How to Start an Auto Repair Shop

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Quick Reference

If you enjoy repairing your vehicle and have some training or experience working on cars, opening a car repair shop might be the career move for you. With a car repair shop, you’ll get to work on vehicles daily, and you’re sure to see a variety of challenging repair jobs. You’ll also have the satisfaction of helping car owners to get their much-needed vehicles back on the road. With time, you can grow that shop into a profitable business, and with a base of returning customers, you can enjoy stable work that puts your talents to use.

Business Overview

Car repair shops offer a variety of vehicle repair services to the public. Some of these repair shops specialize in particular services, like muffler repair, brake work, or tire service. Others become more generalized and may offer brake work, engine repair, inspections, AC/heating services, and more. Some shops also specialize in working on certain types of vehicles, like sports cars or luxury vehicles. It’s common for a shop to not only work on cars and trucks but also on trailers and small engines like lawn mowers and golf carts.

There’s a great deal of variety in the car repair shops in business today. Small, one-person shops offer a personalized experience, while larger shops provide efficiency and a capacity that allows them to repair dozens of vehicles each day.

Industry Summary

According to IBIS World, the auto mechanic industry has undergone a steady 1.4 percent annual growth from 2014 to 2019 and is expected to bring in $69 billion in revenue in 2019. During that time, the number of small businesses in the industry increased to 271,068, and the industry now employs 577,172 people.

That growth is largely due to an increase in disposable income and corporate profit, allowing consumers to choose professional repair services over do-it-yourself repair options. As businesses enjoy increased profits, they also expand their operations, which further contributes to the number of vehicles on the road – and the number of vehicles that need to be repaired.

Industry Trends

The car repair industry benefits from the fact that people are increasingly keeping their used cars longer, states Christian Brothers Automotive. Given the high cost of purchasing a new vehicle, consumers are increasingly buying used vehicles instead. Brands known for their reliability, such as Toyota and Honda, have become more popular. With drivers requiring that their used vehicles last, there’s an increased need for repair shops to keep these vehicles running well.

Electric cars also continue to grow in popularity. Tax credits, electric car improvements, and a reduction in electric vehicles’ cost mean there are more of them on the road now. Auto repair shops that can learn and work on this new technology can increase their customer base and potentially increase their profits, too.

Target Market

Most car repair shops target vehicle owners, though some shops specialize and market toward more niche audiences. A shop might specialize in a particular service, like muffler repair, and market solely toward vehicle owners looking for this particular service. Other shops might work on certain types of vehicles, like luxury or foreign vehicles, and would market only toward the owners of those types of vehicles.

Skills, Experience, and Education Needed

While starting an auto shop doesn’t require a business degree, certain skills and experiences are valuable when going into the auto repair business.

Automotive knowledge. A detailed knowledge of cars is a must for any car repair shop owner. The better you know cars, the more trust customers will have in you – and the more they’ll keep coming back.

Vehicle repair experience. No formal vehicle repair education is required to become a mechanic, but when opening a car repair shop, however, you should have plenty of vehicle repair experience. Earning a degree in an automotive-related field can leave you well-prepared for the challenges of working as a mechanic, but it isn’t required.

Interpersonal skills. Car repair shop owners will need to work with customers daily, and customers can be stressed or upset when their vehicles are broken. Strong interpersonal skills are valuable when running a repair shop.

Management experience. If a repair shop employs staff, then management experience is a valuable trait to have. From interviewing and hiring staff to maintain schedules and training staff, management is an ongoing task when owning a repair shop.

Organizational skills. With multiple vehicles on the schedule, each needing different repairs and different parts, organization becomes important to keeping a shop running smoothly. Organizing the shop itself is also vital so that mechanics can quickly find the tools and supplies they need to maximize their productivity.

Marketing skills. Most repair shops have to do at least some marketing. When a shop’s owner can handle part of the marketing themselves, they can save money over hiring an agency.

Physical stamina. Repairing cars is a physically demanding job, and mechanics spend most of the day on their feet. Physical stamina is important when working in this industry full-time.

Costs to Start an Auto Repair Shop

The cost to open a car repair shop will largely depend on the shop’s size and the amount of tools and equipment already owned. A one-bay shop with a vehicle lift stocked with basic equipment will cost at least $50,000 to get started. Larger shops with more extensive equipment and multiple lifts can cost as much as $75,000 or more to open.

Common startup costs include:

  • Vehicle lift – $3,000-$4,000
  • Diagnostic machine – $5,000 – $10,000
  • Specialty tools – $10,000 – $15,000
  • Initial inventory – $2,000
  • Signage – $2,000
  • Initial insurance – $3,000 – $5,000
  • Working capital for building rent, payroll, and other operating expenses – $??
  • Shop renovations and modifications – $??

 

Steps to Starting an Auto Repair Shop

Step 1: Write a Business Plan

After coming up with the idea, the next step in starting your business should be to write a business plan. A business plan helps organize the important aspects of the business such as; what will set the shop apart from competitors (customer service, price, location, etc.), what is the total cost of startup costs, where are funds going to come from, what marketing channels will be the best, along with many others.

Not only will a bank require you to have a business plan, 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
Free sample business plans

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, it also has to be available to use.

Related: Tips for naming an auto repair shop

Step 3: Form 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: sole proprietorship, partnership, corporation, and LLC. Each type of entity has its own pros and cons, such as liability exposure, costs, and administrative requirements.

Related: Comparison of business entities

Step 4: Select your Location

While an automotive repair shop doesn’t necessarily require a prime, high-traffic location, it can provide visibility and potentially more customers. These locations, however, come with a higher price tag or rent cost.

Some auto repair businesses operate on a small scale out of the owner’s garage. Before going down this path, be sure to check neighborhood covenants and city restrictions from running a business from your home.

Related: Choosing a business location

Step 5: Obtain an EIN

The EIN or Employer Identification Number (also called a Federal Employer Identification Number, FEIN, or Federal Tax Identification Number) is a unique 9-digit tax identification number assigned to a business by the Internal Revenue Service (IRS). Similar to a social security number for an individual, the EIN identifies business entities for tax purposes. The EIN will be needed to hire employees, open a bank account, register for business licenses and permits, file federal and state taxes, and more.

There is no cost for the EIN when registering through the IRS. The number is available immediately when applying through the IRS website; however, you can also register by phone, fax, or mailing IRS Form SS-4.

Related: How to apply for an EIN

Step 6: Apply for Business Licenses and Permits

There are no licenses required specifically for auto repair shops; however, there are some general local, state, and federal business registrations such as a sales tax permit, Employer Identification Number, and Occupancy Permit, among others.

The Environmental Protection Agency (EPA) does have some oversight over repair businesses with disposing vehicle waste like old motor oil.

While you’re not required to hold an Automotive Service Excellence (ASE) Certification, the Advanced Technology Institute states that it may be difficult to find financing and liability insurance for your shop without that certification. To earn the ASE Certification, you’ll need to have at least two years of work and educational experience before you can take the certification test.

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

Step 7: 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 an auto repair shop is another. Funding to start an auto repair shop can be difficult, whether working with an investor or lender to go after a convention or Small Business Administration (SBA) loan. To get a loan, the borrower(s) will need to have good credit and invest 15-25% of their money towards the total start-up costs.

Related: Finding the money to start a business

Step 8: Open a Business Bank Account

Keeping your business and personal finances in separate business bank and credit card accounts makes it easier to track the business’s income and expenses.

Step 9: Get your Marketing Plan in Place

While many repair shop customers will become recurring customers, shops need to market to establish that initial customer base. Marketing options vary, but a strong marketing plan will help your business stand out from your competitors. Some common advertising channels for repair shops include print advertising, radio advertising, social media, review sites such as Google, Facebook, and Yelp, customer loyalty discounts, and even sponsoring local events and networking within the community. Costs of these activities will vary depending on the type and volume of marketing.

Another way to market is through word of mouth. If your shop can become a trusted source for towing companies and insurance agents, they can be a profitable source of customers as they are often the first people contacted when a vehicle breaks down and needs repair.

Related: Low-cost ideas to market a new business

Step 10: Get Insurance

A car repair shop will need multiple policies to be fully covered:

  • Commercial liability insurance protects the shop if a customer is ever injured while at the shop and can pay for expenses like legal fees.
  • Commercial property insurance covers the cost of lost or damaged equipment or if the building itself is damaged by a fire or other event. If you choose to operate on your personal property, be sure to check your homeowner’s policy as it may not cover your home if there is damage resulting from the business activities.
  • Workers’ compensation insurance covers expenses like lost wages or medical bills if an employee is ever injured while on the job.
  • Garage keepers insurance protects a car repair shop in case of accidental damage to a customer’s car during a repair.

The costs of insurance policies vary based on a repair shop’s location, property value, and the value of the shop’s equipment. To get an accurate idea of what insurance will cost, request quotes from multiple providers. Compare those quotes while considering factors like premiums, deductibles, and coverage limits and exclusions.

Related: Types of insurance your business may need

Step 11: Hiring Employees

Some repair shops operate with just the owner, but it can be not easy to juggle the repairs and the tasks of running the business. According to Glassdoor, auto mechanics make an average salary of $51,410 per year. It’s important to budget not only for employee salaries but also for the additional expenses of having employees, such as workers comp insurance, payroll taxes, health insurance contributions, unemployment insurance expenses, and paid time off.

Related: Hiring your first employee

Step 12: Set up an Accounting System

Setting up an accounting system for your auto repair shop is critical to your business’s long-term success.

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

Related: Setting up accounting for your business

How much can you potentially make owning a car repair shop?

Many factors affect a car repair shop’s potential earnings, including the shop’s size, the number of employees, the types of services it offers, and even its location – shops in urban areas will probably bring in more business than shops in more rural areas. A shop’s profit margins also affect its income.

Independent shops will likely charge between $70 and $100 per hour, whereas a car dealership typically charges between $80 and $160 per hour. Many shops also have flat rates for certain routine services, like tune-ups and oil changes.

Hard data on the average income of repair shops aren’t available, but we can assume that shop owners make more than the average automotive service technician salary. The Bureau of Labor Statistics reports that the top 10 percent of automotive service technicians make an average of $66,950, which can give us a rough idea of the earning potential for a car repair shop owner.

Things to consider before starting a car repair shop

Opening a car repair shop requires a significant financial investment, especially if you don’t have much of the equipment you need. Diagnostic equipment alone can cost many thousands of dollars, and if you have to modify the shop that you’re renting, you’ll be looking at even larger expenses.

Be sure to write your business plan to make sure the idea is feasible. Read our article on writing an auto repair shop business plan.

Consider starting with a specialty service like brake work or tire alignments, adjustments, and installation to keep expenses minimal. These fields don’t require extensive diagnostic equipment, and the inventory is more minimal when compared with that you’d need to start a more generalized repair business.

You can also make the transition into owning your own shop easier if you have an existing customer base. Doing some work out of your home’s garage (with the proper insurance) can help gradually build up some customers while also getting a feel for what running a shop full-time would be like. This experience can leave you better prepared when you ultimately decide to start up your own car repair shop.

 

Resources:

Auto Care Association
Automotive Maintenance & Repair Association
Automotive Service Association