Starting a car dealership can be a lucrative business idea. Doing so isn’t overly difficult when you follow the appropriate steps. Here are the top actions you’ll need to take in order to succeed in car sales.
Any good business starts with a thorough business plan. This is where you sit down and determine exactly what it is that you want to do. Any startup funding company or bank will need to see a copy of your small business plan so that they understand what you want to do and how many vehicles you expect to have in your inventory.
Your business plan must include basic information like your company name and intended location. You’ll need to determine the target market, startup costs, business structure, and other essential information. As you work through constructing your business plan, it will become much easier to determine the specifics of what your auto dealership will look like and how you’ll develop it.
Dealership Type: New or Used
There are two main types of dealerships: used car sales and new car sales. As a new auto dealer, you’ll be purchasing or leasing vehicles directly from the manufacturer and offering your customers only the latest model SUVs, cars, and trucks.
You can offer customers varying model years and warranties as a used car dealer. As a wholesale car dealer, you’ll mainly obtain your used car inventory from car auctions. Understanding what type of cars you want to sell at your automotive dealership is vital because your business model will revolve around it.
Startup Capital and Costs to Start a Car Dealership
Starting a car dealership can be a bit challenging as it requires an auto dealer bond as well as adequate licensing, dealer plates, and business experience in the auto industry. When it comes to your dealer bond, various factors will determine the price that you’ll need to pay. If you have good credit, you may be able to pay as little as 1% of the total bond amount as your premium, depending on your type of business.
Other costs you’ll need to plan for include rent, starting inventory, technology, employees, licensing, and potentially a franchise fee. You can determine rent by checking local prices in your area for business locations that are the right size for your new business. While every business’s starting inventory will vary depending on its target market, you can expect it to be valued at around $100,000.
You’ll need to invest in technology to run a car dealership in today’s digital environment. Plan for at least $5,000 for technology expenses. You’ll need to be able to cover at least three months of paychecks for employees. Bonding and DMV licensing will cost a few thousand dollars.
Franchise fees can vary from as low as $30,000 to as high as $500,000. Business registration for a limited liability company or another establishment can run a few hundred dollars.
Market Research and Your Target Market
Market research is essential for any successful car dealer. You will need to realistically look at the market potential for your chosen location and see what your business can actively accrue in sales over a year’s time. Some key research questions to ask include:
- How many cars were sold in your area in the last two years?
- How many other car dealerships and repair shops are there?
- What are the demographics of a typical customer in your area?
- What are the most common cars to sell in your area?
- What are the average sales figures for the type of inventory you want to supply?
- What amount can you realistically obtain in sales over a year’s span?
Market research is the key to determining if you have a legitimate business idea that can be implemented in your area. It also gives you a good idea of who your customers are and what you can expect to make in a year.
Choosing the Right Location
While marketing tools like social media can play a big role in helping to grow your startup business, your location will play the largest role. You need to be positioned at a place that many people pass daily. You’re selling vehicles, tangible objects people typically want to see before purchasing.
Legal and Licensing Requirements
One key factor to consider as you review the legalities of starting your new car dealership is whether to obtain a franchise that gives you the right to sell a particular brand’s product. Opting for a franchise can allow you the perks of an already trusted brand. However, many franchisors won’t allow you to sell other vehicle makes at your dealership. If you opt-out of a franchise, you can sell different make and model vehicles at your dealership without any problem.
Once you know the type of dealership you’re going to have, it’s time to get your legal requirements out of the way. You’ll need to apply for a business license and dealer license in your state. This will require you to pass a criminal background check and complete a mandated dealer training course.
You’ll also need to obtain liability insurance. This helps to protect you and your business from any unforeseeable problems. You’ll need to submit a copy of your active general liability insurance policy along with your surety bond to be approved to operate as a dealer.
Build Inventory and Create Buying Policies
Now comes the fun part of actually getting vehicles on your lot. If you opt to operate a franchise dealership, then you’ll be given a predetermined inventory. If you go the independent dealership route, it’s time to head to vehicle auctions. There are both in-person and online auctions that you can participate in to obtain your new inventory.
Next, you’ll want to outline some buying policies. This will set guidelines for things like how many cars you should have in your inventory and the maximum amount you can spend obtaining them. These policies will change over time as your business grows and serve as a foundation to help guide your buying practices successfully.
Develop a Sales and Marketing Plan
Once you have your inventory, it’s time to focus on sales. You need to attract people to your dealership via a website, social media, advertising, etc. It’s wise to sit down and develop a marketing plan that you can implement to drive your target customers towards your business.
Selling cars is about putting the right product in front of the right person. It can be very helpful for entrepreneurs to invest in honing their sales skills through various courses. Being an active listener for potential customers and knowledgeable about the vehicles you’re selling play a significant role in your ability to connect with customers and make consistent motor vehicle sales.
How Profitable Is Owning a Car Dealership?
Car dealerships can be very profitable businesses. A small dealership with a limited inventory and minimal overhead costs can achieve consistent cash flow. Smaller car lots will typically offer used cars that they obtained through auctions.
Larger dealerships are more prone to contracting with major car manufacturers to sell new vehicles. These dealerships typically require showrooms, service departments, and sometimes a car wash. These large-scale operations have up-front costs, require large franchising fees, and need to meet high sales volumes set by manufacturers. Once established, these larger dealerships can be quite profitable.
Starting a car dealership is a big investment for anyone. However, with the right strategy, you can create a thriving business that funds your lifestyle and keeps you happy.