How to Start a Used Car Dealership: A Definitive Guide

  • Jake Pool by Jake Pool
  • 4 years ago
  • Blog
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If your love for used cars ranks above enthusiast, it may be time to take things to the next level.

Ever thought about owning your own dealership? We’re going to tell you how! Our exclusive interview with Carlos Becerra of Imports & Classics helped reveal the details on starting a used car dealership.

As Carlos explains, starting a car dealership takes some investment in time and money. However, with the right location and a passion for the car business, you can be successful in the industry.

Follow this guide and you’ll be well on your way to becoming your region’s top car dealer.

1. Become an entrepreneur… Or at least get in the mindset!

Carlos had been an entrepreneur his entire life before he even got into the classic car business. He didn’t grow up with a lot and when he wanted something, his parents encouraged him to ask, “How are you going to get it?”

As Carlos said, “At some point, everybody needs to make a decision. And he made that decision at a very young age.”

While his friends were probably playing video games, Carlos was selling berries on the side of the road from fifth grade through high school. He was smart with his money and saved up enough to purchase his first car.

Watch the full interview with Carlos here:

If you’re entering into the dealership of cars, then you too will need to make some decisions about the course of your life. That means getting into the entrepreneurial mindset.

You alone will be responsible for your business and its success. It’s not a decision to be taken lightly, but remember, the rewards have no ceiling. And ultimately, you are in control your time.

To help with your mindset, here’s a list of essays from Paul Graham that are focused on entrepreneurship. He has helped fund over 800 startups over the course of his career. Ever heard of Reddit, Airbnb, Stripe, and Dropbox?

If you don’t want to build from the ground up, find active listings near you, and buy a dealership that’s already operational.

What does it take to start a used car dealership?

If you’re starting a used car business, you better like being around cars. But it’s not enough to just love cars, you have to know about how the car business works.

Carlos gained his knowledge of the industry by flipping cars. After selling his first car, he went to auctions to find cars that would sell for a profit and upgraded to classic cars. If you have the liquid capital to do this, it can be a great way to gain knowledge of the car business.

When it came down to it, I had to save up money to buy my first car. Right? And if I was going to buy my first car, I wanted to make sure I got a good deal. And if I got a good deal, chances it was something I could make a profit off of. And that’s what happened. I bought my first car, drove it for a while, and then I made a profit. And I’m like, ‘Hey, I kinda know what I’m doing.’

It helps if you have some base knowledge of how to value a car. Here are some resources to get you started:

Get a job as a car salesperson to gain experience.

But if you’re new to the industry, consider some training courses from an accredited institution like the National Automobile Dealers Association or find a job at a local car dealership to get some experience with how car dealerships work.

The U.S. Bureau of Labor Statistics ranks automotive salespeople under the retail sales workers classification, and within that class, automotive dealers have the highest median hourly wage of all retail sales workers.

BLS Retail wage statistics

You can work hard at this position and be one of the highest paid retail workers in the U.S. job market! Which is good because you’ll need that capital and skills like accounting, sales negotiation, social media and web management, finance, and more when you start your used car business.

These are all skills that fall into the entrepreneurial mindset.

2. Organize your startup costs.

Businessman counting money

Like any business, you’ll need some capital to get things started, and a used car dealership has a lot of startup costs associated. It’s important to get everything organized before you begin.

How much does it cost to start a used car dealership?

There are many aspects to think about when opening up a used car dealership, so let’s break it down step by step based on Carlos’ plan. However, we won’t sugarcoat it. The simple answer is that used car businesses cost anywhere from $50k to $500k (even for a small operation) based on your location and business plan.

Here’s a list of startup costs:

  • Business Registration
  • Auto Dealer Bond
  • Auto Dealership License
  • Other licenses (health, fire, software, etc.)
  • Business Attorney
  • Accountant
  • Location (deposit)
  • Marketing and Branding (website, social media, flyers, etc.)
  • Office Supplies
  • Inventory (largest cost, plus insurance)

Business registration, auto dealership licenses and dealer bonds

These three startup costs are the inescapable fees associated with any auto dealership and the most important to ensure you’re running a legal operation.

Complete your business registration at the federal and state levels. The fees vary from state to state based on the type of business you want to create (limited partnership, sole proprietorship, limited liability company, or corporation). It’s best to work with an accountant to find the best option.

Next, to get your auto dealership license, every state requires that you have an auto dealer bond. This is a type of surety bond that protects customers from fraud and the amount differs by state ($30k in Washington, $25k in Texas, $100k in Arizona).

Last, you’ll need an auto dealership license from the state in which you’ll be doing business. The costs vary by state, and in some states, like Washington, costs can run over $1,000 after completing the required training courses.

Additional and ongoing costs

In this guide, we’re not talking about full-on restoration work like Carlos does at his garage. However, any used car dealing business will need to account for maintenance or low-level restoration work associated with the inventory. It’s a cost that’s commonly underestimated, so don’t make that mistake.

Think of it this way, AAA averages the annual maintenance cost of owning a used car at $792 per year ($66 per month). While you won’t be using a car at a consumer level, you will need to maintain the vehicle until you sell it and factor that cost into your business plan.

If you can do the work yourself, you’ll save a lot of money in the long run.

Other ongoing costs associated with the car dealership business:

  • Rent
  • Payroll (if hiring salespeople or office help)
  • Insurance
  • Advertising

3. Knowing Your Market and Choosing a Location

Once you have your initial costs figured into your business plan, it’s time to do the hard work that could make or break your business. You need to understand your market and factor that into your business plan before making any investment into the business.

Conduct market research and find your niche

Men conducing market researchYou can determine your market by several factors like:

  • Age
  • Income level
  • Marital Status
  • Occupation
  • Location

You also need to factor in your own referrals from friends, relatives, and perhaps former colleagues if you’ve been in the auto business for a while.

These elements help to determine the clients you want to do business with when you open. The U.S. Small Business Administration has great resources to help businesses determine their market.

It’s the due diligence you would conduct for opening any type of business, and knowing your market will help you choose a niche. Here are some examples:

  • Luxury Vehicles
  • Multi-brand (make/model) Car Dealership
  • Classic or Collector Cars
  • Online-Only Dealership

Your niche will help you choose a location.

Location, Location, Location

It’s the first rule of real estate, and it’s one of the biggest costs you’ll figure into your business plan.

Business location

Based on your market, you want to be sure that your location can support your business. That means it is affordable and visible. Often, dealerships open near one another in direct competition because it gives customers the opportunity to quickly shop for the vehicle of their choice.

We posed the question to Carlos: So if we were to open up a dealership across the street, what would you do? His response was,

You can’t hate on competition. I’m going to have my business, and I’m going to run it well. And if somebody else is going to run the same business, I’m just going to work harder than them. I don’t hate my competition. I don’t fear my competition. If somebody set up across the street, well it’s because it’s a great location.

Do I need a physical location to sell cars?

Starting a used car dealership from home is one way to avoid a lot of startup and operational costs. It’s certainly possible and many used car dealers are based from home.

Carlos started this way with an online based classic car business where he stored the cars in his mother’s driveway. He said,

I’d buy a car for a thousand bucks. Tow it for three hundred bucks. Sell it for just under three [thousand] and I’d make a little margin. Do that for two to three cars a month.

However, you need to check your state and local laws (city and county) on storing used cars.

Also, a serious online and social media presence is necessary to be successful without a physical location. If you’re not up to speed on current SEO and web marketing trends, you need to hire a highly capable webmaster and marketing team.

Otherwise, you may want to consider buying a business with an established online following.

4. Inventory

In our interview with Carlos, he explained that you need to be very careful about what you buy and that your target demographic would probably differ completely from his. It’s all based on location.

Car dealership inventory

How do I know what to buy and sell?

Carlos explained about his region:

Up here, there’s Subarus that are selling because we’re in the Pacific Northwest. We have snow. We have seasonal climate that you need a four-cylinder, all-wheel drive to get through.

Some questions you can ask when choosing your inventory:

  • Do we have weather conditions in my area that would warrant a specific style of car?
  • Is there an industry in the area where workers require trucks or other larger vehicles?
  • Are there a lot of families in my area where I could easily market SUVs or Minivans?

It’s up to you to determine what sells very well in your region and to your target market. Edmunds Industry Insights is a great resource for statistical information to help you figure it out.

Researching local car selling marketplaces online can also help you determine what’s selling on the market.

Where am I going to buy the inventory for my dealership?

It takes a lot of effort to find cars to resell on the retail market for a profit. Because of this, most dealers get their inventory from dealer-only auction companies.

The auctions are one of the major reasons (aside from selling multiple cars per year legally) that you’ll need your dealer license. Here’s a list of the top dealer-only auction companies in the U.S.:

But don’t limit yourself to dealer-only auctions. There are several great auto auction sites out there where you can find great deals on used cars that can be sold for a profit.

5. Funding Your Car Dealership

We can talk about startup costs, location, and inventory all day, but to come up with the funds to get things rolling, you’ll need a solid business plan.

What’s in a Car Dealership Business Plan?

For any business to be successful, you need to have a solid business plan to start. It’s also essential if you plan to apply for a business loan to get your dealership off the ground. Make sure your plan includes the following items:

  • Executive Summary of the Business
  • Objectives and Mission Statement
  • Keys to Success
  • Company Summary
  • Inventory
  • Market Analysis
  • Web Plan
  • Management Summary
  • Financial Plan

And even if you don’t plan to apply for outside funding, a business plan is necessary to owning a car dealership. It provides the vision and structure your business needs to be successful. Without a plan, a business is destined to fail.

How can I start a car dealership with no money?

Learning how to open a car dealership is hard enough on its own but opening one with no money will be even more difficult. However, it’s not impossible.

Your business plan is the key tool you’ll use to pitch to potential investors and financial lenders. Just know that most lenders require a business to be established and in business for several years before they’ll lend money.

Other options

It is possible, with good credit, to get a credit card with a 0% introductory rate. In Step 4 of our article on how to open a gym, we explain how entrepreneur Jake Brog leveraged his credit to launch a successful gym business.

With that, you could fund a small inventory (1 – 2 vehicles) and pay off the credit card debt before accruing any interest charges. It’s a risk, but with a great business plan, the payoff could be rewarding and help jump-start your dealership.

However, most car dealerships start the way Carlos began his: with money from his own pocket.

I just leveraged my skills to pay my bills because I didn’t actually have the money.

6. Volume and Financial Goals

Calculating financial goals

When figuring out how to start a car dealership, you must quickly establish the financial goals for the business.

Buying a car and selling it for a profit is great, but your dealership needs to do it at a high volume to cover the costs of the business and make money. As Carlos said,

We like to move volume. If I can make $1,500 on a car… $2,000 on a car, the state makes more money than me on that car. If I sell a $40,000 car and I make $2,000 on it, the state gets $3,500 – $3,600 in taxes. So the state makes more than us, but they’re not paying the power bill. They’re not paying the mortgage.

Figuring out your volume is all contingent on your financial goals. If you’re a small, one person dealership, with little overhead, your volume could easily be only three to four cars per month to cover your expenses and make a decent profit.

However, as you grow your operation, your volume will need to increase to sustain your business. Look at Carlos’ goal:

I want to get to about 60-70 cars a month. And that’s not a massive dealership, but it’s a decent size.

Is owning a used car dealership profitable?

The quick answer is yes—if you have a good business plan and knowledge of the industry, car dealerships are a profitable venture. In fact, the Cox Automotive Market Insight Report recently confirmed that the gross profit margin of used cars is now nearly double that of new ones, which is great news for used car dealerships.

Auto industry leaders like Edmunds are putting out great press for independent used car lots, which is helping to drive up sales nationally.

How much does a used car dealership owner make?

How much you make is up to you!

It’s hard to pinpoint exactly how much used car dealers make. Comparably puts the average between $18,902 to $495,413, which is a tremendous gap.

Comparably salary data

Remember that in entrepreneurial ventures, you get out of the business what you put into the business. As Carlos said in the interview,

I feel like anyone who logs their own hours in the business is setting themselves up to fail. 

7. Customer Service

Dealership customer serviceUsed car dealers may have had a bad reputation in the past, but because of the internet, that sentiment is rapidly changing. Successful car dealerships need referrals, and good reviews if they want to stay in business.

We’ve sold hundreds of cars. We’ve never had a negative review. I can honestly say that there’s nobody around here who will say that I screwed them over, and that’s coming from a used car dealer.

Here are some key tips you can use to present great customer service before and after the sale:

  • Loyalty is king. If you create loyal customers, you’ll stay in business forever.
  • A great attitude goes a long way with a potential customer.
  • Be genuine. People don’t like to be sold to, but they like it when someone genuinely wants to solve their problems.
  • Your sales floor and office reflects your customer service. Keep a clean environment!
  • If you can give your customers an amazing experience from start to finish, they’ll recommend you to others.
  • Just because the customer is off the lot, it doesn’t mean the service is over. Call to check and see how things are going.

Now go out and sell some cars!

Now that you know all of the basics on how to start a used car dealership, it’s time to get out there and start selling! It can be a tough industry to break into, but with determination and a good entrepreneurial mindset, you’ll be slinging used cars in no time. You might also find starting a rental company attractive if you like the idea of owning a dealership.

Can you think of any other aspects of opening a dealership or have valuable information to add?

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