If you’re reading this, chances are you’re interested in the nitty-gritty of starting a car dealership. And why not? The automotive industry offers immense opportunities for savvy business folks looking to make their mark. But before you start rolling cars off the lot, there are some key things you need to know.
Whether you have great sales skills and love helping people find the product that’s right for them or whether you live and breathe cars, starting a dealership of your own can allow you to put these talents to work in building a successful business.
Starting a car dealership involves more than just a love for cars though. You’ll be diving into tasks like market research, business planning, and legal setup. To help you get started, this guide provides an introduction to starting your own car dealership, including an overview of the business, steps to get started, and answers to common questions.
Car dealerships sell a variety of vehicles to consumers. A dealership may specialize in used automobiles only or may offer a combination of new and used cars. Some also offer lease opportunities, and many dealerships take trade-ins for credit against a new vehicle purchase. While most dealerships sell passenger vehicles directly to the public, some also stock commercial vehicles or can order specialty vehicles for commercial purposes.
Business owners may choose to build their own dealership, giving them complete control over the business model, the vehicles sold, and the marketing. Others may choose to purchase a franchise location, which comes with less freedom of control but delivers the advantage of relying on an already established brand and business model.
In addition to vehicle sales, dealerships also provide maintenance, repair, and warranty services, sell parts, and assist with financing and insurance needs. Revenue streams include new and used vehicle sales, parts, service, and financing/insurance commissions.
Related Business Idea
The car dealer industry has consolidated in recent decades, with publicly traded dealer groups operating hundreds of locations across the country. However, the industry remains highly fragmented overall, with 17,600 new car dealers and 150,854 used car dealers in the United States. Dealerships range from small family-owned businesses to these large dealer groups.
Some key trends impacting car dealers currently include:
- Increased online shopping and digital retailing: Customers browse inventory, apply for financing, and communicate digitally. Some companies like Carvana have taken auto shopping entirely online. While dealerships don’t necessarily need to offer online sales, there’s absolutely a need to create a modern, up-to-date website that allows shoppers to browse online before taking a trip down to a dealership.
- Rise of electric vehicles: As EV adoption grows, dealers must invest in sales/service training and infrastructure to support these vehicles.
- Ongoing inventory shortages: Due to supply chain issues, low inventory has led to less discounting and higher prices. Acquiring inventory continues to be a challenge.
Checklist To Start A Car Dealership
Starting a car dealership business is complex but rewarding for those with sufficient capital, industry knowledge, and sales experience. Here is a step-by-step checklist to help you get started.
Step 1: Assess the Market
Starting any business is risky, but with a car dealership, the stakes are especially high. You’ll be dealing with substantial inventory costs, staffing needs, and a range of operational expenses. The last thing you want is to invest heavily only to find out there’s not enough customer interest or too many competitors. Market research acts as a preliminary radar, picking up signals of demand (or lack thereof) and giving you critical insights.
Market research isn’t an exact science, but it can provide valuable insights into whether there are enough potential customers to sustain your new business. Here are some ways to check out whether there is a viable market.
- Identify your target market: Define who your potential customers are. Consider factors like age, income level, location, and car preferences. Using data from the Census Bureau, look at population growth, income levels, and other demographic data for your target area. Is your target market growing or shrinking?
- Analyze the competition: Identify other dealerships in your area. What types of cars are they selling? What’s their customer traffic like? How are their reviews?
- Survey potential customers: Conduct surveys or interviews with people in your target market. Ask about their car buying habits, brand preferences, and what they value in a dealership. These can be online or in-person. Use these to get a direct understanding of what people in your area are looking for in a car dealership. It’s simple, but effective.
- Study industry trends: Keep an eye on trends in the automotive industry. Is there a growing demand for electric vehicles? Are consumers leaning towards buying used cars?
Step 2: Write a Business Plan
So, your market research shows promise, and you’re pumped to turn that vision into a functioning car dealership. Your next pit stop? Crafting a compelling business plan. Think of it as your roadmap, one that does more than just mark the route from A to B; it highlights potential roadblocks, detours, and shortcuts. It helps you get those swirling ideas out of your head and onto paper, where they can be examined, challenged, and refined.
When writing a business plan, especially when going after funding, there are a few sections to pay close attention to. These include:
Market analysis: This section explains why your car dealership will succeed. It should include information about the target audience, competition, market size, and trends in the automotive industry. For lenders, this section demonstrates that you understand the market and have a strategy to capture a share of it.
Management team: Who’s steering the ship? Investors and banks often say that they invest in people, not just ideas. Your management team section should showcase the experience, skill sets, and unique capabilities of each key team member, including you, the owner. A well-rounded, experienced team indicates a lower risk and a higher likelihood of business success. So make this section count.
Location: The location of your dealership can greatly impact its success. Explain why your proposed site gives visibility, easy access, and enough space for inventory, service bays, and test drives. Show the site meets manufacturer requirements. Proximity to customer demographics is also key. Include photos or illustrations of the site.
Financial projections: Present realistic forecasts for sales, expenses, profitability, and cash flow. Provide assumptions behind the projections and show the business will generate sufficient profit.
Also, provide a detailed funding plan and clearly explain how much funding you need, how you will use the funds, and repayment terms you can commit to.
One more tip
Before presenting your business plan to a lender or investor, it’s advisable to have someone else, such as a business owner or accountant, review it. They can offer a fresh perspective on any vulnerabilities in your plan, enabling you to preempt questions from lenders and solidify your position. So, go ahead and let them poke holes so you can patch things up. It’s better to face hard questions from a friend than a potential financier.
Related: How to write a business plan
Step 3: Source Funding
You’ve verified a market need and polished your business plan, now it’s time for the rubber to meet the road. One of the biggest hurdles you’ll likely face is securing enough money to launch your dealership. Let’s navigate through your options so you’re well-equipped to tackle this challenge.
Personal savings: Tapping into your personal savings is a straightforward way to finance your business. It’s clean, it’s quick, and it doesn’t come with interest rates. However, personal savings often cover only a fraction of the total startup costs.
Traditional loans: Banks are a common source of funding real estate, build-out costs, and outfitting a car dealership. Lenders typically require borrowers to invest at least 15% of their personal funds towards the project, have a good credit score, and possess sufficient collateral. If the bank deems the risk too high, they may use an SBA guarantee.
Floor plan financing: This specialized financing is used to fund vehicle inventory purchases. This is essentially a short-term loan specifically designed to stock your showroom. Banks and commercial lenders offer floor plan lines of credit using the vehicles as collateral. Maintaining proper inventory levels is key to managing this financing.
Friends and family: Many entrepreneurs turn to private funding sources like friends and family. While convenient, it’s important to put any investment agreements in writing to avoid misunderstandings.
Investors: Some dealers seek startup investment from high-net-worth individuals or angel investors within their community. Investors can provide capital in exchange for equity or partial ownership.
Step 4: Acquire & Set Up the Dealership
This is where it starts feeling real. Once you’ve secured funding, the next exciting step in setting up your car dealership is acquiring and setting up your location. This is a significant phase where all your initial planning finally transforms into something tangible.
Acquiring the Property
Dealerships require several acres of land for the sales facility, service bays, and inventory storage. Sites should have highway access and visibility. Optimally, dealerships need to be located in a high-traffic retail area or high-traffic road for good visibility. The right location should include a good population density and be located on a high-traffic road so people can see the vehicles.
Here’s a big piece of advice: secure your funding before you sign on any dotted lines for acquiring property. Why? Because funding can hit snags, be delayed, or fall through altogether.
You also need to confirm that the property is zoned for a car dealership. Different cities have different zoning laws, and it’s essential to ensure your chosen property aligns with these regulations before proceeding.
Making the Space Ready for Customers
Once the keys are in your hands, the next phase is setting up your space to welcome customers. It’s not just about filling the lot with cars; consider the layout, the customer flow, and where you’ll set up service areas. This might also be the time to coordinate with contractors for any build-outs, set up office spaces, and create a comfortable waiting area for customers.
If you’re offering on-site vehicle servicing, you’ll also need to equip and prepare a service area. Your goal? Create an environment where customers feel comfortable and trust you enough to make a significant purchase.
Step 5: Register the Business
So you’re fired up and ready to move from concept to operation. But before you sell that first car, you’ll need to navigate the legal maze of business registration. This isn’t the flashiest part of entrepreneurship, but it’s crucial. And while many steps are common to any business, a car dealership has some unique elements you need to consider.
Choosing a business structure: The first thing you’ll need to decide is your business structure, which will affect everything from how you report income to your level of personal liability and how you can raise capital. Your choices boil down to four main structures: sole proprietorship, general partnership, corporation, and Limited Liability Company (LLC).
- Sole proprietorship: This is the simplest structure, offering complete control and all the responsibility. The upside is ease of startup and lower operational costs.
- General partnership: This is when two or more people share ownership of a business. Like a sole proprietorship, it’s relatively easy to set up, but the partners are personally liable for business debts.
- Corporation: A corporation is a separate legal entity from its owners, providing them with personal liability protection. However, it’s more complex and costly to set up and has more regulatory requirements.
- LLC: An LLC combines the liability protection of a corporation with the simplicity and flexibility of a sole proprietorship or partnership.
For car dealerships, corporations and LLCs are quite common because they offer liability protection while also offering potential tax savings. That said, the right structure for your dealership will depend on various factors, including your financial situation and tax considerations.
Related: Comparison of business structures
Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.
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Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.
During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.
Obtain business licenses and permits: A motor vehicle dealer will need to obtain a car dealer license before opening. This license is typically through the state’s Department of Motor Vehicles or Department of Licensing. States typically require the business to have a location secured with the proper zoning and any business licenses approved before they can apply for a car dealer license. Most states will also require the dealer to purchase a Surety Bond, sometimes called an Auto Dealer Bond, to get licensing. The surety bond is a type of insurance that protects customers from fraud and the dealer from contract defaults with vendors, vehicle suppliers, and wholesalers.
While not a license, auto dealerships have other requirements unique to their industry. One is following the Federal Trade Commission (FTC) guidelines for dealerships called the Used Car Rule and the Consumer Rights and Safety Laws. The FTC Used Car Rule requires each dealership to have a Buyers Guide to reduce miscommunication between the business and consumers.
Also, states have legislation for used car dealers known as lemon laws, which mandate the dealer is upfront about the car’s condition.
Additionally, an auto dealership has general licensing requirements such as a sales tax permit and Employer Identification Number.
Step 6: Purchase Inventory
Once you’ve got your funding sorted and the business registered, it’s time to make your car lot look like, well, a car lot. Buying your initial inventory is where you start shaping your dealership’s identity. The cars you choose will define your brand, attract a certain type of customer, and determine your profit margins. So, let’s get into how you can smartly go about this crucial step.
A fast and efficient way to acquire a broad selection of cars is through dealer auctions. This is especially useful for used car dealerships. Places like Manheim and ADESA are industry staples for getting reliable cars at competitive prices. Keep in mind, only licensed dealers can attend most of these auctions, so that license you secured earlier will come in handy here.
Directly from Manufacturers
If you’re going new, you’ll be working directly with manufacturers. This generally involves contractual agreements, often stringent and detailed. Each manufacturer has different requirements for stocking new cars, including lot size, capital requirements, and even facility aesthetics.
Local Trade-ins and Private Sellers
Don’t ignore the potential of local business. Many dealerships acquire good inventory by offering competitive trade-in deals for customers. Local auctions and estate sales can also be gold mines for unique finds.
Step 7: Hire Staff
Running a car dealership is not a one-person show; you’ll need a team. From salespeople and finance managers to auto mechanics and administrative staff, each role contributes to your business’s operation. But before you start placing help-wanted ads, there are legal steps you’ll need to take to ensure you’re in compliance with the law.
- Obtain an EIN: The Employer Identification Number is your business’s social security number. You’ll need this to report taxes and other documents to the IRS.
- Employment eligibility: It’s essential to verify that your employees can legally work in the U.S., often verified through Form I-9.
- State reporting: New hires must be reported to your state’s new hire reporting agency. Keep in mind that each state has its specific requirements and timelines.
- Worker’s compensation: Most states mandate that you have workers’ compensation insurance to cover workplace injuries.
- Labor laws: Familiarize yourself with federal and state labor laws. This includes minimum wage, overtime, and workplace safety standards.
In addition to the salary you’ll pay your employees, set aside around 15% extra to cover payroll taxes, which include Social Security, Medicare, and federal and state unemployment taxes
Related: Hiring your first employee
Step 8: Create a Marketing Strategy
When it comes to marketing your car dealership, you’ve got quite a few effective options.
Traditional advertising still holds weight; think radio spots, billboards, and local newspaper ads. These help you build local awareness and can offer special promotions to reel in customers.
In the realm of online marketing, social media platforms like Facebook and Instagram can help showcase your inventory and create a community around your brand. Email campaigns can also be effective for announcing sales events or new arrivals. SEO (Search Engine Optimization) is another powerful tool that helps your dealership’s website show up in online searches. Online classified sites like Craigslist, Facebook Marketplace, and OfferUp can be effective for driving sales, particularly for used vehicles.
Claiming your business on relevant online business directories is also a good idea. This includes Google Business Profile, Yelp, and Yellow Pages, among others. These platforms increase your online presence and credibility, and allow customers to leave reviews.
Joining your local Chamber of Commerce can provide networking opportunities and a platform for you to establish credibility within your community. Through a balanced combination of these methods, you’re well on your way to making your dealership a household name.
Step 9: Prepare to Open!
With the finish line in your sights, there are some remaining tasks to wrap up before opening the doors. Each dealership will have unique needs, but these are some foundational steps to guide you. With these boxes checked, you’ll be better prepared to turn that “Open” sign around and greet your first customer with confidence.
Business insurance: Given the high value of your inventory, you can’t afford to skimp on comprehensive insurance. It’s essential for property damage, general liability, and worker’s compensation. Most states also require that dealers hold a Surety Bond, a type of insurance, as a condition of licensing.
Bookkeeping: Accurate bookkeeping is crucial for tracking income, expenses, and overall financial health. You might consider hiring a professional bookkeeper or using accounting software like QuickBooks.
Contracts: You’ll need various contracts, such as purchase agreements for customers buying vehicles, employment contracts for staff, and lease agreements if you’re renting your dealership premises. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful, though having an attorney is recommended.
Business bank account: Open a separate account for your dealership to manage all business-related finances, keeping them distinct from personal finances.
Joining industry associations: Associations like National Automobile Dealers Association (NADA), American International Automobile Dealers Association (AIADA), and National Independent Automobile Dealers Association (NIADA) offer resources, networking opportunities, and advocacy for members.
Preparing for the grand opening: Plan an event to draw in potential customers, such as special promotions, entertainment, or refreshments. Consider advertising the event locally to maximize attendance.
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Common Questions When Starting A Car Dealership
How much does it cost to start a car dealership?
Starting a car dealership requires significant upfront capital investment. The total costs to get up and running can range from $50,000 for a used car lot to easily over $1-2 million for a new car dealership.
Here are some of the key expenses involved:
Facility: This could range from $25,000 for a small lot in a less popular area to upwards of $1,000,000 in a prime location. And this doesn’t include the costs of any renovations or construction you might need to fit your dealership’s needs.
Inventory: The next big-ticket item is your initial car inventory. Depending on what kinds of cars you intend to sell, this could be anywhere from $50,000 for a selection of used cars to $500,000 or more for new, high-end models.
Equipment: Shop equipment like lifts and diagnostic systems can cost $75,000 to $100,000. IT systems, phone systems, furniture, and supplies are also required.
Licenses & permits: Dealer licensing fees, dealer surety bond, and other state and local permits can total $5,000-$10,000.
Insurance: Initial premiums for commercial policies like liability, property insurance, workers comp, etc., often exceed $20,000.
Marketing: Advertising and grand opening promotions to attract customers run $10,000-$30,000 to start.
Professional fees: Lawyers and accountants assist with legal and accounting needs in the first months, which may cost $5,000-$10,000.
Miscellaneous: Other startup costs could include utility deposits, franchise fee, payroll for training, shop inventory, etc.
Initial working capital: A buffer of cash is needed to operate for the first few months before sales generate positive cash flow. Plan on $100,000 or more.
How profitable is a car dealership?
The profitability of a car dealership can vary widely, depending on factors like the dealership location, size, and brand association. However, a commonly used formula for used car dealerships is a 2-3% net profit margin. This figure takes into account all the expenses such as rent, employee salaries, utilities, inventory costs, and marketing.
For instance, a small dealership selling two cars per week at $20,000 per vehicle, generates $2,080,000 million in annual revenue. Therefore, you could expect a net profit of around $41,600 to $62,400 based on this margin.
What skills are helpful in running a car dealership?
Starting a car dealership doesn’t require a business degree, but certain skills and experiences are valuable in this field.
Auto industry knowledge: Understanding vehicle trends, condition, and value will allow a dealership owner to make wise decisions when buying inventory and valuing trade-in vehicles.
Car repair experience: For owners of small dealerships, knowledge of auto repair is valuable. Experience and the ability to perform some repairs can save money in preparing used vehicles for sale.
Sales experience: Even if it’s not related to the auto industry, experience in a sales position will equip dealership owners with valuable skills. A dealership owner who is a skilled salesperson can drive sales and teach the sales team those same techniques. If you don’t have a lot of sales experience, the National Automobile Dealers Association (NADA) has automotive retail training courses.
Customer service experience: Building a strong relationship with customers and gaining a customer’s trust can contribute to a dealership’s success.
Management experience: Most dealerships will need multiple employees, so hiring, training, and managing staff are important for any dealership.
What is the NAICS code for a car dealership?
The NAICS code for a car dealership is 441120 for used car dealers and 441110 for new car dealers.
The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.
Related: What is a NAICS code?