Do you have the gift of the gab? Are you passionate and knowledgeable about automobiles? Do you enjoy interacting with people on a daily basis? Well, if you have a passion for sedans and roadsters and possess an entrepreneurial flair, then perhaps starting a car dealership – new or used – is for you.
How do you go about setting one up, though? After all, it is not an easy enterprise to operate. It requires a lot of startup capital, extensive licensing, legal provisions and brand partnerships – and that's just scratching the surface. However, when done well, it can be a significantly lucrative operation, with huge scaling opportunities and the potential to expand to new locations.
Starting a Car Dealership Business
If you're determined to take the risk and make your fortune in the world of automobiles, we have compiled a comprehensive breakdown of how to start a car dealership from scratch. So, let's start your engines.
1. Crunch the Numbers
The amount of startup capital required to open a new or used car dealership depends on a wide variety of factors. It could range from a few hundred thousand dollars (or Euros) to a couple of million, depending on the type of inventory you're planning to stock. Of course, you can also anticipate higher startup costs if you are franchising brand-name vehicles than if you are dealing in local second-hand cars.
That said, here are just some of the startup costs you will likely face:
- Rent (lot, parking, garage, business office and service centre): Starting at anything from 50 cents per square feet.
- Early inventory: Starting at $100,000.
- Technology (computers, phones, printers and coffee machine): $5,000.
- Employees: Generally three months' of initial salary.
- Bonds and licensing: A few thousand dollars.
- Franchise fee (if applicable): $30,000 to $500,000.
Some of these costs are one-time, while others are ongoing. There is also likely to be huge variances depending on where in the world you are, but these figures should act as a rough guide.
2. Consider the Type of Dealership
As touched upon, there are several primary types of car dealership you can opt to open.
The first decision you need to make is if you want to be a franchised reseller of an existing, established brand, or if you're going to be an independent front. Secondly, do you want to sell new or used cars – or both?
- Franchise: This is when you enter into an agreement with the big automakers and have a license to sell their vehicles.
- Independent: You have not made any contracts with a major auto manufacturer, and, thus, you have a wider selection of brands on your car lot.
- New: Your dealership only sells new vehicles that are the latest models.
- Used: The dealership offers used cars that may be as old as a decade.
If you want to be independent, then you will ultimately need to settle on being a used dealership. Depending on your financial situation, it is important to consider which business model is more doable.
3. Perform Market Research
The next step is to perform market research to determine the demand for your products and services. This requires a bit more technical research than in other industries since you are managing an extensive selection of significantly-priced automobiles. So, what should you be looking into as you navigate your market?
- Figure out the number of vehicles sold in your vicinity over the last 12 to 18 months.
- Calculate the currency amount of sales for your types of products and then estimate how much of the pie you can realistically attract.
- Determine the types of cars most sold in your area (sedans, trucks, sports cars, etc.). It would also be prudent to identify the brands of automobiles, too.
- How many existing car dealers do business in your market?
- Identify either your ideal customer, or a typical consumer in your area (age, gender, employment and income level).
- Learn where most motorists get their vehicles serviced, such as a dealership or local repair shop.
- Decide how you will advertise your dealership and what kind of marketing campaigns you will initiate.
Since this is a massive entrepreneurial investment, you need to think about every avenue of the industry and consider all possibilities. It is critical to understand who will be your primary demographic and how you can pad your bottom line.
Consider the wider microeconomic factors of the industry, too. The car market is a cyclical one, generally following the trends of the broader economy; if there is an expansion in the gross domestic product (GDP), expect to see greater car sales. However, on the flip side, if there is an economic downturn, you will inevitably experience a decline in activity. This is the case for many sectors, of course, but it's something that you should consider; that said, through strong risk management and contingency planning, your dealership can endure the best of times and the worst of times.
4. Satisfy the Legal Requirements
While most dealership owners will talk about the extensive process of attaining the necessary capital to launch such a company, many will agree that it is the legal groundwork that needs to be laid. And that is the real headache. There is a laundry list of regulations you need to abide by not only to open a dealership, but to keep it up and running.
Here are just some of the regulatory requirements you must both acquire and adhere to:
- Visit a state or provincial government location and apply for a business license and a dealer's license.
- Pass a criminal background check or conduct a personal questionnaire from a licensing department.
- Pass a mandated deal training course and an inspection of your dealer premises.
- Obtain an employee identification number and state/provincial tax number.
- Apply for several dealer plates and pay the necessary fees.
- Abide by full disclosure regulations on all known mechanical issues with your fleet of used cars (if applicable).
- Submit copies of your insurance policy and auto dealer surety bond agreement (see below).
Of course, this is just a general outline of the required legal groundwork; depending on your jurisdiction, there may be additional compliance elements involved.
5. Obtain Licensing and Insurance
A fully-fledged dealership will need to go through the proper channels to ensure that it possesses sufficient licensing, insurance, and bonding. Without these features, your dealership is always under threat of being shut down, or could face legal hurdles.
As noted above, you will need business and dealership licensing.
In addition, all dealerships need to purchase comprehensive insurance coverage. The most common insurance products are general liability, lot coverage, inventory loss and property damage. With bonding, you will need a surety bond, so you are shielded from contract defaults, whether it is with a wholesaler or a vendor.
A surety bond is critical to safeguard your transactions, even if they are completed with the most reliable third-party. After all, you never know what can happen.
6. Build Inventory and Establish Buying Policies (If Applicable)
When you are franchising, you will be given an inventory of automobiles. When you are an independent used facility, however, you need to source them yourself. So, how do you do this?
The most common method is to register and participate in auctions in your area for low-cost cars. Some newer dealerships will source their supplies from social media, or via an existing network of contacts. The important thing to remember is to start small and build your inventory gradually. Once your cash flow builds, you will have more options at your disposal.
Once you have the stockpile, you need to develop buying policies. This might be considered long-term thinking when you are in the infancy stage of your enterprise, but this can help reduce headaches. A buying policy functions as a plan to prevent all your resources from being drained, and it is imperative to implement a limit on a used car inventory investment.
7. Assess a Service Department
A service centre is an addition that can make you stand out from the competition almost immediately. Although it is an additional costly expense, it is a worthwhile investment if you have the capital. Why?
- You build a relationship with car owners.
- You have more people on your property.
- You construct a Rolodex of customers who might buy their next car from you.
- You already have a consumer base for your ad campaigns, whether it is a sales promotion or encouraging past customers to refer your dealership to others.
Overall, if you maintain a stellar service department that can do the job well, you can have a competitive advantage at the onset.
8. Establish an Online Presence
It is crucial in today's environment to have an online presence – and even more so in the automobile industry.
This is because the first port of call for many potential buyers is social media "buy and sell" pages, online marketplaces such as eBay, and other assorted specialist car sales forums and message boards. Many customers prefer to review the key specifications of vehicles (such as their mileage, engine size, and history) online before deciding to see them in person, and you are far more likely to drive sales this way.
Many dealers offer nationwide (and even overseas) shipping, too, so you don't need to restrict your stock to local customers. That said, local SEO can also play a pivotal role in driving visibility, so ensure that you follow all recommended digital marketing practices – or hire someone that can.
9. Hone Your Sales Skills
Used car salespeople have cultivated something of a stereotype over the years, and while you don't need to be Willy Loman or Alec Baldwin in Glengarry Glen Ross, you do need to be able to communicate effectively with potential customers.
Of course, being a salesperson is not easy. It requires a knack, a flair and a strong perspicacity. Whether you are selling a used BMW or a new Honda Civic, every sales agent needs to apply a diverse array of strategies to execute a transaction. While, as you grow, you will hire sales professionals who are experts at this, many of the early transactions may fall down to you.
Be honest with your customers, refrain from being pushy, know how to handle a negotiation, and practice empathy with potential buyers. A key sales skill is to know when to take a step back and allow customers to breathe, too.
Although new motor vehicle sales have taken a hit this year, the early indicators in the post-COVID economy show that new and used cars are already on the path to recovery. Therefore, this may be an excellent time to launch your car dealership and start driving sales. When vehicles are your passion, and you have a gift for sales and entrepreneurship, then there is no reason why you can't be successful in a business that you love.
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