like resurgence in marketing used vehicles to employees. On the other hand, when the resale market is strong, employee sales programs at many fleets are on auto-pilot, so to speak. These fleets are complacent about employee sales (waiting for buyers come to them) and do not aggressively market the program to new buyers. The national average of vehicles sold to employees is 23 percent. However, by aggressively marketing employee sales, many fleets could sell as much as 50 percent of their vehicles in-house. This can be achieved by expanding sales beyond drivers to other employees, family members, friends, and the surrounding community. Some companies even market used vehicles to the employees of other companies. The competitive-bidding environment of an auction is the best way to establish a vehicle’s fair market value; however, this is a wholesale value. Employee sales, if done correctly, are priced above wholesale.
Pricing is the Critical Element
Most companies allow employees to purchase vehicles at wholesale market value or a percentage back of Black Book or other guidebook. The lower price is possible by eliminating auction fees, transport charges, and recon expenses. A few companies sell vehicles at steeper discounts, far below fair market value, viewing the reduced pricing as an employee perk. Fleets that price aggressively below market value need to think twice before complaining about depreciation rates. In a similar vein, other companies price vehicles sold to employees at the remaining book value rather than fair-market value. The problem with these two pricing strategies is that if a vehicle is sold to an employee for substantially less than market value, the difference is taxable income and should be treated as imputed income on an employee’s W-2. In addition, this is a potential Sarbanes-Oxley issue. No special allowances should be made in an employee sales program; such exceptions are a "red flag" for a skeptical SOX auditor.
At the opposite extreme, some companies price vehicles higher than fair market value – at the equivalent retail price. Needless to say, profiting at the expense of your employees is detrimental to corporate morale. You need balance when establishing employee pricing. End-of-service vehicles need to be offered at a price higher than wholesale, but lower than retail. It is important to remember that all quotes will be "shopped" against similar vehicles available for sale in the retail market.
Most employees consider it a perk to buy company vehicles at near-wholesale prices. However, do not use the word "benefit" in describing an employee sales program since the IRS could perceive it as a taxable benefit. Also, a successful employee sales program must have a non-negotiable pricing policy. Although 17 percent of the nation’s fleets allow employees to submit bids and negotiate the vehicle’s ultimate selling prices, this is "thin ice" and can easily become a Sarbanes-Oxley compliance issue, especially if your recordkeeping isn’t up to snuff.
Market Aggressively to Employees
Fleet management creates a product — a used vehicle, which is "produced" during its term in service. A fleet manager must be a "used-car salesman" to maximize the percentage sold to employees. You must market vehicles rather than just sell them. One mistake many fleets make is waiting for employees to request pricing. For every vehicle coming out of service, a formal price quote should be provided to the driver, whether or not the driver requests one. This gives drivers time to deliberate the purchase and arrange funding if they are interested in buying. Also, drivers who weren’t initially interested may be swayed upon seeing the price. It is not necessary to offer extended warranty/service contracts with used fleet vehicles, but doing so will create additional value for the purchaser. Approximately 14 percent of commercial fleets offer an extended warranty program for out-of-service vehicles sold to employees. However, it is important to give drivers the option to buy an extended warranty program. For example, the cost of the service contract should be built into the vehicle’s selling price, but permit the buyer to eliminate the option, which would correspondingly reduce the selling price.
Employee sales are the best way to reduce your days-to-sale, and it represents the fastest cash flow in recouping resale proceeds. In the final analysis, employees represent the strongest resale market for company vehicles. They know the history of the vehicle and, as a result, have a high comfort level in making the purchase decision. Employee sales also encourage better care of vehicles during their service lives. However, you should be "street smart" and monitor maintenance histories on an ongoing basis to prevent "over-maintained vehicles" by drivers in anticipation of purchase, such as purchasing of four new tires prior to turn-in.
Mike Antich has been covering the fleet management and vehicle remarketing markets for more than 20 years. During this period, Mike has written or edited more than 4,600 articles on the subjects of fleet management, manufacturer fleet activities, the fleet leasing industry, and vehicle remarketing.