Auto Bond: D&M Leasing's Family Business

The auto leasing business was supposed to be a stopping point on the way to something else for Mike Hernandez. He’s now 26 years in at the helm of D&M Leasing, which he’s now built into a firm that manages $1.2 billion in auto leases, more than $300 million in annual gross sales, offices in North Texas and Houston, a used car operation, and a finance arm – a post-recessionary tool that freed the company from reliance on banks to loan money to its customers.

“I figured I’ll do this until I figure out what I’m going to do for the rest of my life,” Hernandez, who, at a young 54, has been stepping away from the business to give more control of it to his stepsons, Cody Kennemer and Chase Kennemer, and spend time with charitable endeavors he supports to end poverty in his hometown of Brownsville.

Hernandez doesn’t want to talk about that for this story. “I don’t do it to sell more cars,” he says of contributions he’s making through a nonprofit that provides legal assistance, food, healthcare alternatives, and Wi-Fi, computers, phones and safe places for people to use them.

All in the Family The Kennemers’ rise through the organization from entering it in sales – Cody Kennemer, 31, heads the D&M Dallas sales office, and Chase Kennemer, 29, heads the Mid-Cities office, responsible for the area between Dallas and Fort Worth – is part of a broader plan Hernandez has put into place over the years that allows the executives of each office and business unit to buy him out of it over time. None has yet, he says. Not clear yet is who ends up controlling Hernco, the parent company now owned entirely by Hernandez.

Hernandez has been thinking about succession at least since the boys were in junior high school. That’s when he had the boys doing everything from filing to managing voice mail during the summers. If they were interested in the business, they’d have to work their way up from bottom, just like everybody else, he told them.

“My buddies and I were going to Wet ‘N Wild, and we were summoned to the office,” Cody Kennemer jokes, ‘we’ meaning the two brothers, recalling the summer interruptions that he says started when he was 10. “Every summer, it was something different.”

Chase Kennemer remembers the cancelled checks he was assigned to organize. “They’d slap a box of checks on my desk,” he says. “And I’d have to ‘numerize’ them. And then there’s a FedEx guy with a dolly, and he’s got eight more boxes of what I just spent three days doing.”

No surprise then that auto leasing wasn’t what Kennemer thought he’d end up doing. “I always thought I’d be an attorney,” he says. While at SMU, where he played on the Mustangs’ football team, Kennemer took the LSAT, followed up with a prep course, and was set to take the exam again when the team’s trip to the Hawaii Bowl - SMU's first bowl game since the NCAA-imposed "death penalty for infractions - was scheduled over it in December 2009. “I was linebacker on the team that broke the death penalty,” Kennemer says. “I didn’t take the test.” Kennemer was wait-listed at the SMU law school. With no news on his status, he dove into selling cars at D&M in the Mid-Cities office.

“Ended up loving it,” says Kennemer, who worked his way into a post as sales manager, opened D&M’s Fort Worth office in 2014, and then took over as general manager of the Mid-Cities office in January. “I had no idea I’d work at D&M.”

Cody Kennemer’s route into the company was more direct. He graduated from Texas A&M in 2007 with an economics degree and minor in business. On the front end of the recession, Kennemer went right into selling cars at D&M in the Mid-Cities office, moved into the Dallas office, opened D&M’s Houston office, and then was moved back to Dallas as general manager of that office.

The Houston post – D&M acquired an existing operation that Kennemer says had a poor reputation with customers – was a key moment in his growth, Kennemer says. “My job was to go find people with integrity,” says Kennemer, who turned down people from the existing operation who wanted jobs. “It was sink or swim. It allowed me to open my own office without the pressure of having 40 sales guys wondering what’s going on here.”

D&M “In the Hole” D&M wasn’t always in such sound shape. Hernandez came into the company in 1984, out of Texas A&M, where he majored in industrial distribution. But “most of those jobs were in oil and gas,” and, with the early ‘80s crash in oil prices, “there weren’t any jobs to be had, Hernandez says. “It affected real estate; it affected everything.”

Hernandez landed a job selling oilfield equipment and leased a 1984 Oldsmobile Cutlass from D&M, owned by Don Davis and David Moritz, father of a close friend of Hernandez. Hernandez, offered a job at D&M, took it and made $40,000 in his first year, twice what he made selling oilfield equipment. In 1990, Davis and Moritz invited Hernandez to become managing partner and take a 25 percent stake in the company for $60,000, which they allowed him to repay over time. In 2002, Hernandez bought Davis and Moritz out.

At the point he became CEO, the company was not in good shape, Hernandez says. “We were in the hole,” he says. D&M had withdrawn from a multi-state business plan that included offices in Florida, Atlanta, Austin, Arlington, and San Antonio. Hernandez opened the San Antonio office and had moved to Florida and was managing the Tampa office, when Davis and Moritz called him back to run the company.

Hernandez moved to make D&M more professional, adding policies and procedures, including formal sales training and techniques. He developed the rationale of leasing. “Back then, people didn’t lease,” he says. And he began aggressively advertising on talk radio, hitting talk radio’s growth, and initially doing the creative and writing the spots, buying the air time, and hiring the voice talent. “I analyzed the successful companies that were on the radio and just listened to them all,” Hernandez says. “Talk radio was just starting to become popular. We kind of caught that wave.”

The internet forced changes in D&M’s approach. The company does not operate new car lots. Rather, it arranges leases with its network of auto dealers, and customers pick their cars up at D&M’s offices. Years ago, D&M carried out these conversations with customers over the phone. Today, it largely handles them over the Internet.

Rebuilding the Brand Hernandez rebuilt D&M around the Mid-Cities location. He recruited longtime friend and D&M colleague Joe Graber to open D&M’s Dallas location and, in 2009, promoted him to president. “We felt that was going to be a strong market, and we were right,” Hernandez says. Hernandez then added the Houston location, opened a used car sales operation in Addison, the finance company, and, finally, a year and a half ago, the Fort Worth office at Interstate 30 and Summit. Hernandez even opened a car wash in North Dallas to handle the detail work for its used car sales. D&M today does about 1,100 lease deals a month and has 160 employees and 20,000 active customers, Graber says. The used car business sells as many as 300 cars a month through the retail lot, and another 200 by wholesale, Hernandez says.

The creation of the finance company was a major step in assuring the longtime stability of D&M, Hernandez and Graber say. Five of six major banks that used to finance auto leases exited the market during the recession, with one bank saying it had taken big hits on residual values – the price lessees can pay to buy the car when their leases expire. D&M’s customers are prime credit risks, Hernandez and Graber say.

“We have got lending partners, we have all the money we need, and we control our own destiny,” Graber says. “It’s better than it was before,” Hernandez says. “It’s funny how these things work out.”

With the Dallas-Fort Worth area 72 percent of the company, D&M is looking toward Houston for future offices. It plans a new office in The Woodlands north of Houston and, potentially, a third Houston-area office in Katy, Graber says. D&M also is interested in opening another used car sales operation, likely in Houston, Hernandez says. “The idea is just to mirror the growth of DFW,” Graber says.

Hernandez, through the company’s growth, had his eye on roles for his stepsons, Graber says. “When the boys got older, Mike and I developed a plan to bring the boys in,” says Graber, who started with D&M 31 years ago and has an equity stake.

The plan they came up with ensured Cody and Chase Kennemer knew every part of the business and also protects the executives who run the various business units, who have the right to buy into the business, as do the Kennemers. “They learn the business, they work in the organization, they’re involved in the business,” Hernandez says, explaining the plan to bring his stepsons in. “It was important to me that they come and prove themselves. I have GMs who have been with me a long time that are partners.”

Key in the plan is that the general managers who buy Hernandez out keep running their deals through the finance company, Hernandez says.

“Over time, each one of the GMs will take over their operation and probably buy me out over time,” Hernandez says. “The boys will probably end up buying theirs out over time. They keep running their deals through the finance company.”

Cody Kennemer’s Dallas office now has 50 employees, including 40 salespeople, two sales managers, and support staff. The building has another 50 employees from other D&M operations. Chase Kennemer’s Mid-Cities office now has 60 people, including 41 sales agents. 

The Kennemers’ approach to recruitment reflects what occurred in the transformation of the company. They look for organized people who have a record of successful sales, personal financial stability, and understanding of the consultative approach and how to maintain clients using it. A big order, given that the company’s compensation for salespeople is 100 percent commission.

Not every customer is right for leasing, which means salespeople have to talk some people down from leasing, just because they can get into a car for the first month’s payment and fees, the D&M approach goes. The sales managers are trained to ensure they’re not making bad deals, Cody Kennemer says.

“I depend on these guys to stay involved to make sure we’re not rushing into a car deal,” he says. Consumers who roll negative equity from one lease deal into the next send up red flags, Kennemer says.

“We don’t want to take them down the path of thinking they can trade more quickly on these lease terms, because they can’t,” Kennemer says. Sixty to 70 percent customer retention is the company’s target, although certain customers have a retention rate with D&M of as high as 90 percent, Kennemer says.

D&M trains its salespeople to be in touch frequently with customers, even if their lease terms aren’t set to expire, Kennemer says. A happy birthday call or one reminding a customer of upcoming maintenance can sometimes lead to conversations about a new lease deal, say, for a customer’s driving-age child, Kennemer says.

“These are the kinds of conversations you walk into when you’re in touch with your customers,” Kennemer says. “My goal is we’re talking to them every six months.”

The fast-paced nature of the business and required follow-through are what Chase Kennemer found he loved about the business right off. The detachment of dealing with customers over the Internet – or, in the past, by phone – also helps D&M maintain customer relationships, Kennemer says.

“Because we’re not there in front of them, we can have a different approach,” he says. “Our model isn’t built on trying to kill someone, quite frankly. You’re building a relationship with clients forever.”