How to Start a Car Dealership
Guide To Starting a Used Car Dealership
Starting a used car dealership comes with a list of questions. We have answers. In this guide, we'll cover all of the steps you need to start your car dealership, plus some additional considerations and common questions. We'll also provide some insights on what you can expect once you are open for business.
How To Start A Car Dealership
Devise a Business Plan
Whether or not you're getting loans or investments to start your used car dealership, you'll want to start with a thorough business plan. This includes conducting market research to understand the local demand, competition and pricing. From there, your business plan should outline your dealership's goals, target market, budget and revenue projections.
Take Care of Your Dealer's License and Legal Needs
Used car dealerships require special licensing, or a dealer's license. The process for obtaining this will depend on your location/state/city rules; sometimes there are different licenses for new and used car dealers, so make sure you know the ins and outs of the process. You'll also need to register your business and select an appropriate legal structure (e.g., LLC, corporation). Finally, many states require used car dealers to obtain a surety bond (which serves as a financial guarantee in the event of business issues) and specific kinds of insurance (liability, property, etc.).
Choose a Location
Location, location, location! You'll want to choose a good location for your dealership that is visible and will allow easy access for your customers. You'll also need a location that complies with local zoning requirements for car dealerships. Study up on any permitting, inspection or other local regulatory requirements before finalizing location.
Know the Regulations
In addition to the above mentioned legal requirements involved in opening the business, you'll want to make sure you're clued in and ready to comply with operational regulations, including but not limited to:
- Dealer Training and Screening. Some states require background checks or training programs for dealership employees.
- Federal Trade Commission's (FTC) Used Car Rule. This rule requires the disclosure of certain information about your cars to potential buyers.
- Environmental Regulations. If you have a service department or do autobody work on-site, be sure to comply with any environmental regulations, including proper disposal of hazardous materials.
- Consumer Protection Laws. Be aware of any state and federal consumer protection laws, such as lemon laws and warranty requirements.
Get the Proper Tools in Place
The used car market changes every day, with fluctuating demand, supply and pricing at a hyper-local level. So operating a used car dealership requires advanced tools to help you stay on top of these trends in order to maximize your profit. Laser Appraiser is the most comprehensive and affordable VIN valuation, automotive appraisal and vehicle dealer management software solution for car dealerships, wholesalers, and buyer services. It helps used car dealers understand the used car landscape in their area with live market data from the most trusted sources in the automotive industry—straight to your mobile device or desktop.
Market your business
Now that you have the foundation for your used car dealership, it's time to market it! Consider a variety of local and digital channels—from digital listing and lead generation sites to radio and TV advertising. Consider working with a local expert to help you navigate things.
Is the Used Car Business a Good Industry to Get Into?
According to IBIS World, in the US there are over 150,000 used car dealerships open for business in 2023. By 2024, Statista projects the used car dealership industry will generate over 123 billion dollars in revenue.
Also according to IBIS World statistics, from 2017 to 2022, the market size of the used car dealer industry saw an average growth rate of 6.2 percent per year. Many industry experts expect the growth rate to continue at a steady pace in the coming years.
Besides the anomaly that was the COVID-riddled year of 2020, the used car dealership industry growth has remained consistent.
What Are the Requirements to Open a Used Car Dealership in Each US State?
There are different requirements for you to open a used car dealership in each state. You will need to acquire a business license, a sales tax permit, and a car dealer license. Some states have specific financial requirements you must meet, and you will probably have to pass a background check with a clean criminal record.
For example, some of the most populous states in the United States share similar requirements for opening a used car dealership. In the following states, you need to get a business license, sales tax permit, and dealer's license while having a clean criminal record and meeting specified financial requirements:
- New York
Keep in mind, these are just some of the requirements you will need to meet when starting a dealership. If you are serious about taking the next step, you should contact your state's department of motor vehicles to get more information about the specific requirements to open a car dealership in your area.
How Much Does It Cost to Start a Used Car Dealership?
The answer to this question, as you can probably imagine, has a lot of variable factors at play. However, there are some startup costs that you must plan for when you open a used car dealership. Those startup costs include:
- License and Permit Fees
- Dealership Facility - Leasing, Purchasing, or New Construction Costs
- Equipment and Office Supplies
- Furniture and Decorations
- Advertising and Promotional Materials
The amount required will vary based on the decisions made through the process. The typical startup costs associated with starting a used car dealership ranges from $100,000 to seven figures or more.
If you want to do more detailed research into the startup costs associated with a used car dealership, there are many resources available on the Internet. ProfitableVenture estimates it will cost between $250,000 to $950,000. Meanwhile, CPAPracticeAdvisor estimates the startup costs of a used car dealership will fall between $100,000 to $200,000.
If planning $1 million dollars for a startup budget seems expensive, don't consider a new car dealership. According to a study by the National Automobile Dealers Association, the startup costs associated with a new car dealership average about $11 million.
How Much Revenue Can a Used Car Dealership Generate?
There are many potential factors that will affect your overall revenue as a used car dealership. There are also several options to consider if you want to look for additional sources of revenue as a used dealership. However, this guide will focus on the primary way a used dealership makes money: selling cars.
Some experts suggest using a combination of averages and assumptions to calculate your revenue projections. This can be risky, however, because it can give a startup dealership unrealistic expectations. A good guide is going to set realistic expectations for you, not just publish generalized assumptions. Look at some of those statistical averages and see how they could apply to you, realistically, as a startup used car dealership.
There are a lot of different statistical averages to consider when projecting your possible revenue as a used car dealer. Autoweek recently calculated the average sale price of a used car to be right around $33,000. According to the National Automobile Dealers Association (NADA), the average gross profit for a used car is about $2,337.
The question becomes, how many used vehicles will you be able to sell per month? This is where experts offer you monthly revenue projections based on assumptions, such as the number of walk-in visitors and your close percentage. This is not how an effective projection works; it shouldn't be a guestimate based on assumptions.
There are also other complications to consider. For example, you cannot just take the projected overall used car industry revenue of $123 billion and divide it by the 150,000 used car dealerships IBIS says are open for business. That would equal an average annual revenue of only $820,000 per dealership.
Meanwhile, some websites estimate there are more than 25,000 active used car dealerships operating to share that 123 billion-dollar pie. That would come out to an average annual revenue of $4 million per used car dealership.
What kind of revenue should a used car dealer expect to make? The safest answer is to break it down by how many vehicles you will sell. There are several other options to generate more revenue streams for your startup dealership. If your dealership can sell 10 used cars per month, you will generate an average of $3,960,000 in annual revenue based on inventory sales alone. From the nearly $4 million in revenue, approximately $280,440 of that will be profit based on the industry-wide average of $2,337 of profit per used vehicle sold.
If you want more realistic expectations, keep in mind that not every car will sell for $33,000 or see a profit of $2,337. These are just averages. According to Mercer Capital, the average gross profit margin for a used car dealer ranges between 11.8 to 13.4 percent in recent years.
Of course, the secret to being a successful used car dealership is not as simple as filling a lot with as many vehicles as possible. Once officially open for business, use these key strategies to improve your profit margin on every vehicle you sell.
There are also several resources and tools to help you gain a better understanding of which vehicles are moving quickly in a local market and where to find the best deals on those cars. The easiest way to manage a dealership while optimizing your profit potential on every decision is through Laser Appraiser's VIN Scanner and Dealer Studio auto dealer management software. See how you can make more profits by starting a FREE demo today!
How Does a Used Car Dealership Finance Vehicle Inventory?
When it comes to running a successful used car dealer, you're going to need vehicle inventory. There are two things you should focus on when it comes to inventory planning; the first thing is getting a sense of how many vehicles you want to keep in your inventory and the second part involves how you will pay for that inventory.
As a general rule of thumb, Laser Appraiser recommends keeping about 30 days’ worth of inventory on your lot. Of course, the used car business experiences ups and downs, just like any other industry, from month to month or year to year.
Over the years, you will gather the data you need to understand your inventory turn ratio to the point of knowing what to expect throughout the sales year. However, for the sake of starting your dealership, consider the financial commitment for each vehicle and you will gain a better understanding of how much inventory you are comfortable with having on your lot.
Let's use some simple math here with somewhat realistic numbers to back it up. If you want to sell 10 cars a month, you will need to commit to having 10 vehicles on your lot each month.
For the sake of this example, let's say the average price you are paying for each vehicle in your inventory is $25,000. That means you will need $250,000 to fund your initial inventory investment.
If you don't happen to have $250,000 in the bank, you will likely need to consider financing options for your initial inventory acquisition. Believe it or not, it is extremely common for car dealerships to use financing to acquire their inventory.
Luckily, there are several car dealership industry-specific lenders who provide a program known as “floorplan financing” options. Most used car dealers find a lending partner to help them finance their inventory.
It doesn't matter if you are more comfortable dealing with your local bank for a line of credit or if you explore industry-specific lending options, you will just want to keep this step in mind while thinking about financing your inventory.
Using a line of credit to acquire inventory and paying down the line of credit as those vehicles sell is pretty much the standard operating procedure in the industry. As is the case whenever you borrow money for anything, your credit score will play a factor in the lender's final decision.
Finally, the lender will probably ask for a down payment or equity to secure the loan. Don't be surprised if they ask for 10 percent or more of the total loan amount you are asking for.
What Gross Profit Margins Can a Used Car Dealership Expect?
- How many vehicles should a used car dealership keep in its inventory?
- What is the best way to finance your used car dealership inventory?
What Gross Profit Margins Can a Used Car Dealership Expect?
Have you ever purchased a vehicle from a car dealer and wondered how much they are going to profit from the transaction? Well, earlier we pointed out that according to NADA, the average gross profit for a used car dealer is about $2,337 per vehicle sold. We also mentioned the average sale price for a used car is $33,000.
For the sake of staying consistent, let's use those numbers again. We also mentioned that, according to Mercer Capital, the average gross profit margin for a used car dealer ranges between 11.8 to 13.4 percent in recent years.
So, based on these numbers, if your dealership can sell 10 used cars per month, you will generate $3,960,000 in revenue based on inventory sales alone. From the nearly $4 million in revenue, approximately $280,440 of that will be profit based on the industry-wide average profit of $2,337 per used vehicle sold.
If you prefer the average gross profit margin for used car dealers as reported by Mercer Capital, that GPM number grows to $530,640. If you are looking for an exact answer, there isn't one because your results will vary. However, you can paint a pretty accurate picture of what to expect when you project your GPM to fall somewhere between $280,440 to $530,640 if you sell approximately 120 used cars per year.
If you want more realistic expectations, keep in mind that not every car will sell for $33,000 or see a profit of $2,337. These numbers act as a baseline so you can begin to form your business plan. Always calculate on the low side of the estimate when considering projections, so you have plenty of room for improvement as you begin to hone your craft.
If you're looking for the ultimate car dealer profit maximization tool, you’ve found it. The Laser Appraiser VIN Scanner app and Dealer Studio appraisal software simplifies everything so you can improve your average used car profit margin on every sale you make.
There's a bit of a learning curve when it comes to opening your own car dealership. Let Laser Appraiser do the heavy lifting for you so you can focus on optimizing the return on your investment with more profits.
Is It Beneficial to Add a Used Car Dealership Service Department?
Now that you know how to calculate the potential annual gross profit on car sales, you might want to consider additional sources of revenue. Adding a service department can be very beneficial to your bottom line.
In fact, according to NADA, nearly 49.6 percent of an average dealership's profits come from the service department. That is, of course, if you have a service department.
Consider adding a service department if you want to stabilize your dealership's revenue stream. Diversifying your sources of revenue with a service department is a great way to increase the overall profitability of your dealership.
How Much Revenue Can a Used Car Dealership Service Department Generate?
In the used car business, some of your favorite customers will be the ones who keep coming back. Opening a service department gives you the opportunity to convert each customer you sell a car to into return customers at your service department.
This even affords you the opportunity to establish more rapport with that customer over time. When they are ready to trade their vehicle in for another car, you'll be the first place they look.
In the end, would you rather make one sale to a single customer or conduct multiple transactions with that same customer over time?
According to The Balance, the average driver spends between $900 to $1,800 per year on vehicle service and maintenance. You should make it a goal to ensure your customers are spending their vehicle maintenance dollars at your dealership to boost your revenue stream.
What Kind of Variable Expenses Should a Used Car Dealership Expect?
There are several variable costs to consider as a used car dealer each time you sell a car. For starters, there are all the obvious costs that are worth mentioning such as changing the oil, filling vehicles with gas, as well as washing and cleaning the car.
Those are just the bare minimum expenses to consider. You really should be doing more than just that to establish yourself as reputable and trustworthy. Some dealerships go as far as building their own on-site car wash facility they open to the public as an additional source of revenue.
Other variable expenses you will run into include:
- Vehicle Title Fees
- Payment Processing Fees
- Sales Commissions
- Commodity Price Fluctuation
On top of that, your dealership will have other variable expenses such as the actual cost of your inventory and marketing expenses. You might even classify your marketing spend as a fixed expense if you follow a strict budget, although unforeseen promotional events will likely go over budget from time to time.
Don't forget about your variable service department expenses either. As they say, you have to spend money to make money. You will need to account for:
- Service Shop Supplies and Tools
- Labor Expenses or Staff Salaries
- Cost of Parts
If you have an idea of what to plan for, you will find the experience to be smooth. The good news is, it's possible to find solutions to potential obstacles you encounter along the way.
What Kind of Fixed Expenses Should a Used Car Dealership Expect?
You will have many fixed expenses as a car dealer to consider on top of the variable costs. As previously mentioned, you may follow a strict advertising and marketing budget, thus considering them to be fixed expenses.
If you have rent, lease, or business loan payments, they would be classified as fixed expenses. Other typical fixed expenses car dealerships face include:
- Office Supplies
- Utility Payments
- Software and Subscriptions
- Staff Salaries and Benefits
- Equipment and Maintenance
- Dealer Licensing and Permits
- Asset Depreciation
There are also going to be various operating expenses to consider that cater to your specific business plan. Several factors such as your location, loan or lease terms, and tax codes can impact what kind of fixed expenses you should expect in your region.
This is where it could be beneficial for you to do some due diligence in your local market to get a better idea of what to expect as a car dealership in the area.
How Much Profit Can a Used Car Dealership Make?
By now, you probably realize it is quite possible to make a healthy profit from a used car dealership. There are several factors such as overall sales volume, gross profit margins, and dealership expenses. As a result, it is nearly impossible to pinpoint exactly how much profit a specific car dealership will make. Especially a startup.
Luckily, there are several helpful resources and valuable tools available to help registered car dealers optimize their profit margin potential. Anyone who spends enough time around cars knows there is always a right tool for every job.
That's why you need the Laser Appraiser VIN Scanner and Dealer Studio used car dealer management software to maximize your car dealership's profits and boost your return on investment from day one. Laser Appraiser combines every car dealership profit enhancing tool you need in one convenient place accessible via desktop or your favorite mobile device.
Additional Tips for Opening a Used Car Dealership:
Do Your Own Research - Take some time to analyze the used car market in your local area. Discover which cars are in demand and the prices local buyers are paying for them.
Shop for the Right Financing - You need inventory to sell cars as a dealership. Take some time to ensure you are getting the best deal while exploring the different financing options that are available.
Hire Qualified Staff - If you want to run a successful dealership, it begins with hiring a team of qualified salespeople and mechanics. You're going to want a good combination of employees who are knowledgeable about cars and have a personable sales mentality. Interview potential employees carefully and conduct as many follow-ups as it takes to find the right people.
There's no doubt that starting a used car dealership can be a very profitable business venture. You still need to do your due diligence and plan accordingly before getting started.
At the end of the day, when it comes to a car dealership, you should probably know to expect the unexpected from time to time. There will be plenty of pleasant surprises, but you should still leave a little wiggle room for unpleasant surprises. Why not accelerate to the head of the business class by using the car dealer management software designed with the goal of putting more profits in your pockets?
Discover the ease of car dealer inventory management software optimization at your fingertips with Laser Appraiser to maximize your profits. Please share this article and start a free Laser Appraiser VIN Scanner or Dealer Studio demonstration to see how you can use these tools to increase your average used car profit margin on every transaction.
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