Last Updated on November 10, 2022
As children, some of us enjoy playing with toy trucks and cars. When we become teens, sometimes that interest turns into tinkering with vehicles. We try fixing up our cars, applying just the general maintenance. Then there’s an even smaller group of us who discover they have a passion for cars. And that passion becomes a desire to enter the car market. Does this describe you? If so, and you want to get into the business of working with used cars, then we have just the thing! The essential guide to starting a used car dealership.
Entering the car market means finding a way to not only acquire vehicles, but sell them as well. Starting this type of business in North America is likely to be very profitable. Most people love driving and owning cars.
However, finding success in the car market does not come naturally. Only with the proper skills and knowledge can all of your efforts pay off. Any and all who want to start a successful car dealership should follow these five steps.
- Assess your skills
- Assess the market
- Choose the type of dealership
- Create a business plan
- Set up the business
1. Assess your skills
Once you get through the red tape of setting up a dealership and have at least one car to sell, your business is ready to begin. In order to make this venture a success, you should have most of the following skills – which represent both attitude and knowledge.
- Auto industry knowledge
- Auto repair knowledge
- Entrepreneurial aptitude
- General business knowledge
- Management experience
- Customer service experience
- Sales knowledge
- Friendly demeanor
Now, the importance of each attribute depends on the type of dealership you want and your role within the company. Will company costs be fronted to pay for others to do all the work, and you just show up for a weekly meeting? In that case, you won’t need many of these skills.
On the other hand, if you plan on taking an active role in the dealership and operating more like a start-up, the need to be skilled and knowledgeable becomes much more crucial.
Whatever gaps you have in knowledge and ability, you can correct through courses and work experience (prior to starting your own dealership).
2. Assess the market
Even if you have the best product in the world, without understanding the market, the product won’t sell.
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Market awareness will inform many decisions within your business plan like choosing inventory to sell and finding clients.
If starting a brick-and-mortar shop, consider the physical space where your business will be located. This is important when thinking about the demographics you wish to serve. Two types of customers will find their way to your door. The first type will be people who live nearby, and visit your dealership for that reason. The other type, the second group of people, are those who will drive for an hour to see a vehicle they found on your website.
By being more informed about your demographic, you will be able to answer the following questions.
What vehicles are people driving?
Is there a higher percentage of sedans, SUVs, trucks, etc?
What percentage of the vehicles are Ford, Honda, Toyota, Volkswagen, etc?
How many vehicles are purchased each year in that area?
Who are the people that live in those areas?
What is their income?
If you plan on starting a web-only car dealership, you have to answer a different set of questions.
Which demographics of people buy vehicles online?
What types of vehicles are people buying online?
What channels do they prefer to buy from?
Who can I reach online?
Where are they located?
How can I ship purchased cars to customers?
Learning what potential customers drive will help in determining what they may want to drive next? Remember, you are not the only one with a product to sell.
Whether brick-and-mortar or exclusively online, you should know your competition. Familiarize yourself with how many dealerships are in your area. Know their locations and what they sell. What percentage of these dealerships work with new cars or even specialty vehicles?
For online dealerships, research how many dealerships are similar to the kind you’re starting. How many cars do they sell? And how many of these vehicles get sold online compared to in-person?
Once you’ve conducted the necessary research, you’ll know which dealership option is the best – online, in-person, or a hybrid.
3. Choose the type of dealership
There are several ways to get into the car dealership business. For example, you can purchase an existing dealership or start a new one. The business can have a physical location or be exclusively online. You could opt to have a new car dealership, a used car dealership, or one that sells both types of vehicles. Depending on your plans, the dealership can remain independent or grow into a franchise.
A franchised dealership is one that sells new vehicles from just one car company. Not only that, they sell just one brand of car.
For example, a GM car dealership may be permitted to sell Buick, Chevrolet, GMC and Cadillac, since all of those brands are owned by GM. Or the franchise may exclusively sell Chevrolet models.
Note that car manufacturers sell new vehicles only to franchised dealerships. This includes large-order customers such as government agencies and taxi companies.
These franchises can only sell the vehicle brands indicated in their franchise agreement. They can sell new vehicles, used vehicles, and certified preowned (CPO) vehicles, as long as they are the specified brand. They can accept other brands as trade-ins, but they must sell those vehicles in another way. Examples include making such sales at auctions or to another car dealership for that brand.
When the franchise dealer is given territory to operate, no other identical franchise dealer can be located there. This eliminates same-brand competition.
With an independent dealer, they can never purchase new or CPO vehicles straight from the manufacturer. Though they can sell any brand of vehicle on their lot, which they acquire from auctions, private sales, and trade-ins.
An independent franchise dealer is a combination of the two above models. Independent franchise dealers can sell new cars from the manufacturer and used vehicles of any brand, but they can’t sell CPO vehicles.
Whereas starting an independent car dealership can be done on a “shoestring” budget, starting a franchise dealership cannot. The license to buy and sell vehicles from the manufacturer is costly, but does almost guarantee customers. Since people buy a lot of new vehicles, some of them will have a preference for the brand you sell.
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4. Create a business plan
Once you’ve assessed your skills and the market, and have decided on a type of dealership, you need to draft a business plan. This plan will be a step by step process for turning your dream into a reality.
In your write-up be sure to outline the following:
- Costs and financing
- Company name and identity
- Schedule and location
- Inventory acquisition
Car dealerships are costly ventures. You need a lot of capital to purchase the initial inventory. That cost increases if you purchase a physical location and build a showroom. Those two alone could be more than the inventory.
You will need to factor in other start-up costs as well: website creation, business registration, licenses, lawyer fees, auto dealer bonds, accounting fees, office supplies, and more.
Spend time also figuring out what your monthly costs will be for rent, utilities, advertising, salaries, hiring and training. Not to mention other monthly expenditures like vehicle repairs, maintenance, cleaning, insurance, and any sort of debt repayment.
In addition to calculating expenses, also determine how much you expect to make each month. Measure this in the number of vehicles sold and the average profit per vehicle. Also include other revenue streams, such as vehicle servicing and aftermarket sales.
Your revenue needs to be higher than your monthly expenses in order for the dealership to be successful (make a profit). And, you will need to demonstrate the potential profitability to potential investors if you wish to secure financing.
In addition, you will need to figure out what kind of legal entity you want your company to be: LLC, LLP, C Corp, or S Corp. By incorporating your business, you are creating a new entity that is identified as a separate person under the law. By incorporating, your personal assets are protected if your company gets into legal or financial trouble. Also pertinent, your corporate assets are protected if you suffer legal action or your personal finances falter.
- A limited liability company (LLC) is a private company whose owners are legally responsible for its debts up to the amount of capital they invest in it.
- A LLP (limited liability partnership) is for businesses with multiple partners. This type of incorporation limits the liability between partners, so one’s practice isn’t negatively affected by the bad practice of another.
- A C Corp. is the standard corporation format and allows profits to be kept within the business.
- An S Corp. is similar to C Corp. but has some tax benefits and taxes are more complex. This incorporation is not open to individuals who would make similar money if performing the same work as an employee at another company.
Incorporation is not an obligation, but rather a choice. Just know that if you don’t incorporate, your company is a sole proprietorship, meaning your personal and corporate assets are owned by the same entity – you.
If you do incorporate, of course, your company will need a name.
Along with the name, come up with a mission, motto, and logo. For which qualities do you want your company to be known? Value? Quality? Service?
Use your market analysis to identify your ideal customer. What messaging and imagery will appeal to them?
And, every item on your to-do list needs a date attached to it, so you know you are staying on schedule.
When picking a physical location, you should also have one or several viable spaces chosen. Make a point to talk to the landowners and advise them of your interest.
5. Set up the business
Local, state and federal governments require car dealers to acquire licenses, insurance, and auto dealer bonds. Talk to the accountants and lawyers to acquire any item you don’t have.
Plan how you will acquire inventory. When you first begin, auctions and private sales are your only options. You should start acquiring inventory before the company is set to launch.
Buy vehicles for resale. In the beginning, you will want to sell vehicles with high sale rates to increase the number of sales and increase inventory turnover. At auctions, you can acquire several quality vehicles at low prices from a single source in a short duration. For this reason, entering into the car market as a used car dealership is more viable than trying to sell exclusively new vehicles. Know what to look for when procuring used cars.
Auctions available to you will include those held by private sellers. Find out what your options are through word of mouth and online listings. You can also find government auctions, where some used vehicles like police cars will be available for purchase.
Then you need to set up your office space and hire staff. Depending on the size and nature of your dealership, you will need sales staff, service technicians, car detailers, administrative staff and managerial staff.
Launch your website and marketing campaign. Have an open house to welcome people and introduce yourself, your staff, and all your offerings.
With all of these steps taken, and anything additional that you would find helpful, your business will be ready. Starting a used car dealership is easier said than done, but so very possible with the right steps. Set your plan, take the steps, and find yourself with a successful business. You can begin your search for used car inventory today.