How to Start a Car Dealership

How to Start a Car Dealership

ON THIS PAGE

 

How To Start a Car Dealership

Starting a car dealership can be very profitable. With proper planning, execution and hard work, you can enjoy great success. Below you will learn the keys to launching a successful car dealership.

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

17 Steps To Start a Car Dealership

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

1. Decide Which Type of Car Dealership To Open

The first step in starting a car dealership is deciding whether to open an independent dealership or become part of a franchise.

An independent dealership will allow you to sell a wider range of vehicles since you won’t be signing any contracts with specific automakers. You will also have more flexibility in pricing your inventory since you don’t have to meet manufacturer requirements. On the downside, you won’t have access to special financing options that come directly through automakers, such as Ford Credit, for your customers and will be responsible for coming up with all your own marketing, branding, and other business materials.

A franchise will limit the brand of cars you can sell and you will have to meet specific franchise requirements and pay fees to join. You will, however, be able to offer your customers more financing options through the automakers and have the backing of a larger brand to help guide you.

Make sure to research both options completely to determine which is best for you. Also, remember that joining a franchise may influence what you can do in the following steps when it comes to marketing and other business decisions.

2. Choose the Name for Your Car Dealership

The first step to starting a car dealership 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 car 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 car dealership.

3. Develop Your Car Dealership Business Plan

One of the most important steps in starting a car dealership 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 car dealership.
  2. Company Overview – this section tells the reader about the history of your car dealership and what type of car dealership you operate. For example, do you only sell vehicles or do you also have a service department? Do you sell many different brands or specialize in just a few?
  3. Industry Analysis – here you will document key information about the car dealership 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? Where do they live? What do they find important when purchasing vehicles or services like the ones you will offer?
  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 car dealership? 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 business 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 car dealership make money?
    • What are your projected sales and expenses for the next five years?
    • Do you need to raise funding to launch your business?

4. Choose the Legal Structure for Your Car Dealership

Next you need to choose a legal structure for your car dealership and register it and your business name with the Secretary of State in each state where you operate your business.

Below are the five most common legal structures:

1) Sole Proprietorship

A sole proprietorship is a business entity in which the owner of the car dealership 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 car dealership 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 car dealership 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 car dealership 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 car dealership, 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.

5. Secure Startup Funding for Your Car Dealership (If Needed)

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

If so, the main sources of funding for a car dealership 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 car dealership that they believe has high potential for growth.

6. Secure a Location for Your Business

A big step in opening your own car dealership is finding the perfect location for your business. The ideal spot will be visible from the road, have plenty of parking for customers and your inventory, and be in a high-traffic area. Make sure there is enough space to include a reception area, office spaces, and a service department if you plan to add one.

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

7. Register Your Car Dealership With the IRS

Next, you need to register your business 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.

8. Open a Business Bank Account

It is important to establish a bank account in your car dealership’s 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 Car Dealership Business Plan Template and complete your business plan and financial model in hours.

9. Get a Business Credit Card

You should get a business credit card for your car dealership 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 your credit history which could be very important in securing loans and getting credit lines for your business in the future.

10. 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 will need to obtain a general business license in order to operate your dealership. This can be done through the Secretary of State’s office in your state.
  • Sales Tax License – In order to collect sales tax on the vehicles you sell, you will need to obtain a sales tax license from your state’s tax collecting agency.
  • Franchise License – If you wish to sell vehicles from a particular manufacturer as part of a franchise agreement, you will need to obtain a franchise license from that manufacturer.
  • New Vehicle Dealer’s License – In order to sell new vehicles, you will need to obtain a new vehicle dealer license from your state’s motor vehicle department.
  • Used Vehicle Dealer’s License – In order to sell new vehicles, you will need to obtain a new vehicle dealer license from your state’s motor vehicle department.

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

11. Get Business Insurance for Your Car Dealership

Some common types of insurance to consider include:

  • General Liability Insurance – This will protect your dealership from any third-party claims of bodily injury or property damage.
  • Commercial Property Insurance – Commercial property insurance protects your dealership’s building, as well as any contents inside of it.
  • Business Interruption Insurance – his insurance protects your dealership in the event that it is unable to operate due to a covered event, such as a fire.
  • Workers’ Compensation Insurance – If you have employees, you will need this type of insurance to protect them in case of a work-related injury or illness.
  • Dealer’s Open Lot Insurance – This type of policy will protect any vehicles that are on your dealership’s property.
  • Garage Keeper’s Insurance – If you offer any type of repair or maintenance service, you will need this insurance to protect against any damage that may occur to a customer’s vehicle while it is in your care.

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

12. Buy or Lease the Right Car Dealership Business Equipment

A car dealership needs some basic office equipment to operate, including computers, printers, phones, fax machines, and general office supplies. You should also plan to have some reception furniture and a break area for your employees. Some car dealerships also offer customers vending areas or free refreshments.

If you plan to offer vehicle services, you will also need to buy a range of mechanic tools and stock your service bays with diagnostic tools, car lifts, and any other equipment needed to service your customer’s vehicles.

13. Develop Your Car Dealership Marketing Materials

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

The key marketing materials you will need are as follows:

  1. Logo – Spend some time developing a good logo for your car dealership. Your logo will be printed on company stationery, business cards, marketing materials, and may even
    be seen when users load your products. The right logo can increase customer trust and awareness of your brand.
  2. Website – Likewise, a professional car dealership 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. If you plan to showcase your inventory online, you will need to update your website regularly.
  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 car dealership. Social media platforms are also great places to run promotions and advertise new vehicles.

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

Car dealerships need software to manage their inventory, customers, and finances. Some common software programs used in car dealerships include AutoTrader, Microsoft Dynamics AX, and Salesforce.

Research the software that best suits your needs, purchase it, and set it up.

15. Get Inventory

Next, you need to make sure you have cars to sell. If you are part of a franchise, you may already have a system set up with your franchisee and certain requirements for the vehicles you need to order. If you are an independent car dealership, you can start collecting inventory by going to auctions and contacting private sellers.

16. Hire Employees

A good car dealership requires a good team to run it. You will need salespeople to sell the cars, managers to keep track of inventory and finances, and mechanics to keep the cars in top condition. Hiring the right employees is essential to the success of your dealership.

To find candidates, post ads on online job boards and in local newspapers. You can also reach out to automotive schools and ask them to recommend graduates who might be a good fit for your business.

When interviewing candidates, be sure to ask about their experience in the automotive industry and their customer service skills. You should also give them a sales test to see how they would do in a real-world selling situation.

17. Open for Business

You are now ready to open your own dealership. 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 Car Dealership Business Plan in 1 Day!

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

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

Click here to finish your car dealership business plan today.

 

 

How To Start a Car Dealership FAQs

No, it's not hard to start a car dealership. Your biggest challenges at first will be funding your new business and buying enough inventory to launch. Depending on your area, you might also struggle to find employees to build out your team. If you can overcome those challenges, you will be well on your way to running your own car dealership successfully. Following the steps outlined above will help you get started.

If you're looking to get into the car business but have no experience, don't worry. It is possible to start a successful dealership without any prior experience in the industry. However, it will require some hard work and dedication.  You should be certain to do as much research as you can into the car industry in general and how successful dealerships are run. It would also be helpful to familiarize yourself with the licensing, permits, and other legal requirements for buying and selling vehicles. Finally, finding a professional who has experience managing car dealerships to talk with can be very helpful.

In general, new car dealerships are more profitable than used car dealerships. Deciding which brands or styles of vehicles will make your dealership the most money comes down to industry trends and demand in your area.

Estimate start-up costs for a new car dealership are approximately $100,000 – $1,000,000.

  • Purchases – An overwhelming majority of revenue by new car dealers is spent on inventory purchases. These are vehicles held for sale.
  • Wages – New car dealerships require salespeople, technicians and office workers to operate. Labor costs have slowly declined over the past five years, reflecting the increasing use of automation by industry operators. Parts and repair service workers account for a growing share of revenue and payroll.
  • Marketing and Advertising – Beyond wages and purchases, new car dealers must maintain substantial advertising efforts to draw in customers. According to the NADA, the average advertising cost per vehicle sold was $654.00.

The general car dealership business model is to sell and service motor vehicles. The main sources of revenue for a dealership are vehicle sales and service, but many dealerships also generate income from financing, parts sales, and other ancillary businesses.

Owning a car dealership can be a profitable venture but, as with most industries, comes with a lot of ups and down. Since cars are fairly big-ticket items, economic changes can greatly impact how many cars get sold. If you can navigate those changes effectively, owning a car dealership can be a great financial decision.

New car dealers typically make around two or three percent of either the invoice or the sticker price of the car.

The main reason car dealerships fail is due to poor management. Many dealerships are started by people who are great at selling cars, but don't have experience running a business. They may be great at negotiating with manufacturers and getting good prices for their vehicles, but they don't have training in things like inventory management, marketing, or even bookkeeping.

Another common reason for failure is not properly understanding the customer. Too many dealerships focus on selling to people who are looking for a bargain, when in reality, most car buyers are willing to pay full price if they feel they're being treated well. Great customer service is the key to success in any business, but it's especially important in the car business where customers have a lot of choices.

Finally, many dealerships fail because they're not able to adapt to changing market conditions. The car business is constantly evolving, with new technologies, new models, and new competitors entering the market all the time. Dealerships that can't keep up with the changes will quickly find themselves falling behind.

There are 18,391 car dealerships in the U.S.with revenues of $834.4 billion.

A number of factors affect the performance of the car dealership industry. These drivers include:

  • Consumer Confidence Index – It is expected that the consumer confidence index will increase as the economy recovered and unemployment reduced making consumers willing to make big purchases like a new vehicle resulting in potential opportunity for the industry.
  • Average Age of Vehicle Fleet – An increase in the age of vehicles means suppressed demands for new vehicles. When a rise in disposable income and demand for affordable fuel-efficient vehicle increases, the average age of vehicle decrease all at the same time. But since the quality of vehicles has improved and they can now last longer in running condition it is then expected that the average age of the fleet will shoot up.
  • Yield on 10-year Treasury Note – The yield on 10-year treasury note is expected to increase as automobiles are usually financed, therefore the need will likely regress and interest rate is expected to flow and change. The reason behind financing vehicles becomes costly due to high interest rates.
  • Per Capita Disposable Income – When there’s a high disposable income expect high discretionary spending however this is also the time when consumers’ are confident to go and get debt-funded consumption such as buying new vehicle. It is then expected that per capita disposable income will as well increase at any time.

In the U.S. there are only two major competitors in the car dealership industry and they are as follows:

  • AutoNation Inc.
  • Penskie Automotive Group Inc.

 

Helpful Slideshows, Videos & Images

How To Identify and Leverage Local Influencers To Drive Car Dealership Sales

Online Reputation

How To Close a Sale – 5 Reason Clients Don’t Buy

How To Sell 30 Cars A Month – Car Sales Training – Become A 30 Cars A Month Sales Person

Automotive Market Trends

Automotive Market Trends infographic

Why Should Auto Dealers Care About Social Media & Reviews

Why Should Auto Dealers Care About Social Media infographic

Additional Resources in the Car Dealership Industry

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

 

How to Finish Your Car Dealership Business Plan in 1 Day!

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

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

Click here to finish your car dealership 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 Growthink’s professional business planning can create your business plan for you.
 

Other Helpful Business Plan Articles & Templates

[class^="wpforms-"]
[class^="wpforms-"]
[class^="wpforms-"]
[class^="wpforms-"]