How to Start a Car Dealership | SkillsAndTech

Most of us have purchased a car at some point. Did you ever wonder how much the dealership raked in on your purchase? You could be the one doing the raking if you start your own car dealership. You could start with a small lot of used cars and build from there until you’ve got your own auto mall!

The US car industry is worth over a trillion dollars, so why not grab hold of the wheel and snatch a share of the market. Of course, starting a business has its challenges and you’ll likely need some guidance.

Fortunately, this step-by-step guide is full of insights and information to get you started on your journey to becoming a car mogul.

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Table of Contents

Decide if the Business Is Right for You

Pros and cons

Every business, including a car dealership, has pros and cons that you should consider before deciding whether it’s right for you.

Pros

Socializing – You’ll meet and work with a lot of people every day
Steady Demand – Somebody is always in need of a quality ride
Good Money – Cars have big profit potential that can drive growth

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Cons

Startup Costs – An inventory of cars does not come cheap
Long Hours – Most dealerships are open 10 – 12 hours six days a week

Car dealership industry trends

Hybrid and electric vehicles are among the hotter trends in the car industry. Tesla and its electric cars have been in the spotlight for years, and seem to be popping up everywhere lately.

Market research firm Statista reports that Tesla sales increased over 800% from 2016 to 2021. Eco-friendly auto options such as superior fuel efficiency and lighter weight cars made of composite materials are in demand, as are digital safety features such as forward-collision warnings and automatic emergency braking.

Despite a 40% price increase since March 2020, as reported by the US Bureau of Labor Statistics, consumers are flocking to the used car market due to supply chain disruptions for new cars. This presents a significant opportunity for the smart and aggressive entrepreneur.

Another industry trend is the ongoing shift to the online marketplace, which is no longer just for new cars. Shift, Vroom, and Carvana are major online players in this market, selling nearly 250,000 used cars combined in the first half of 2021.

Industry size and growth

Industry size and past growth – Market analyst IBISWorld values the US new car market at an incredible $1.2 trillion and the used car dealers market at $160 billion
Growth forecast – Car sales have yet to recover from the pandemic-driven slump, but are predicted to grow more than 3% annually from 2023 to 2025.
Number of businesses – The US is home to more than 18,000 new car dealers and around 140,000 used car dealers.
Number of people employed – New car dealers employ more than 1.2 million people, while used car dealers have only around 290,000 employees.

Trends and challenges

Car dealership trends are:

Hybrids, plug-in hybrids, and pure battery electric vehicles are gaining popularity
Direct-to-consumer vehicle sales are increasing
Consumers would rather buy a car online than go physically to a dealership

Challenges in car dealerships include:

Rising car prices due to tight supply and high demand
Growing consumer preference for ride-sharing apps
High fuel prices

Consumer spending

Average consumer spend – The average American household spends $5,435 a year on auto loans and auto insurance.
Potential customer base – 91% of US households own at least one car
Average prices – Automotive research company Kelley Blue Book says the average price of a new car in the US topped $47,000 for the first time in December 2021, while a used car was sold for an average of $28,205.

Price differences across the country

More expensive – Used cars are most expensive in Alaska, Wyoming, Montana, Arkansas, and Idaho, with the prices ranging from $26,600 to $29,600
Less expensive – Used cars are cheapest in Indiana, Ohio, Connecticut, Virginia, and Kentucky, with prices ranging from almost $22,000 to just under $23,000.

What kind of people work in car dealerships?

Gender – 71% of car dealers in the US are male, while 29% are female.
Average level of education – 41% of car dealers hold a bachelor’s degree.
Average age – The average age of a car dealer in the US is 41 years old.

How much does it cost to start a car dealership?

Startup costs for a car dealership range from around $30,000 for a small used car lot to well over $100,000 for a large new car dealership. The biggest expense is, of course, the initial inventory of vehicles, though you can start small but with just a handful of used cars and a great website.

Startup Costs	Ballpark Range	Average
Setting up a business name and corporation	$150 – $200	$175
Licenses and permits	$200 – $300	$250
Auto dealer bonds	$100 – $500	$300
Insurance	$100 – $300	$200
Business cards and brochures	$200 – $300	$250
Website setup	$1,000 – $3,000	$2,000
Location rental security deposit	$3,000 – $8,000	$5,500
Initial inventory	$25,000 – $100,000	$62,500
Total	$29,750 – $112,600	$71,175

How much can you earn from a car dealership?

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Markups on used cars range from 25% to 45%, while the average markup on a new car is 8% to 13%. You can use our markup calculator to calculate your sale price and how much revenue and profit you will earn with different markup percentages. When you work by yourself, your profit margin should be around 40%. The average price of a used car is about $25,000. But at least initially you will probably be handling lower-priced cars, so let’s assume you start selling used cars for an average price of $10,000.

In your first year or two, you could run your own used car lot and sell 50 cars in a year, bringing in $500,000 in annual revenue. This would mean $200,000 in profit, assuming that 40% margin. As your brand gains recognition, sales could climb to 200 cars a year. But due to your new staff, your margin would fall to around 15%, the industry average. With expected annual revenue of $2 million, you’d have a pre-tax profit of $300,000.

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What barriers to entry are there?

There are a few barriers to entry for a car dealership. Your biggest challenges will be:

Costs – All those cars will cost a pretty penny, even used
Competition – You will face competition from physical and online dealers

Related Business Ideas

If you’re still not sure whether this business idea is the right choice for you, here are some related business opportunities to help you on your path to entrepreneurial success.

Hone Your Idea

Now that you know what’s involved in starting a car dealership, it’s a good idea to hone your concept in preparation to enter a competitive market.

Why? Identify an opportunity

Research car dealerships in your area to see what they offer. Maybe there’s no used car dealership that offers warranties, or focuses on lower-priced used cars. You’re looking for a gap in the market in a particular part of town that you can fill.

You might consider targeting a niche market by specializing in a certain aspect of your industry, such as only used trucks or classic American models like Mustangs and Camaros.

This could jumpstart your word-of-mouth marketing and attract clients right away.

What? Determine your products or services

First, determine what kinds of cars you want to specialize in. You can offer used cars, new cars, or both, but you also need to determine if you’re going to offer value-priced models or higher-end models. Then determine what else you might offer, such as:

Warranties
Financing options
Repair and maintenance services

How much should you charge for cars?

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The typical markup for used cars is 25%-45% and the markup for new cars is between 8% and 13%. If you specialize in used cars, your price will depend on what price you can acquire cars for. You’ll need to know the value of various models, so you’ll want to keep the Kelley Blue Book nearby, to provide value estimates. You should purchase cars at below market value so that you can mark them up to a reasonable price. For new cars, you’ll be marking up from the wholesale price offered by the manufacturer.

Once you know your costs, you can use this Step By Step profit margin calculator to determine your mark-up and final price points. Remember, the prices you use at launch should be subject to change if warranted by the market.

Who? Identify your target market

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Your target market will depend on what type of cars you decide to specialize in. If you sell used cars that are lower priced, your customers may be younger, so you are more likely to find them on sites like Instagram or TikTok rather than Facebook.

Where? Choose your business premises

You’ll probably want to rent a location that has a big enough lot for you to park your cars, and it should be big enough for you to grow. You can sell cars online, but you still need a lot to store them on. It should also have a structure that you can use as an office. You should choose a location that has a lot of road traffic, but also have a great website to make online sales. You can find commercial space to rent in your area on Craigslist, Crexi, and Commercial Cafe.

When choosing a commercial space, you may want to follow these rules of thumb:

Central location accessible via public transport
Ventilated and spacious, with good natural light
Flexible lease that can be extended as your business grows
Ready-to-use space with no major renovations or repairs needed

Brainstorm a Business Name

Your business name is your business identity, so choose one that encapsulates your objectives, services, and mission in just a few words. You probably want a name that’s short and easy to remember, since much of your business, and your initial business in particular, will come from word-of-mouth referrals.

Here are some ideas for brainstorming your business name:

Short, unique, and catchy names tend to stand out
Names that are easy to say and spell tend to do better
The name should be relevant to your product or service offerings
Ask around — family, friends, colleagues, social media — for suggestions
Including keywords, such as “cars” or “used cars”, boosts SEO
Choose a name that allows for expansion: “Jim’s Bakery” over “Jim’s Cookies”
Avoid location-based names that might hinder future expansion
Use online tools like the Step by Step business name generator. Just type in a few keywords and hit “generate” and you’ll have dozens of suggestions at your fingertips.

Once you’ve got a list of potential names, visit the website of the US Patent and Trademark Office to make sure they are available for registration and check the availability of related domain names using our Domain Name Search tool. Using “.com” or “.org” sharply increases credibility, so it’s best to focus on these.

Finally, make your choice among the names that pass this screening and go ahead with domain registration and social media account creation. Your business name is one of the key differentiators that set your business apart. Once you pick your company name, and start with the branding, it is hard to change the business name. Therefore, it’s important to carefully consider your choice before you start a business entity.

Create a Business Plan

Every business needs a plan. This will function as a guidebook to take your startup through the launch process and maintain focus on your key goals. A business plan also enables potential partners and investors to better understand your company and its vision:

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Executive Summary: Brief overview of the entire business plan; should be written after the plan is complete.
Business Overview: Overview of the company, vision, mission, ownership, and corporate goals.
Product and Services: Describe your offerings in detail.
Market Analysis: Assess market trends such as variations in demand and prospects for growth, and do a SWOT analysis.
Competitive Analysis: Analyze main competitors, assess their strengths and weaknesses, and create a list of the advantages of your services.
Sales and Marketing: Examine your companies’ unique selling propositions (USPs) and develop sales, marketing, and promotional strategies.
Management Team: Overview of management team, detailing their roles and professional background, along with a corporate hierarchy.
Operations Plan: Your company’s operational plan includes procurement, office location, key assets and equipment, and other logistical details.
Financial Plan: Three years of financial planning, including startup costs, break-even analysis, profit and loss estimates, cash flow, and balance sheet.
Appendix: Include any additional financial or business-related documents.

If you’ve never created a business plan, it can be an intimidating task. You might consider hiring a business plan specialist at Fiverr to create a top-notch business plan for you.

Register Your Business

Registering your business is an absolutely crucial step — it’s the prerequisite to paying taxes, raising capital, opening a bank account, and other guideposts on the road to getting a business up and running.

Plus, registration is exciting because it makes the entire process official. Once it’s complete, you’ll have your own business!

Choose where to register your company

Your business location is important because it can affect taxes, legal requirements, and revenue. Most people will register their business in the state where they live, but if you are planning to expand, you might consider looking elsewhere, as some states could offer real advantages when it comes to a car dealership.

If you’re willing to move, you could really maximize your business! Keep in mind, it’s relatively easy to transfer your business to another state.

Choose your business structure

Business entities come in several varieties, each with its pros and cons. The legal structure you choose for your car dealership will shape your taxes, personal liability, and business registration requirements, so choose wisely.

Here are the main options:

Sole Proprietorship – The most common structure for small businesses makes no legal distinction between company and owner. All income goes to the owner, who’s also liable for any debts, losses, or liabilities incurred by the business. The owner pays taxes on business income on his or her personal tax return.
General Partnership – Similar to a sole proprietorship, but for two or more people. Again, owners keep the profits and are liable for losses. The partners pay taxes on their share of business income on their personal tax returns.
Limited Liability Company (LLC) – Combines the characteristics of corporations with those of sole proprietorships or partnerships. Again, the owners are not personally liable for debts.
C Corp – Under this structure, the business is a distinct legal entity and the owner or owners are not personally liable for its debts. Owners take profits through shareholder dividends, rather than directly. The corporation pays taxes, and owners pay taxes on their dividends, which is sometimes referred to as double taxation.
S Corp – An S-Corporation refers to the tax classification of the business but is not a business entity. An S-Corp can be either a corporation or an LLC, which just needs to elect to be an S-Corp for tax status. In an S-Corp, income is passed through directly to shareholders, who pay taxes on their share of business income on their personal tax returns.

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We recommend that new business owners choose LLC as it offers liability protection and pass-through taxation while being simpler to form than a corporation. You can form an LLC in as little as five minutes using ZenBusiness’s online LLC formation service. They will check that your business name is available before filing, submit your articles of organization, and answer any questions you might have.

Register for Taxes

The final step before you’re able to pay taxes is getting an Employer Identification Number, or EIN. You can file for your EIN online or by mail or fax: visit the IRS website to learn more. Keep in mind, if you’ve chosen to be a sole proprietorship you can simply use your social security number as your EIN.

Once you have your EIN, you’ll need to choose your tax year. Financially speaking, your business will operate in a calendar year (January–December) or a fiscal year, a 12-month period that can start in any month. This will determine your tax cycle, while your business structure will determine which taxes you’ll pay.

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The IRS website also offers a tax-payers checklist, and taxes can be filed online.

It is important to consult an accountant or other professional to help you with your taxes to ensure you are completing them correctly.

Fund your Business

Securing financing is your next step and there are plenty of ways to raise capital:

Bank loans: This is the most common method, but getting approved requires a rock-solid business plan and strong credit history.
SBA-guaranteed loans: The Small Business Administration can act as guarantor, helping gain that elusive bank approval via an SBA-guaranteed loan.
Government grants: A handful of financial assistance programs help fund entrepreneurs. Visit Grants.gov to learn which might work for you.
Venture capital: Offer potential investors an ownership stake in exchange for funds, keeping in mind that you would be sacrificing some control over your business.
Friends and Family: Reach out to friends and family to provide a business loan or investment in your concept. It’s a good idea to have legal advice when doing so because SEC regulations apply.
Crowdfunding: Websites like Kickstarter and Indiegogo offer an increasingly popular low-risk option, in which donors fund your vision. Entrepreneurial crowdfunding sites like Fundable and WeFunder enable multiple investors to fund your business.
Personal: Self-fund your business via your savings or the sale of property or other assets.

Bank and SBA loans are probably the best options, other than friends and family, for funding a car dealership. You might also try crowdfunding if you have an innovative concept.

Apply for Licenses/Permits

Starting a car dealership requires obtaining a number of licenses and permits from local, state, and federal governments.

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Federal regulations, licenses, and permits associated with starting your business include doing business as (DBA), health licenses and permits from the Occupational Safety and Health Administration (OSHA), trademarks, copyrights, patents, and other intellectual properties, as well as industry-specific licenses and permits.

You may also need state-level and local county or city-based licenses and permits. The license requirements and how to obtain them vary, so check the websites of your state, city, and county governments or contact the appropriate person to learn more.

You could also check this SBA guide for your state’s requirements, but we recommend using MyCorporation’s Business License Compliance Package. They will research the exact forms you need for your business and state and provide them to ensure you’re fully compliant.

This is not a step to be taken lightly, as failing to comply with legal requirements can result in hefty penalties.

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If you feel overwhelmed by this step or don’t know how to begin, it might be a good idea to hire a professional to help you check all the legal boxes.

Open a Business Bank Account

Before you start making money you’ll need a place to keep it, and that requires opening a bank account.

Keeping your business finances separate from your personal account makes it easy to file taxes and track your company’s income, so it’s worth doing even if you’re running your car dealership as a sole proprietorship. Opening a business bank account is quite simple and similar to opening a personal one. Most major banks offer accounts tailored for businesses — just inquire at your preferred bank to learn about their rates and features.

Banks vary in terms of offerings, so it’s a good idea to examine your options and select the best plan for you. Once you choose your bank, bring in your EIN (or Social Security Number if you decide on a sole proprietorship), articles of incorporation, and other legal documents and open your new account.

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Get Business Insurance

Business insurance is an area that often gets overlooked yet it can be vital to your success as an entrepreneur. Insurance protects you from unexpected events that can have a devastating impact on your business.

Here are some types of insurance to consider:

General liability: The most comprehensive type of insurance, acting as a catch-all for many business elements that require coverage. If you get just one kind of insurance, this is it. It even protects against bodily injury and property damage.
Business Property: Provides coverage for your equipment and supplies.
Equipment Breakdown Insurance: Covers the cost of replacing or repairing equipment that has broken due to mechanical issues.
Worker’s compensation: Provides compensation to employees injured on the job.
Property: Covers your physical space, whether it is a cart, storefront, or office.
Commercial auto: Protection for your company-owned vehicle.
Professional liability: Protects against claims from a client who says they suffered a loss due to an error or omission in your work.
Business owner’s policy (BOP): This is an insurance plan that acts as an all-in-one insurance policy, a combination of any of the above insurance types.

Prepare to Launch

As opening day nears, prepare for launch by reviewing and improving some key elements of your business.

Essential software and tools

Being an entrepreneur often means wearing many hats, from marketing to sales to accounting, which can be overwhelming. Fortunately, many websites and digital tools are available to help simplify many business tasks.

You may want to use industry-specific software, such as Frazer, CDK Global, and vAuto, to manage your inventory and sales.

Accounting

Popular web-based accounting programs for smaller businesses include Quickbooks, Freshbooks, and Xero.
If you’re unfamiliar with basic accounting, you may want to hire a professional, especially as you begin. The consequences for filing incorrect tax documents can be harsh, so accuracy is crucial.

Marketing

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Some of your business will come from the casual passerby or online visitors, but still, you should invest in digital marketing! Getting the word out is especially important for new businesses, as it’ll boost customer and brand awareness.

Once your website is up and running, link it to your social media accounts and vice versa. Social media is a great tool for promoting your business because you can create engaging posts that advertise your products:

Facebook: Great platform for paid advertising, allows you to target specific demographics, like men under age 50 in the Cleveland area.
Instagram: Same benefits as Facebook but with different target audiences.
Website: SEO will help your website appear closer to the top in relevant search results, a crucial element for increasing sales. Make sure that you optimize calls to action on your website. Experiment with text, color, size, and position of calls to action such as “Buy Now”. This can sharply increase purchases.
Google and Yelp: For businesses that rely on local clientele, getting listed on Yelp and Google My Business can be crucial to generating awareness and customers.

Kickstart Marketing

Take advantage of your website, social media presence, and real-life activities to increase awareness of your offerings and build your brand. Some suggestions include:

Competitions and giveaways – Generate interest by offering prizes for customers who complete a certain action, such as the first customer each week gets 20% off.
Signage – Put up eye-catching signage at your store and website.
Flyering – Distribute flyers in your neighborhood and at industry events.
In-Person Sales – Sell cars to the casual “lot looker.”
Sponsor events – You can pay to be a sponsor at events that are relevant to your target market.
Post a video – Post a video about your car dealership. Use humor and maybe it will go viral!
Email marketing/newsletter – Send regular emails to customers and prospects. Make them personal.
Start a blog – Start a blog and post regularly. Change up your content and share on multiple sites.
Press releases – Do press releases about new products, sales, etc.
Paid ads on social media – Choose sites that will reach your target market and do targeted ads.
Pay-per-click marketing – Use Google AdWords to perform better in searches. Research your keywords first.
Influencer marketing – Pay people with large social media followings to promote your products and services. You can find micro-influencers with smaller followings and lower rates.
Make a podcast – This allows you to make a personal connection with your customers.
Testimonials – Share customer testimonials about how your dealership helped them.
Create infographics – Post infographics and include them in your content.

Develop your website

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Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism. They are unlikely to find your website, however, unless you follow Search Engine Optimization (SEO) practices. These are steps that help pages rank higher in the results of top search engines like Google.

You can create your own website using services like WordPress, Wix, or Squarespace. This route is very affordable, but figuring out how to build a website can be time-consuming. If you lack tech-savvy, you can hire a web designer or developer to create a custom website for your business.

Focus on USPs

Unique selling propositions, or USPs, are the characteristics of a product or service that set it apart from the competition. Customers today are inundated with buying options, so you’ll have a real advantage if they are able to quickly grasp how your car dealership meets their needs or wishes. It’s wise to do all you can to ensure your USPs stand out on your website and in your marketing and promotional materials, stimulating buyer desire.

Global pizza chain Domino’s is renowned for its strong USP: “Hot pizza in 30 minutes or less, guaranteed.” Signature USPs for your car dealership could be:

Reliable cars for less, guaranteed
Upscale used cars for your luxury life
Family cars that keep your family safe

Networking

You may not like to network or use personal connections for business gain. But your personal and professional networks likely offer considerable untapped business potential. Maybe that Facebook friend you met in college is now running a car dealership, or a LinkedIn contact of yours is connected to dozens of potential clients. Maybe your cousin or neighbor has been working in a car dealership for years and can offer invaluable insight and industry connections.

The possibilities are endless, so it’s a good idea to review your personal and professional networks and reach out to those with possible links to or interest in cars. You’ll probably generate new customers or find companies with which you could establish a partnership. Online businesses might also consider affiliate marketing as a way to build relationships with potential partners and boost business.

Build Your Team

If you’re starting small, you may not need any employees right away. But as your business grows, you will likely need workers to fill various roles. Potential positions for a car dealership would include:

Sales People – Sell cars, customer service
Finance Manager – Work with lenders to get customers’ financing
Marketing Lead – SEO, social media strategies
General Manager – Manage staff, order inventory

At some point, you may need to hire all of these positions or simply a few, depending on the size and needs of your business. You might also hire multiple workers for a single role or a single worker for multiple roles, again depending on need.

Free-of-charge methods to recruit employees include posting ads on popular platforms such as LinkedIn, Facebook, or Jobs.com. You might also consider a premium recruitment option, such as advertising on Indeed, Glassdoor, or ZipRecruiter. Further, if you have the resources, you could consider hiring a recruitment agency to help you find talent.

Start Making Money!

In good times and bad, people buy cars. It’s a trillion-dollar market, and with hard work and determination, you could grab your share and make a great living. It’s also important to keep up with the trends, such as going digital and maintaining a strong online presence to attract consumers who prefer to shop online.

Start small, build a name, add to your inventory, and grow your business. One day you could be that celebrity local auto dealer with an acre of cars. Now that you have the knowledge you need, you should be off to the races on your entrepreneurial journey!