How to Start An Auto Dealership
Starting an auto dealership can be a challenging but worthwhile endeavor. If you are considering opening an auto dealership, it's crucial to examine the nature of the automobile industry and whether it aligns with your career interests and expectations. Below, we'll highlight what selling vehicles will require of you, the steps to begin the process, how to develop your dealership further and any legal factors you may need to take into consideration when starting your own dealership.
What You Need to Know About Auto Dealerships
Buying and selling automobiles can be a lucrative business. Sometimes, a dealer will sell a specific category of cars depending on their business model, such as only selling used cars or only carrying cars from a particular manufacturer. Dealerships can extend wholesale purchases to customers for profit, often involving professional salesmanship. Many dealerships also offer additional services beyond car sales, such as warranties, insurance, financing, and after-market accessories to further enhance deals and generate revenue.
New-car operations partner with established auto manufacturers to introduce consumers to the latest models of popular brands. Franchised dealerships are a subcategory of new dealers that work in conjunction with a larger organization. These entities typically stock a single brand and limited types of vehicles. Some dealerships that mainly sell new cars also offer used vehicle inventories in order to enhance their selection for customers.
Used car dealerships, on the other hand, accrue pre-owned or previously leased vehicles from a variety of sources, including auctions, trade-in deals and individual buyers. Many used car dealers are independently owned, but chains of used car dealerships do exist. Even used car dealers offer warranties on their products to establish confidence in their formerly owned vehicles. In addition, some dealerships provide their used vehicles with pre-owned certifications to provide extra peace of mind. Innovations in automotive manufacturing and advanced technology have led to cars lasting longer than before, helping to make selling used cars a viable market.
A variation of used and new vehicle retailing is online car dealerships. This business model does not require a physical location for customers to visit in order for the retailer to thrive in the automotive retail industry.
Like most businesses, location is a significant factor in whether your auto dealership succeeds. Choose a region or a state with a high likelihood for your business' success and annual profit, taking into consideration the area's demographics and the level of competition nearby. The area's established annual sales amount is an important factor in future growth.
A state or city's potential is also based on the local response to services — word of mouth and recommendations are vital to developing the desired market and targeting customers. Attention to community members pinpoints the best market for your dealership. Differences in financial stability and credit within a community affect how customers purchase vehicles. Good credit scores may be the most common characteristic of ideal buyers, but individuals with poor credit can often enter into payment programs to redeem their unstable financial state.
What Skills Do You Need to Start a Car Dealership?
Auto dealership owners come from a variety of backgrounds, but they usually have several qualities in common that help their dealerships thrive. Most dealership owners share an interest in cars and have extensive knowledge of vehicles. These automotive experts are often adept at discussing anything that is vehicle-related including specific details and benefits of particular models or brands with interested customers.
Dealership owners may not have salesmanship or skillful communication when they first start their business, but persuasive and informative speech is a must for any owner to master in order to develop their sales force and to contribute to the business themselves. When it comes to interacting with customers, keep your recommendations honest and strive to provide the best fit for each prospective buyer. Interacting with others is a large component of the job. When it comes to these daily interactions, capable conversationalists and natural speakers are less likely to tire after lengthy face-to-face time as opposed to their more introverted counterparts.
Business acumen also helps new dealership owners make the most of their start-ups. Organizational abilities and extensive amounts of paperwork are a large part of an owner's responsibilities, from the outset. The first steps towards opening a car dealership require various registrations, selling and leasing space for your open lot inventory and even establishing reasonable expectations for your sales. Excellent business sense will expedite the processes of business planning, structuring your dealership, obtaining proper documentation and maintaining growth.
Experience in management and similar administrative roles will oftentimes produce better relationships with employees and a straightforward chain of command. Your sales force will receive and implement your instructions, so being able to properly delegate tasks and manage others is key. Business practices and administration often overlap — for instance, you first need to understand and develop your business plan before executing any of the actionable stages.
The costs involved in starting an auto dealership range from bonds and licensing to property fees and inventory. The average estimated cost of investing in a small dealership is $250,000 to $500,000. Let's look more closely at how this investment breaks down.
1. Property Fees
One of the most significant costs for the initial and ongoing stages of starting a dealership are property fees. Whether leasing a garage facility or a full service building with showroom and open lot, a high-traffic area that attracts customers will be more costly than less centralized locations. Leasing a facility is easier financially at first, but purchasing the property of your business tends to pays off in the long run. The right commercial property will differ in price depending on the state and city of your dealership — naturally, high-traffic areas with a higher cost of living will have higher real estate price points.
2. Employee Salaries
Your initial investment will cover operational costs including employee wages before your business generates a profit. Once you employ a sales force, business and financial consultants, accountants, office personnel, technicians, and maintenance workers, you will need to support them and compensate them for their work at your dealership.
The appropriate insurance for your entity — auto, garage/general liability, theft, workers’ compensation and property casualty — is an unavoidable cost. Each state has their own regulations for auto dealership insurance, as there isn't a blanket policy across the country. Premiums are also unique to providers. However, this will constitute a fair portion of your expenses.
Purchasing vehicles to stock your open lot with inventory for the opening of your dealership will be one of the priciest components of this venture. Purchasing used vehicles will be less taxing on your start-up budget, and the types of new cars you select will significantly alter your total cost. Buy popular cars that are likely to sell quickly for your first round of inventory, and keep the number of vehicles lower at first. As your business grows, your inventory can expand with a wider variety of offerings.
5. Legal Expenses
You will need to get surety bonds from your local DMV to get licensed as an auto dealer. The complicated process of surety bonds is for the benefit of your customers and your state, in order to correctly identify your business as legitimate rather than fraudulent. Solid financial credentials, financing the premium and the particular bond will determine the premium you pay and allow you to obtain a license. A license will be specialized for your new, used, franchised or additional category of dealership.
You may also want to hire an accountant who can help you prepare for unexpected expenses throughout the process. Certified Public Accountants (CPAs) are equipped to steer your business in the right direction. When choosing a CPA, it's best to find someone who has consulted for other auto dealerships. They will understand best practices for your means, situation and goals.
Each state requires businesses to register for a fee. These fees are usually under $1,000. You have several options when it comes to how you want to organize your company legally. These options include a corporation, a limited partnership (LP), a sole proprietorship or a limited liability company (LLC). These business types will include annual fees and additional maintenance amounts, depending on your state's procedures.
Steps to Start an Auto Dealership
1. Create a Business Plan
Unless you have experience forming business plans or have done sufficient research, it's best to consult a business expert who understands the needs and trajectory that you want to accomplish with your business. Many business plan references can walk you through the typical considerations and obstacles of business growth. However, managing your immediate expenses and identifying your break-even point will be higher concerns when starting out. The operations model and staff projections also are necessary for developing day-to-day functions.
In addition, develop a marketing budget and leave room for general advertising costs in your business plan to reach your goals. Your target audience for the business should not be missing the product you intend to sell — take into account the demographics of the area in which your businesses is located. What types of vehicles will best suit their needs? How much are they typically able to spend on a vehicle? Do they prefer to buy new or used? Answering several questions about your potential customers will make sales strategies and advertising endeavors more effective. When your business plan outlines the way to fill an unmet need, your dealership will be much more productive and well received.
2. Define the Structure of Your Business
Legally founding your business and laying out its structure is the first step in legal protection. You need to decide the name of your business — which could be different than the name of your dealership — and pick a legal structure as outlined above. Keep in mind that although it's an important decision, the structure of your business is not permanent; if you discover a better fit down the road, you can make the appropriate changes.
Regulations apply differently to each type of entity — LLC, LP, sole proprietorship and corporation — and consultation with a specialist can gauge which type will improve your dealership and provide adequate protection according to your business plan and strategies.
3. Name Your Dealership and Register It
After choosing the entity type of your enterprise, you are free to select your dealership name. This decision will affect branding, marketing and identification. Cautiously consider how the potential name will fit your business and determine whether your chosen name will be easy enough for passersby to remember. Before registering your dealership as a business, look to see if the name is already being used or is restricted due to copyright or trademark, as this can prevent you from using the name as well.
4. Set up a Business Bank Account and Accounting
Create an account specifically for your dealership finances. When you have a separate business account, the exact expenses of your company will be isolated and easier to track. This protects you, as the owner, from mixing personal and professional funds. Any employees given control of funds will also be kept in check due to the upfront and organized nature of a business bank account.
Hire an accountant at least for an initial consultation and use them as a reference for the business' progression throughout the coming months and years. Your accountant will also have a clearer picture of your billing, employee salaries and purchase history if your entity has a separate account. Accounting software can also stand in after your first visit to a CPA.
5. Complete Tax Registration
Register for state and federal taxes to comply with legal obligations. For most entities, you will need to get an Employer Identification Number (EIN), which is also called a federal tax ID number. You may also need a state sales tax number. Register with your state first and then on the federal level. Keep in mind that retailers must deliver the sales tax on any items purchased according to the state's stipulations, and you, the owner, are responsible for taking that tax from the item's price.
6. Find Business Insurance
As stated earlier, auto dealership insurance is required for the various risk factors involved in your business and according to your region's rules. General liability insurance should be your first step in obtaining protection for your business from legal fees. Liability insurance is for third-party mishaps, so any damages that happen on your property by customers and others will not harm you.
Once your employees begin working for you, you must secure your side of any possible issues. Workers' compensation is generally fitting for covering your employees. Contemplate adding unemployment and disability insurance if your region does not already require it. Depending on your location and the possibility of natural disasters, consider adding commercial property insurance to your list as well. Another option for your property is the business owner's policy which includes your dealership property.
7. Obtain Permits and Licenses
Promoting legitimate business practices by acquiring and showcasing the correct permits and licenses will help build trust with your customers. Acquire dealer tags from the appropriate department in your area, and ensure your property meets the standards it should. You can then feature these permits in visible signs for incoming visitors to see. Not only is this good from a customer perspective, but it's also necessary from a legal standpoint: if you're not properly licensed, your business can be shut down. Remember that licensing your salespeople is also required, and any owners who wish to act in the sales department when needed should also be licensed.
Growing Your Business
If you are not sure where or when to begin hiring employees, think about what you are willing and able to do yourself. Don't be afraid to hire someone to handle things you're unable to. For instance, if you're not strong with numbers and don't have the time to properly balance the books, hire a staff accountant. If you're worried about the cost, you can also consider hiring a consultant rather than a full-time employee.
Sales managers, salespeople, technicians and maintenance workers are the positions most necessary to your business. Retain employees by offering benefits to salespeople, which can help you retain your staff and avoid additional hiring and retraining. Employee turnover rates for auto dealerships are higher than many industries, so showing that you value your employees and provide incentive programs can help keep your team positive, productive and still working at your start-up dealership while it becomes a steady workplace.
You can promote your business through marketing strategies, events, sales, brochures and other tactics. Taking an active role in marketing your business will help spring you toward your break-even point as quickly as possible. An opening event, in particular, can be an attention-grabbing occasion to let your area know about their new source for their vehicle needs. Offsite tent sales are another type of event that many successful dealerships are known for.
Brand your business with eye-catching logos or other graphics to convey messaging to your potential customers. Branding includes verbal phrases, visual tools and attributing a common need or item with a company. Recognizable elements that set your dealership apart from others will remain in their mind all day or pop back into their head when they think of buying a vehicle. Your brand also includes your values and how you wish to be seen by your community and potential buyers. Start to brand your dealership with a memorable business logo or consult a designer to form a well-rounded approach to your brand.
Build a website and social media presence for your dealership to provide convenience and to spread your reputation further into your community. After you have a business name, purchase your domain name so potential customers can find you online. Purchasing design services and website building assistance will make this process smoother and will display a cleaner product.
Social media is one way that word of mouth helps your dealership. Satisfied customers can leave reviews on different websites or share pictures of their new vehicles and mention your salespeople or dealership. Recommendations from trusted family, friends, neighbors, coworkers and other acquaintances will boost your business. The social media population is a separate target audience for your car dealership that is useful to your advancement and a simple way to advertise.
Used car dealerships must abide by lemon laws — the stipulations that steer customers away from deals that turn sour, negatively surprising them after they've made a purchase and driven off in their pre-owned vehicle. These regulations differ by state, and each area defines an unsuitable automobile in their own terms.
The most important facet of lemon laws is that you must be honest about the car's condition and faults. Ensure that your customers are acquainted with the details of their vehicle and satisfied with their purchase. Review your state's lemon laws and provide upfront information regarding your vehicles.
Follow the Federal Trade Commission (FTC) Used Car Rule and the Consumer Rights and Safety Laws as you open your dealership. The FTC Used Car Rule requires each dealership to have a Buyers Guide to reduce any miscommunication between your business and consumers.
Used car warranties can originate from many sources, including your dealership and the manufacturer. A Buyers Guide clarifies confusing elements like this. Third-party or manufacturer warranties and service contracts are included in these guides, and this extensive information will protect your business from penalties. This resource also defines "as-is" condition, the nature of certified used cars and serious defects.
Protecting Your Inventory
When purchasing your initial inventory, consider the best method for keeping your vehicles in top condition. Weather is an unpredictable factor in the auto retailing industry — hail, heat and UV rays each can take their toll on your newly acquired vehicles. Secure the condition of your cars by adding protective structures on your commercial property.
Park your vehicles under structures to showcase them and to keep them away from heat and hail. Protective coverings do not have to sacrifice appearance to add shade solutions, and durable coverings display the quality your dealership is aiming for. Custom shade structures enhance the dealership lot and preserve your inventory.
VPS is the leading provider of protective structures, pioneering the best practices in hail, heat and UV damage prevention for automotive facilities and similar markets. Large-scale and smaller dealerships can be fully serviced with our custom solutions to weather exposure. VPS can fit your business' needs with professionally engineered and built structures. Contact VPS today to talk to a representative about how you can better protect your assets and inventory.