How to Start a Car Dealership

Overview

How to Start a Car Dealership

Starting a car dealership can be a rewarding and highly successful business opportunity. Even smaller dealerships can become highly profitable, especially when run by an owner with a strong knowledge of auto values and local demand. 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 and auto repair, starting a dealership of your own can allow you to put these talents to work in building a successful business. If you think that a dealership might be the right career choice for you, read on to find out just what’s involved.

Business Overview

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. A dealership may specialize in a particular vehicle make. At the same time, it’s more common for used car dealerships to take a general approach, offering a wide assortment of vehicles of different makes.

Many dealerships also have the ability to do vehicle repair and maintenance work. A larger dealership may have an entire repair shop that offers comprehensive services, while smaller dealerships may have more limited repair and maintenance capacity. A comprehensive repair shop serves as a way to continue building a relationship with customers even after they’ve purchased a vehicle, and it may encourage them to purchase a new vehicle from the same dealership in the future.

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.

Industry Summary

According to IBIS World, the new car dealer industry grew by 1.6 percent from 2014 through 2019. As of 2019, the industry brought in $926 billion in revenue, and 21,439 dealerships were in business. Industry employment totaled 1,153,259 for the year.

The used car dealer industry also experienced growth during that time. IBIS World reports that the used car industry experienced a 3.7 percent growth during that same five-year period. In 2019, the used car industry brought in $118 billion in revenue. There were 140,239 dealerships in existence, and they employed 270,504 employees.

Both the used and new car dealer industries experience fluctuating business closely linked to disposable income and crude oil costs. Persistent unemployment caused more consumers to look for used cars that deliver value rather than investing in new vehicles. Dealerships that can offer financing to buyers with poor credit can also draw in customers that might not qualify for auto loans at other dealerships. While the economy improved from 2014 to 2019, and new car dealers enjoyed increased sales, this industry can vary depending on the state of the economy at any time.

Industry Trends

Many trends are currently shaping the car dealership industry, and car dealers need to keep pace with these trends to keep their dealerships appealing and competitive. Carsurance notes that the entire auto industry has become highly digitized, from the way that buyers shop to how cars, themselves, are built. Vehicle manufacturers are increasingly incorporating advanced technology into their vehicles. While this technology allows for heightened vehicle performance, it becomes increasingly difficult for independent mechanics and repair shops to maintain and repair these vehicles.

Technology has also led to the popularity of alternative transportation options, like car-sharing subscription programs like ride-hailing and car-sharing. These programs give buyers an alternative to purchasing a vehicle, potentially driving down auto sales.

Self-driving vehicle technology also has the potential to reshape the entire auto industry. As autonomous vehicle technology becomes more reliable and accessible, it could reduce the number of vehicles on the road. It could also make vehicles safer, reducing repair needs and the need for replacement vehicles.

Additionally, 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.

Target Market

Most car dealerships will market to adults who are ready to buy their next car. Some dealerships specialize, and that specialty will also shape their target markets. For instance, a dealership that specializes in luxury vehicles will be marketing to an affluent audience. In contrast, a used car dealership will market to buyers looking for vehicles that offer value or want vehicles available at a certain price point.

Skills, experience, and education useful 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.

Checklist for Starting a Car Dealership

If you’re thinking about starting a car dealership, it’s important to do your research first. Here is a checklist to help you get started.

Step 1: Write a Business Plan

After coming up with an idea, the next step in starting a car dealership business should be to write a business plan. The business plan is a great tool to help a business owner get ideas out of their head and focus on critical aspects of a dealership like what niche to focus on (new vs. used, import vs. domestic, or brands like Honda or Ford), marketing strategy, projecting income and expenses, and more.

Not only will a bank require you to have one, but multiple studies have shown that a business plan helps increase the odds of starting a successful business.

Related: How to write a business plan

Step 2: Name the Business

Finding the perfect name for a business can be challenging. Not only does the name have to resonate with your customers, but it also has to be available to use.

Related: Tips and ideas for naming a car dealership

Step 3: Select a Business Entity

A business entity refers to how a business is legally organized to operate. There are four primary business entities to choose from, which include the sole proprietorship, partnership, corporation, and Limited Liability Company (LLC). Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

When deciding on which business entity is best for a car dealership, it normally comes down to the sole proprietorship and Limited Liability Company.

A partnership opens the owners up to unnecessary personal liability because if a partner does something to get the business sued, or runs off with cash from the business, the other partners are personally liable to repay.
 
The corporation can be a good choice to minimize liability risk because it separates the business assets from the owner’s assets. If the corporation is sued or certain business debts can’t be paid back, the owners aren’t personally responsible to repay them. The downside to the corporation is that it is more complicated than all the other entities and requires more administration than the LLC. If you plan on raising a lot of investment though, the corporation is usually the better choice.

That leaves the sole proprietorship and LLC.

The sole proprietorship is the least expensive and easiest entity to start which is appealing. The downside is the owner is personally liable should anything happen to the business, which is an important consideration. The LLC offers the ability to operate as a sole proprietorship with the liability protection of a corporation. Depending on the state, the cost to form an LLC runs from $40 – $500, which is pretty inexpensive for protecting the owners from business-related lawsuits and certain debts.

Related: Guide to forming your LLC
 

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.


Some popular LLC formation services include:


IncFile - $0 plus state fees & free registered agent for 1 year!

IncAuthority - $0 plus state fees & free registered agent the first year!

ZenBusiness - $49 plus state fees & free registered agent for 1 year!

Step 4: Select your Location

Car dealerships optimally 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.

Having a lot on the obscure road will save money on the cost of the property, but will be harder to draw in drive-by customers.

Because of a car dealership’s unique design, finding an existing dealership to rent or purchase can save a business owner significant property renovation costs.

Related: Choosing a business location

Step 5: Apply for Business Licenses and Permits

A car dealership 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 car dealer bond.

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.

Related: Common business licenses, permits, and registrations by state

Step 6: Find Financing

Coming up with a good business idea and having the skills to run it are one thing, but getting the funding to start a car dealership is another.  The cost to start a new car dealership can be quite high, with a majority of costs going to property renovations and inventory.  Banks are typically going to want the borrower to have good credit and personally invest 15-25% towards the total start-up costs.

Related: Finding the money to start a business

Step 7: Open a Business Bank Account

Keeping your small business and personal finances in separate bank accounts is important to track the income and expenses of your business and identify trends.
 
Many banks offer free business checking accounts, so be sure to find a cost-effective option for your business.

Step 8: Get your Marketing Plan in Place

With good service, car dealerships can establish loyal and returning customers. Still, because many years may pass before a customer needs to buy a new car, dealerships need to continually market. Many dealerships use print advertising, radio advertising, online advertising, social media, and direct mail for marketing their vehicles.

Related: Low-cost ideas to market a new business

One important marketing task is developing an online presence. A website developer may be out of the budget, but Wix makes it easy for non-technical people to get a website running quickly and affordably.

Step 9: Get Business Insurance

There are several types of insurance to consider when starting a car dealership. A few of these include:
– A Surety Bond, sometimes called an Auto Dealer Bond, is one of the specific requirements car dealers must follow to get licensing in most states. The surety bond is insurance that protects customers from fraud and the dealer from contract defaults with vendors, vehicle suppliers, and wholesalers.
– General liability insurance protects the dealership if customers are injured while on the business’ property. This insurance can cover expenses like legal fees and medical bills.
– Commercial auto insurance covers the expenses, like legal fees and medical bills, that can result if a dealership-owned vehicle is ever in an accident.

There are many factors that affect the cost to insure a car dealership, including the dealership’s location, the value of its inventory, and even the number of employees on staff. To get the most accurate idea of what insurance policies will cost, request quotes from multiple insurance providers. When comparing the quotes, pay attention to important variables like coverage limits and exclusions, premiums, and deductibles.

Related: Common types of insurance a business may need

Step 10: Hire Employees

Even small auto dealers usually need at least a few employees. According to Glassdoor, car salespeople earn an average of $44,290 per year and often earn commissions on the vehicles that they sell. Glassdoor also reports that auto mechanics make an average of $37,308 per year. According to PayScale, car dealership managers make approximately $64,669 per year.

Employee salaries aren’t the only expense that comes with hiring staff. In addition to salaries, a business’ budget also needs to include expenses like paid time off, payroll taxes, health insurance contributions, and workman’s comp insurance.
There are several steps that are required for hiring an employee.

Related: Hiring your first employee

Step 11: Set up an Accounting System

Setting up an accounting system for your car dealerships is critical to the long-term success of your business.

Staying on top of taxes not only keeps the business out of trouble with the government, but the numbers can be used to track and monitor trends and cash flow in the business and maximize profits.

Related: Setting up the accounting for your business

The thought of accounting can be intimidating for a lot of new entrepreneurs. There are a number of ways of handling bookkeeping, from DIY to hiring a bookkeeper. These include:

- Pen and paper - Low expense, but difficult to track.
- Spreadsheet - Low expense, but easy to make errors.
- Accounting software - Medium expense, but owner typically inputs expenses. Some great accounting software programs include Freshbooks or Wave Accounting.
- Hire a bookkeeper - Higher expense, though very affordable at $100-$200 per month in most cases. A dedicated bookkeeper will probably save money because, in addition to handling all of the bookkeeping (so you can focus on the business), they also provide personalized tax advice and ensure the business is in compliance.

Find bookkeepers in your local area or use a service like 800Accountant.

How much does it cost to start a car dealership?

The initial cost of starting a car dealership will vary depending on the size of the dealership, whether it’s a franchise location, and whether it specializes in used cars, new cars, or both. Most of the expenses are driven by inventory costs. In most cases, plan to spend a minimum of $100,000 and as much as $200,000 to build and outfit a smaller dealership.

Some common startup costs for a car dealership include:
– Inventory
– Property
– Building renovations
– Equipment for repairs and maintenance
– Furniture for a waiting room and workstations
– Signage
– Working capital to have a few months of cash on hand to purchase inventory, payroll, utilities, rent, etc.

How much can a car dealership owner make?

Dealership profits will depend on many factors, including the dealership’s overall business model and size. Dealerships that offer both new and used cars and a service center on-site have more potential income streams than smaller used car-only dealerships limited in size. According to the NADA Data report, light-vehicle dealerships averaged a total net profit before tax of $3.38 million in 2021. This data reflects new-car dealerships, including franchised dealerships and luxury dealerships. The average gross profit for a new vehicle was $3,928 and a used vehicle was $3,651.

The auto sales industry can fluctuate, and it’s highly affected by the state of the economy. A successful car dealership will be versatile and able to carry itself through times when sales are both good and bad. A sound financial and business plan and an understanding of the overall auto sales industry and the unique factors that drive sales in a dealership’s location can contribute to its success.

Are there grants to start a car dealership?

It’s extremely rare to find a grant to start a car dealership. If you search for business grants, you will come across a lot of scams and misinformation. Occasionally an organization will offer grants to start a business, however, be skeptical and don’t provide any sensitive personal information or pay money to get more information.

Legitimate federal grants can be found at Grants.gov and you can check on your state’s economic development office to see if they have any grants available.

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?

Resources:
American International Automobile Dealers Association
National Automobile Dealers Association
National Independent Automobile Dealers Association

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