How To Open a Car Dealership

Opening an automobile dealership takes a lot of work and money. Still, being a dealership owner can be a very satisfying and profitable business. In 2019 alone, the entire industry (consisting of over 25,000 dealerships) brought in almost a billion dollars and employed over 1.1 million people. You too can find success in this industry if you do it right.

To begin with, the people who sell automobiles are called automobile dealers, and their businesses are called automobile dealerships.

This article discusses the key points of opening a car dealership, concentrating on the legal side.

Note that this article only discusses brick-and-mortar car dealerships. Creating an online car dealership (like Carvana) is highly complex and outside the scope of this article.

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The Two Most Important Considerations in Opening a Dealership

There are two essential threshold qualifications for opening a car dealership. If you do not have these, you should explore a different business.

First, you should have some experience in working in the automobile industry. The car business has its own rhythm, vocabulary, and business stylings. It is impossible to understand them from the outside. Appropriate background in this industry can include car repair experience (especially in a used lot), sales experience; customer service experience; and car lot management or financing experience.

Your car business experience can be in any aspect of the industry, but the closer your expertise is to running a dealership, the better off you will be.

This means that experience in sales might be even more important than experience in financing or mechanics, as sales are the lifeblood of the car business. This is true even if you plan to buy out someone else's dealership.

Second, you will need a lot of money and great credit to get into this business, as we will discuss below. While a small used car business might have a small, out-of-the-way lot and a few cars costing near $50,000, starting a new car dealership will require millions. Your personal assets will be put to the test. And the day-to-day costs of running a dealership will always be a lot more money than you will expect.

Start with NADA

The National Association of Automobile Dealers (NADA) has over 16,000 dealer members. NADA presents numerous classes and offers educational materials that give you the base information to decide whether to get into this business. Spend as much time as you need with this information.

Conduct Location Research

After you have absorbed the NADA materials, start your research. Look at every car lot in town, and figure out what kind of automobile sales you want for your business. Talk to new and used car lot owners to learn about laws, property costs, and the local business atmosphere. You will also be checking out the competition at the same time. Decide if you want to be a part of a “strip" of car lots or on your own. Get comfortable with the idea of having a business in the neighborhood.

Look for the best place to locate your dealership, based on traffic, availability of land, and the types of customers you want to attract. Your business location will help determine who your customers are and how successful you will be.

Type of Dealership: New or Used?

The first and most obvious decision you have to make is whether you will be selling used cars or new cars. They are very different businesses:

Opening a New Car Dealership

No matter what your experience, it is not easy to become a new car dealer.

Your new dealership will be a franchise, where you will purchase your automobiles from the manufacturer and then resell them, hopefully at a profit and under a dealership franchise agreement.

A franchise is a business arrangement between a franchisor (in this case, the manufacturer) and a franchisee (the local business owner/dealer). According to the terms of the franchise agreement, the franchisor will control virtually every aspect of the dealership. This includes whether or not to have a shop, to sell used cars, the location, advertising, and signage.

If you want to own a new car dealership, you will have no choice but to become a franchisee. No individual can purchase a new car from an automobile manufacturer. To buy or sell new cars, you have to have a franchise agreement with a manufacturer.

Automobile franchise agreements are notoriously complex and difficult to obtain, to the extent that you will need a lawyer to help guide you through.

The first barrier that you will run up against in trying to open a new car franchise business is the startup costs, including purchasing automobiles, building the facility, licensing and other fees, and expenses for the employment process. This will also include franchise fees that can be in the hundreds of thousands of dollars.

The second barrier will be the cost of running the business—estimates of the amount of money it takes to run a new car business run to $5 million a year or more.

You will have liquidity requirements within your franchise agreement before you open your new shop. You will either need to have millions of dollars on hand in cash or a set amount of money on hand and a line of credit/ability to borrow millions. Your banker will be your best friend in these efforts. The franchisor will also determine your dealership location.

Opening a Used Car Dealership

Recent studies have found that the gross profit margin for selling used cars is about twice that of selling new vehicles.

A used car dealership will not have the number of requirements that a new car franchise will have, but it is a complex business with its own set of rules.

Startup costs of a used car dealership can be much lower than a new car franchise. You could start with just a few cars on a lot in a cheap rent district.

Your highest cost of opening this business will be the acquisition of vehicles.

But even if you only have a few cars, you will still be subject to numerous federal, state, and local laws and regulations.

Valuing Used Automobiles

One of the fundamental skills in running a successful used car business is the ability to value the cars—both for how much you will pay for and sell them. Do not go into this business, especially on the used side, unless you are very familiar with this process.

Do You Want a Shop?

Decide early on if you want to hire mechanics and open a car repair facility.

If you franchise, the franchisor will make that determination. If you are opening a used car lot, a shop is a good source of income. But it also has numerous risks, environmental considerations, regulatory requirements, and licensing and insurance requirements.

Create The Business

As an automobile dealer, you will need to create a business entity. This requires two decisions—what to name the business and how to structure that business.

Business Name

The first thing you have to do is create a great name and ensure that no one else can use it in business or on the internet.

For the internet, make sure the internet domain name is available. Then grab it (costs can depend on who you use as a host, but often only involve a few dollars per year).

At the same time, visit your state's Secretary of State website and make sure that the name is available there. Then register that name on that site.

Next, trademark that name with the United States Patent and Trademark Office (USPTO). Then register that trademark back with your state. Now, if anyone else tries to use that name without your permission, you will be able to take legal action to enforce your right in that name.

Business Type

You will have to incorporate your business. The type of business you create will be a joint decision among you, your attorney, and your financial people.

Most car dealerships are Limited Liability Corporations (LLCs). However, a tiny, one-person lot could be a sole proprietorship. Or your business could be a partnership or a limited liability partnership.

Write a Business Plan

Every new business needs a business plan. This is particularly true of dealerships, which can cost millions of dollars to start up. You will need to present a sophisticated business plan to any lender to obtain financing. In addition, you need one if you are starting a franchise.

A good business plan will include the following sections:

1. Executive summary
2. Objectives and missions statement
3. Keys to success
4. Company summary
5. Inventory needed
6. Market and competition analysis
7. Web plan
8. Management summary
9. Financial plan

A significant part of your business plan and ongoing budget will be a marketing plan. If you think that half the mailers and television ads you see are for automobile dealerships, you're not far off. You need to set yourself apart as “best in class" in a highly competitive market. You should strongly consider hiring a marketing company for this all-important task.

Startup Expenses

There is no way around the fact that starting a car dealership is expensive. A franchise agreement will have certain minimum expenses and other financial restrictions. A used car lot will be substantially less costly, but it still will not be cheap.

Examples of startup expenses that you will need to meet before you open are:

• Inventory—your most considerable expense
• Lawyers and accountants
• Dealer license fee fees
• Auto dealer surety bond
• Marketing and branding (fliers, TV ads, web, social media presence)
• Location—rent, build, acquire property, business sign
• Business office supplies
• Hiring costs and startup employee salaries

Laws, Rules, and Regulations

Every business is subject to federal, state, and local laws, rules and regulations. In addition to those, the automobile industry has particular and complex rules for sales and other regulations. There are federal rules for selling used cars. These start with the Federal Trade Commission's Used Car Rule.

Here are links to every state law concerning selling cars. You will need state and local business licenses; many states have specific licenses for automobile sales. The state DMV will inspect before you can open. They will regulate your business in an ongoing fashion.

In addition, every jurisdiction will require a surety bond to sell cars.

Then you will need all the standard business permits. You may need a local business license. You will need construction permits and will need to pass fire inspections and receive a certificate of occupancy.

Depending on the jurisdiction or county, you may need a sales/use tax license or a sign permit.

Employment and Taxation

You will be hiring employees, and you will be paying taxes.

It would be best to have precise criteria for hiring personnel—particularly in sales, mechanics, and finance. Do not go cheap in this area. The best employees bring the best dividends.

Your first step in this process will be to obtain a federal Employer Identification Number (EIN).

As you hire employees, you must make sure that they can legally work in the United States and fill out the proper paperwork (i9) to prove this.

It would help if you also run background checks on your new hires.

You will be responsible for adequately doing your employment taxes. This is a job for your accountant.

You will be responsible for conforming to all state and federal employment laws. You will need to hire a lawyer for this, as well.

Insurance

You will need several kinds of insurance for your car dealership. A local insurance agent should supply all of your needs in this area:

• You will need business liability insurance. Minimum policy limits may be set by your financiers and/or franchisor.
• You will need worker's compensation insurance.
• You will want to consider commercial umbrella insurance.
• You will require a major automobile insurance policy.

Starting Your Car Dealership Business

This article is just a brief overview of how to go about opening an automobile dealership, but it should give you a pretty good handle on how to get started.

For more detailed work, you need to talk with dealers, bankers, accountants, marketing agencies, and business attorneys before you spend any money. 

And when you are ready to start your car dealership business, use our simple DIY business formation process to ensure you meet all the legal requirements in your state.