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How To Open a Car Dealership

Woman buying car at car dealership

A sparkling showroom full of shiny new cars and trucks is exciting and full of possibilities. People drive for many reasons. Whether you're a newly licensed driver just beginning your journey or an experienced owner who enjoys all the new bells and whistles, you'll have to visit a car dealer. Being a dealership owner can be a very satisfying and profitable business.

In 2023, supply issues from the previous year reduced, boosting total passenger vehicle sales. The National Automobile Dealers Association (NADA) reports that motor vehicle sales reached over $614 million for the first six months of 2023. Total sales increased 12.4% from 2022.

Opening an automotive dealership takes a lot of work and money. You can find success in this industry if you do it right. 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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Two Important Considerations in Opening a Dealership

There are two essential threshold qualifications for opening a car dealership.

Understand the Automobile Industry

First, you need some experience working in the automobile industry. The car business has its own rhythm, vocabulary, and business stylings. It's impossible to understand them from the outside. Appropriate background in this industry can include:

  • Car repair experience in a service department or repair shop
  • Auto sales experience
  • Customer service experience
  • Auto lot management
  • Vehicle 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 salesperson experience might be even more important than financing or mechanics experience. Sales are the center of a car dealer business. This is true even if you plan to buy out someone else's dealership.

Understand Business Financing

Second, you will need a lot of startup money and great credit to get into this business. While a small used car dealer might have a small lot and a small inventory of vehicles, starting a new car dealership will require millions. Your personal assets also come into play. The day-to-day costs of running a dealership will always be more money than you expect.

Start With NADA

The National Association of Automobile Dealers (NADA) has over 16,000 dealer members. NADA presents numerous classes and educational materials that give you the base information to decide whether to enter this business. The NADA has statistics, market forecasts, and sales reports to help you build your business idea.

Conduct Location Research

The NADA can aid in market research to help you decide what type of car you want to sell. Do you want to apply for a franchise with a major car company like Honda or Ford? Or is a focus on hybrid and electric vehicles the best option in your area?

Look at every car lot in town and determine 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 potential 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 must make is whether you will be selling used cars or new cars. They are very different businesses.

Opening a New Car Dealership

No matter your experience, it's not easy to become a new car dealer.

If you want to own a new car dealership, you will have no choice but to become a franchisee. No individual person can buy a new car directly from an automobile manufacturer. To buy or sell new cars, you must have a franchise agreement with a manufacturer. You buy your automobiles from the manufacturer and resell them at a profit 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 or dealer). According to the franchise agreement terms, the franchisor will control virtually every aspect of the dealership. This includes whether to have a repair shop or to sell used cars, the location, advertising, and signage.

Automobile franchise agreements are notoriously complex and difficult to get. Seriously consider hiring a lawyer to help guide you through the process.

The first obstacle that you will run up against in trying to open a new car franchise business is startup costs. These costs include:

  • Franchise fee
  • Purchasing automobiles
  • Building the facility
  • Licensing requirements
  • Other fees and expenses for the employment process

Note that franchise fees 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 sales business are $4 million a year or more.

You will have liquidity requirements within your franchise agreement before you open your new shop. You will need millions of dollars in cash or a set amount of money on hand, in addition to a line of credit and the 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

Used car and truck sales can be more profitable than a new car dealership. The gross profit margin for selling used cars is about twice that of selling new vehicles.

Your highest cost of opening this business will be vehicle acquisition. A used car dealer can obtain vehicles from multiple sources, such as trade-ins, auto auctions, and other marketplaces, making their vehicles less expensive to obtain.

A used car dealership will not have the number of requirements of a new car franchise. But it's a complex business with its own rules.

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

But even if you only have a few cars, you're subject to many 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. Don't go into this business, especially on the used side, unless you're 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're 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
  • What business structure will you utilize

Take time to consider your answers to these questions before finalizing your decision.

Business Name

First, you must create a great name. 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, secure it. Costs can depend on who you use as a host, but often only involve a few dollars per year.

Also, visit your state's secretary of state website and ensure the name is available there. Then, register that name on their site.

Next, trademark that name with the United States Patent and Trademark Office (USPTO). Then, register that trademark back with your state. If anyone else tries to use that name without your permission, you can take legal action to enforce your right to 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 partners, your attorney, and your financial people.

Most car dealerships are limited liability corporations (LLCs). But a tiny, one-person lot could be a sole proprietorship. Your business could also 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 to start up. You must present a sophisticated business plan to any lender to obtain financing. You also need one if you're starting a franchise.

A good business plan will include the following sections:

  • Executive summary
  • Objectives and mission statement
  • Keys to success
  • Company summary
  • Inventory needed
  • Market and competition analysis
  • Web plan
  • Management summary
  • Financial plan

A significant part of your business plan and ongoing budget will be a marketing plan. If you think half the mailers and television ads you see are for automobile dealerships, you're not far off. You must 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
  • 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, and 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. The automobile industry also 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 on selling cars. You will need state and local business licenses—many states have specific licenses for automobile sales. The state department of motor vehicles (DMV) will inspect before you can open. They will regulate your business in an ongoing fashion.

Every jurisdiction also will require a surety bond to sell cars.

Then, you'll need all the standard business permits and a car dealer license. Depending on your state and local laws, you may need a local business license and an auto dealer bond. You'll need construction permits, 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

Eventually, you will be hiring employees. 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 they can legally work in the United States and fill out the proper paperwork (I-9) for proof.

It would help if you also run background checks on your new hires. This can ensure you're employing trustworthy people and protect your business investment.

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

You will be responsible for conforming to all state and federal employment laws. You'll also need to hire a lawyer for this.

Insurance

You will need several kinds of insurance for your car dealership:

A local insurance agent should supply all your needs in this area.

Starting Your Car Dealership Business

This article is just a brief overview of what to consider when opening an automobile dealership. But it should give you a good handle on getting started.

For more detailed work, you must talk with dealers, bankers, accountants, marketing agencies, and business attorneys before spending money.

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.

A Small Business Attorney Can Help

Meeting with a small business lawyer can help you understand your options and how to protect your rights best. Visit our attorney directory to find a lawyer near you who can help.

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