How to Start a Used Car Business

Written by Dave Lavinsky

Growthink.com How to Start a Used Car Business

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How To Start a Used Car Business

Starting a used car business can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn how to start a used car dealership successfully.

Importantly, a critical step in starting a used car dealership business is to complete your business plan. To help you out, you should download Growthink’s Ultimate Business Plan Template here.

16 Steps To Start a Used Car Business

  1. Choose the Name for Your Used Car Business
  2. Develop Your Used Car Dealership Business Plan
  3. Choose the Legal Structure for Your Used Car Business
  4. Secure Startup Funding for Your Used Car Business (If Needed)
  5. Secure a Location for Your Business
  6. Register Your Used Car Business With the IRS
  7. Open a Business Bank Account
  8. Get a Business Credit Card
  9. Get the Required Business Licenses and Permits
  10. Get Business Insurance for Your Used Car Business
  11. Start Building Your Used Car Inventory
  12. Buy or Lease the Right Used Car Business Equipment
  13. Develop Your Used Car Business Marketing Materials
  14. Purchase and Setup the Software Needed to Run Your Used Car Business
  15. Start Building Your Team
  16. Open for Business

1. Choose the Name for Your Used Car Business

The first step to starting a used car business is to choose your business’ name.

This is a very important choice since your company name is your brand and will last for the lifetime of your business. Ideally you choose a name that is meaningful and memorable. Here are some tips for choosing a name for your own dealership:

  1. Make sure the name is available. Check your desired name against trademark databases and your state’s list of registered business names to see if it’s available. Also check to see if a suitable domain name is available.
  2. Keep it simple. The best names are usually ones that are easy to remember, pronounce and spell.
  3. Think about marketing. Come up with a name that reflects the desired brand and/or focus of your used car business.

2. Develop Your Used Car Dealership Business Plan

One of the most important steps in going into business as a used car dealer is to develop your business plan. The process of creating your plan ensures that you fully understand your market and your business strategy. The plan also provides you with a roadmap to follow and if needed, to present to funding sources to raise capital for your business.

Your business plan should include the following sections:

  1. Executive Summary – this section should summarize your entire business plan so readers can quickly understand the key details of your used car business.
  2. Company Overview – this section tells the reader about the history of your used car business and what type of used car business you operate. For example, do you only offer used car sales or do you also have a service department?
  3. Industry Analysis – here you will document key information about the used car industry. Conduct market research and document how big the industry is and what trends are affecting it.
  4. Customer Analysis – in this section, you will document who your ideal or target customers are and their demographics. For example, how old are they? What is there income level? What do they find important when purchasing used cars?
  5. Competitive Analysis – here you will document the key direct and indirect competitors you will face and how you will build competitive advantage.
  6. Marketing Plan – your marketing plan should address the 4Ps: Product, Price, Promotions and Place.
    • Product: Determine and document what products/services you will offer
    • Prices: Document the prices of your products/services
    • Place: Where will your business be located and how will that location help you increase sales?
    • Promotions: What promotional methods will you use to attract customers to your used car business? For example, you might decide to use pay-per-click advertising, public
      relations, search engine optimization and/or social media marketing.
  7. Operations Plan – here you will determine the key processes you will need to run your day-to-day operations. You will also determine your staffing needs. Finally, in this section of your plan, you will create a projected growth timeline showing the milestones you hope to achieve in the coming years.
  8. Management Team – this section details the background of your company’s management team.
  9. Financial Plan – finally, the financial plan answers questions including the following:
    • What startup costs will you incur?
    • How will your used car business make money?
    • What are your projected sales and expenses for the next five years?
    • Do you need to raise funding to launch your business?

3. Choose the Legal Structure for Your Used Car Business

Next you need to choose a legal structure for your used car business and register it and your business name with the Secretary of State in each state where you operate your dealership.
Below are the five most common legal structures:

1) Sole Proprietorship

A sole proprietorship is a business entity in which the owner of the used car business and the business are the same legal person. The owner of a sole proprietorship is responsible for all debts and obligations of the business. There are no formalities required to establish a sole proprietorship, and it is easy to set up and operate. The main advantage of a sole proprietorship is that it is simple and inexpensive to establish. The main disadvantage is that the owner is liable for all debts and obligations of the business.

2) Partnerships

A partnership is a legal structure that is popular among small businesses. It is an agreement between two or more people who want to start a used car business together. The partners share in the profits and losses of the business.

The advantages of a partnership are that it is easy to set up, and the partners share in the profits and losses of the business. The disadvantages of a partnership are that the partners are jointly liable for the debts of the business, and disagreements between partners can be difficult to resolve.

3) Limited Liability Company (LLC)

A limited liability company, or LLC, is a type of business entity that provides limited liability to its owners. This means that the owners of an LLC are not personally responsible for the debts and liabilities of the business. The advantages of an LLC for a used car business include flexibility in management, pass-through taxation (avoids double taxation as explained below), and limited personal liability. The disadvantages of an LLC include lack of availability in some states and self-employment taxes.

4) C Corporation

A C Corporation is a business entity that is separate from its owners. It has its own tax ID and can have shareholders. The main advantage of a C Corporation for a used car business is that it offers limited liability to its owners. This means that the owners are not personally responsible for the debts and liabilities of the business. The disadvantage is that C Corporations are subject to double taxation. This means that the corporation pays taxes on its profits, and the shareholders also pay taxes on their dividends.

5) S Corporation

An S Corporation is a type of corporation that provides its owners with limited liability protection and allows them to pass their business income through to their personal income tax returns, thus avoiding double taxation. There are several limitations on S Corporations including the number of shareholders they can have among others.

Once you register your used car business, your state will send you your official “Articles of Incorporation.” You will need this among other documentation when establishing your banking account (see below). We recommend that you consult an attorney in determining which legal structure is best suited for your company.

4. Secure Startup Funding for Your Used Car Business (If Needed)

In developing your used car dealership business plan, you might have determined that you need to raise funding to launch your business.

If so, the main sources of funding for a used car business to consider are personal savings, family and friends, credit card financing, bank loans, crowdfunding and angel investors. Angel investors are individuals who provide capital to early-stage businesses. Angel investors typically will invest in a used car business that they believe has high potential for growth.

5. Secure a Location for Your Business

Having the right physical location can be important for your used car business is important. You will need enough lot space to showcase your inventory, as well as office space for your team. Finding a location that will bring in customers is also key.

To find the right space, consider:

  • Driving around to find the right areas while looking for “for lease” signs
  • Contacting a commercial real estate agent
  • Doing commercial real estate searches online
  • Telling others about your needs and seeing if someone in your network has a connection that can help you find the right space

6. Register Your Used Car Business With the IRS

Next, you need complete business registration with the Internal Revenue Service (IRS) which will result in the IRS issuing you an Employer Identification Number (EIN).

Most banks will require you to have an EIN in order to open up an account. In addition, in order to hire employees, you will need an EIN since that is how the IRS tracks your payroll tax payments.

Note that if you are a sole proprietor without employees, you generally do not need to get an EIN. Rather, you would use your social security number (instead of your EIN) as your taxpayer identification number.

7. Open a Business Bank Account

It is important to establish a bank account in your business name. This process is fairly simple and involves the following steps:

  1. Identify and contact the bank you want to use
  2. Gather and present the required documents (generally include your company’s Articles of Incorporation, driver’s license or passport, and proof of address)
  3. Complete the bank’s application form and provide all relevant information
  4. Meet with a banker to discuss your business needs and establish a relationship with them
If you’d like to quickly and easily complete your business plan, download Growthink’s Ultimate Used Car Dealership Business Plan Template and complete your business plan and financial model in hours.

8. Get a Business Credit Card

You should get a business credit card for your used car business to help you separate personal and business expenses.

You can either apply for a business credit card through your bank or apply for one through a credit card company.

When you’re applying for a business credit card, you’ll need to provide some information about your business. This includes the name of your business, the address of your business, and the type of business you’re running. You’ll also need to provide some information about yourself, including your name, Social Security number, and date of birth.

Once you’ve been approved for a business credit card, you’ll be able to use it to make purchases for your business. You can also use it to build good credit which could be very important in securing loans and getting credit lines for your business in the future.

9. Get the Required Business Licenses and Permits

Every state, county and city has different business license and permit requirements.

Nearly all states, counties and/or cities have license requirements including:

  • General Business License – You need a license to operate almost any type of business, including one to sell cars. Check your local guidelines for licensing requirements.
  • Seller’s Permit – A seller’s permit is needed to sell vehicles. The requirements for getting a seller’s permit vary from state to state.
  • Dealer’s License – Getting a car dealer license is important if you plan on buying or selling more than five cars in a year. These licensing requirements also vary depending on your state.

Depending on where you launch your used car business, you will have to obtain the necessary state, county and/or city licenses.

10. Get Business Insurance for Your Used Car Business

Business insurance policies that you should consider for your used car business include:

  • General Liability Insurance – You will need to purchase general liability insurance in order to protect your business from potential lawsuits. This type of insurance will cover damages that may occur as a result of your business operations.
  • Business Liability Insurance – In addition to general liability insurance, you will also need to purchase business liability insurance. This type of insurance will protect your business from potential lawsuits that may arise from injuries that occur on your premises.
  • Commercial Property Insurance – You will need to purchase commercial property insurance if you own a used car dealership. This type of insurance will protect your business from potential damages that may occur to your property as a result of your business operations.
  • Workers’ Compentation Insurance – You will need to purchase workers’ compensation insurance if you have employees working for your used car dealership. This type of insurance will protect your business from potential lawsuits that may arise from injuries that occur to your employees while they are working for your business.
  • Product Liability Insurance – You will need to purchase product liability insurance if you sell used cars that are under warranty. This type of insurance will protect your business from potential lawsuits that may arise from damages that occur to a customer’s vehicle as a result of a defect in the vehicle.
  • Garage Keeper’s Insurance – This type of insurance will protect your business from potential lawsuits that may arise from damages that occur to a customer’s vehicle while it is in your care.
  • Dealer’s Open Lot Insurance – This type of insurance will protect your business if a vehicle is damaged while being driven by an employee or test-driven by a customer.

Find an insurance agent, tell them about your business and its needs, and they will recommend policies that fit those needs.

11. Start Building Your Used Car Inventory

The most common way to build inventory for a used business is to attend auctions where used cars are being sold. Just register with your local auction houses to receive notifications when new auctions are happening.

You can also find used cars for sale through online classifieds and social media. Just be sure to research the vehicles and their value, including how much you could make from selling them, before you buy.

12. Buy or Lease the Right Used Car Business Equipment

A used car business needs a lot of equipment in order to run successfully. Some of the most important pieces of equipment are computers, printers, and a fax machine. It’s also helpful to have a cash register, as well as racks or shelves to store the cars. Be sure to also have a phone system able to handle multiple calls.

Additionally, you might need office furniture and supplies for your team, as well as reception furniture for your customers. Many used car dealers offer vending areas or free refreshments such as coffee to waiting customers.

13. Develop Your Used Car Business Marketing Materials

Marketing materials will be required to attract and retain customers to your used car business.

The key marketing materials you will need are as follows:

  1. Logo – Spend some time developing a good logo for your used car business. Your logo will be printed on company stationery, business cards, marketing materials and so forth. The right logo can increase customer trust and awareness of your brand.
  2. Website – Likewise, a professional used car business website provides potential customers with information about the products and/or services you offer, your company’s history, and contact information. Importantly, remember that the look and feel of your website will affect how customers perceive you. Update your website regularly if you plan to showcase your inventory online.
  3. Social Media Accounts – Establish social media accounts in your company’s name. Accounts on Facebook, Twitter, LinkedIn and/or other social media networks will help customers and others find and interact with your used car business. Social media platforms are also great places to share new inventory and deals, market to past customers, and bring in new customers.
  4. Ad Materials – Many used car businesses run ads in local newspapers and on TV and radio stations. Be sure to have your ad materials ready to go.

14. Purchase and Setup the Software Needed to Run Your Used Car Business

A used car business needs software that can help them manage their inventory, track sales and purchases, and manage customer information. Some popular software options for used car businesses include Microsoft Dynamics GP, QuickBooks, and CarLotz Manager.

15. Hire and Train Staff

Your used car business will need employees who can sell inventory, help your customers with financing, and service vehicles.

The sales team should be knowledgeable about cars and able to provide excellent customer service. They will be responsible for helping customers find the right car for their needs and negotiating a fair price.

A good finance team should be able to work with different lenders to secure financing options for customers. They will also need to be able to explain the different warranty and protection plans available.

Your service technicians should be Automatic Service Excellence (ASE) certified and able to perform basic maintenance and repairs on the cars in your inventory.

To find the right candidates, consider posting job openings in local newspapers or online. You might also reach out to existing connections.

16. Open for Business

You are now ready to open your used car business. If you followed the steps above, you should be in a great position to build a successful business. Below are answers to frequently asked questions that might further help you.

How to Finish Your Used Car Dealership Business Plan

Don’t you wish there was a faster, easier way to finish your business plan?

With Growthink’s Ultimate Used Car Dealership Business Plan Template you can finish your plan in just 8 hours or less!

Click here to finish your business plan today.

 

How To Start a Used Car Business FAQs

The answer is both yes and no. It all depends on how you approach it and what your goals are.

If you're just looking to make a quick buck, then yes, it can be quite difficult. There's a lot of competition out there and you need to be able to stand out from the crowd. However, if you're serious about starting a used car business and you're willing to put in the work, then it can be a very successful venture. Your biggest challenges to begin will most likely be building your inventory and securing a location. Following the steps outlined above will help you get started.

The first step is to do industry and market research. Learn about the different aspects of the business, such as the types of cars that are in demand, how other used car dealerships are setting their prices, and how much you will need to spend on inventory, licensing, employee salaries, and other costs before you start making money. Finding an experienced mentor in the used car industry could also help you gain some helpful insights.

The most profitable type of used car business will vary depending on your location, target market, and other factors. However, some tips to help you choose a profitable niche include focusing on a specific type of vehicle (such as luxury cars or SUVs), targeting a particular price range, specializing in just one brand, or catering to a specific customer base (such as first-time buyers or experienced collectors).

The cost of starting a used car business will depend on a number of factors, such as the size and location of your dealership, the number of vehicles you plan to stock, and whether you intend to hire any staff. However, you can expect to spend at least several thousand dollars on inventory and several hundred dollars on licensing and permits. Additionally, you'll need to factor in the cost of leasing or purchasing a property for your dealership, as well as any advertising and marketing expenses.

Key costs to keep in mind include:

  • Building lease or purchase and renovation
  • Equipment and professional installation
  • Store fixtures and office equipment and supplies
  • Licensing
  • Surety bond

Ongoing expenses for a used car business include the cost of maintaining inventory, such as paying for storage, repairs, and cleaning; the cost of staffing (if you choose to hire employees); and the cost of marketing and advertising. You will also need to factor in the cost of property taxes and insurance for your dealership.

Key ongoing expenses to keep in mind include:

  • Inventory purchases
  • Inventory repairs/service
  • Wages
  • Marketing
  • Leases for building and/or equipment
  • Equipment and building maintenance

Purchases are the greatest expense for a car dealership owner and account for over 84% of revenue. In addition to purchasing used cars at auction and from customer trade-ins, used car dealers must also repair and recondition these vehicles.

Wages are also a major expense, but increased automation with regard to inventory management and online cataloging has resulted in minimal wage growth.

Marketing costs can be significant for a successful car dealership. According to the National Independent Auto Dealers Association, car dealers spend 33.6% of their marketing budget on internet advertising.

A used car business makes money by selling vehicles for more than the cost of acquiring and maintaining the inventory. The profit margin on each sale will vary depending on the make and model of the vehicle, as well as market conditions. Some used car dealerships also make money from offering vehicle services and repairs.

Yes, owning a used car business can be profitable. However, the amount of profit you make will depend on a number of factors, such as your inventory, overhead costs, and selling prices. 

Additionally, the profitability of your business may fluctuate from month to month or year to year depending on changes in the market. Navigating these fluctuations is key to making money for used car dealership owners.

There are a number of reasons why used car businesses fail. Some common causes of failure include poor planning, inadequate capital, overspending on inventory, and failing to adapt to changes in the market. Additionally, many used car dealerships are unsuccessful due to competition from larger businesses or because they are unable to generate enough sales to cover their expenses.

IBISWorld reports the Used Car Dealership industry has had a net decline over the past five years, due to the Coronavirus, at an average annual rate of -1.6%. Next year, the industry’s 129,553 businesses are forecast to see $99.1 billion in collective revenue.

Used cars account for over half of industry revenue. This excludes vans, minivans, and trucks.

The remainder of industry revenue is generated from other used vehicles, parts and repair services, and financing and insurance.

A number of factors affect the performance of the Used Car Dealership industry. These drivers include:

  • Per Capita Disposable Income – When consumers have more money to spend, they become more willing to spend on expensive discretionary items, such as used cars. 
  • Price of New Cars – Buying a used car is a more affordable alternative to purchasing a new car. 
  • Aggregate Household Debt – Consumers are still less likely to invest in nondiscretionary items such as cars when debt is high. 
  • Average Age of Vehicle Fleet – As the average age of vehicle fleets increases, it represents greater pent-up demand for vehicles. 
  • World Price of Crude Oil – High gasoline prices tend to decrease new and used vehicle sales.

The Used Car Dealers industry is highly fragmented, with nonemploying dealerships representing more than 80.0% of establishments. As a result, the industry exhibits a low level of market share concentration, with the four largest operators accounting for an estimated 19.3% of industry revenue. In fact, just one company holds significant market share in the Used Car Dealership: CarMax, with a 17.9% marketshare leads the industry, while America’s CarMart, Carvana Co., and Enterprise Car Sales each command just a fraction of the market.

The largest customer segment (37.5%) in the used car dealer industry is consumers who have prime credit scores. Other segments include Subprime, Nonprime, Super prime, and Deep subprime customers.

 

Helpful Videos

Facts About Used Cars

Growing a Successful Used Car Dealership

Startup Car Dealership Success Story

Used Car Dealership Merchandising Examples

 

Additional Resources in the Used Car Dealership Industry

For additional information on the used car dealership industry, consider these industry resources:

 

How to Finish Your Used Car Dealership Business Plan

Don’t you wish there was a faster, easier way to finish your business plan?

With Growthink’s Ultimate Used Car Dealership Business Plan Template you can finish your plan in just 8 hours or less!

Click here to finish your business plan today.

 

OR, Let Us Develop Your Plan For You

Since 1999, Growthink has developed business plans for thousands of companies who have gone on to achieve tremendous success.

Click here to see how a Growthink professional business planner can create your business plan for you.
 
You can download a PDF version of our used car dealership business plan template here.

 

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