Start a car dealership by following these 9 steps:
You have found the perfect business idea, and now you are ready to take the next step. There is more to starting a business than just registering it with the state. We have put together this simple guide to starting your car dealership. These steps will ensure that your new business is well planned out, registered properly and legally compliant.
STEP 1: Plan your Business
A clear plan is essential for success as an entrepreneur. It will help you map out the specifics of your business and discover some unknowns. A few important topics to consider are:
- What are the startup and ongoing costs?
- Who is your target market?
- How long it will take you to break even?
- What will you name your business?
Luckily we have done a lot of this research for you.
What are the costs involved in opening a car dealership?
Becoming a car dealer isn’t easy in most states. You will need a surety bond, proper licensing, and business experience to compete in this industry.
Auto dealers usually must file a surety bond with the resident state’s DMV before they get an auto dealer license. The license allows them to sell vehicles in that state. Purchasing a bond can be very confusing. A surety bond is a form of insurance which is designed to protect consumers and the state from fraud.
There are several types of bonds you may need, depending on the kind of dealership you want to run. Some general bonds include:
- DMV bonds.
- Used car dealer bonds.
- Wholesale car dealer bonds.
- RV bonds.
- Motorcycle dealer bonds.
Bond premiums depend entirely on your unique situation, which makes it difficult to quantify exact costs to start a dealership. In general, the surety bonds you need are priced based on:
- The amount of the bond needed.
- Your financial credentials.
- Whether or not you choose to finance the premium.
- Your credit score.
If you have good credit, for example, your premium might be just 1% of the total bond amount. So, on a $10,000 bond, you would pay a $100 premium.
In addition to the bond, you will need licensing. The types of licenses needed depend on the state, county, and locale where you intend to conduct business.
Most states have several categories of dealer licenses, such as:
- New car dealer
- Used car dealer (retailers)
- Wholesaler licensing
- Rebuilder licensing
- Reconditioner licensing
The general process for getting into business is:
- Fill out an application form.
- Get a surety bond (states specify the minimum amount based on your line of business).
- Buy liability insurance for your inventory (vehicles).
- Get your sales tax number.
- Establish your permanent business location.
- Take photographs of your business sign and location and adhere to your state’s specific photo and signage rules and regulations.
- Pay the mandated fees.
- Get your dealer’s tags from the local county courthouse.
- Get your sales license to sell vehicles (if you intend to be a salesperson in the business).
What are the ongoing expenses for a car dealership?
Dealer costs vary a lot by the type of dealership and the specific bonds and insurances needed. A dealership can be run for several thousand dollars per year in operating costs or $15 million for a franchise operation.
Who is the target market?
Dealers typically run advertisements locally for customers, but most of the business is generated by referrals through the salesforce. Friends, family, neighbors, and community members are the “target market” for a dealership.
Good customers usually have fair to good credit (minimum). Many customers will finance the purchase so they need the ability to qualify for a vehicle loan. Dealerships typically have a difficult time selling to individuals with poor credit. However, some dealerships specialize in hard money loans and “buy here, pay here” plans where customers with poor credit are able to finance a vehicle directly from the dealership through a special financing program, similar to “rent to own” payment schemes found in other industries.
How does a car dealership make money?
A dealership makes money by selling vehicles above the dealer’s invoice price and by doing routine maintenance on vehicles sold. Customers typically pay commissions on vehicles they purchase (which is bundled into the total sales price of the vehicle) and pay hourly or a flat fee for maintenance.
How much can you charge customers?
Dealers usually charge the manufacturer’s suggested retail price (MSRP) for their vehicles. However, a dealer may discount their vehicles to entice prospects to buy. When this is done, a dealer may discount the vehicle to the dealer invoice price. Dealers often also receive incentives and “holdback” from the manufacturer. Pricing to the consumer is not transparent. Meaning, a consumer doesn’t typically see the costs and profit for the manufacturer. Instead, consumers see total vehicle price.
How much profit can a car dealership make?
As with dealer operating costs, profit depends entirely on the dealer’s wholesale pricing and cost for inventory, cost for bonds and insurance, and other overhead. In general, a dealer can make between 2% and 3% of the sticker or invoice price of the vehicle.
How can you make your business more profitable?
Making a dealership profitable isn’t easy. Because there are so many laws and regulations governing the sale of vehicles, most dealerships rely on good customer service to fuel future growth. However, a dealer can increase the odds of making more money by specializing. For example, a Honda dealership may make more than a general used car dealership. Luxury dealers may also make more than dealers selling mid to entry-level brands.
What will you name your business?
Choosing the right name is very important. Read our detailed guide on how to name your business. We recommend checking if the business name you choose is available as a web domain and securing it early so no one else can take it.
After registering a domain name, consider setting up a professional email account (@yourcompany.com). Google's G Suite offers a business email service that comes with other useful tools, including word processing, spreadsheets, and more. Try it for free
STEP 2: Form a legal entity
Establishing a legal business entity such as an LLC prevents you from being personally liable if your car dealership is sued. There are many business structures to choose from including: Corporations, LLC's, and DBA's.
Form Your LLC
Read our Guide to Form Your Own LLC
Check out the Top Business Formation Services from our friends at StartupSavant.
You should also consider using a registered agent service to help protect your privacy and stay compliant.
STEP 3: Register for taxes
You will need to register for a variety of state and federal taxes before you can open for business.
In order to register for taxes you will need to apply for an EIN. It's really easy and free!
You can acquire your EIN for free through the IRS website, via fax, or by mail. If you would like to learn more about EINs and how they can benefit your LLC, read our article, What is an EIN?.
STEP 4: Open a business bank account & credit card
Using dedicated business banking and credit accounts is essential for personal asset protection.
When your personal and business accounts are mixed, your personal assets (your home, car, and other valuables) are at risk in the event your business is sued. In business law, this is referred to as piercing your corporate veil.
Open a business bank account
- This separates your personal assets from your company's assets, which is necessary for personal asset protection.
- It also makes accounting and tax filing easier.
Recommended: Find the right bank for you, read our review of the Top 5 Banks for Your Small Business
Get a business credit card
- This helps you separate personal and business expenses by putting your business' expenses all in one place.
- It also builds your company's credit history, which can be useful to raise money and investment later on.
STEP 5: Set up business accounting
Recording your various expenses and sources of income is critical to understanding the financial performance of your business. Keeping accurate and detailed accounts also greatly simplifies your annual tax filing.
STEP 6: Obtain necessary permits and licenses
Failure to acquire necessary permits and licenses can result in hefty fines, or even cause your business to be shut down.
State & Local Business Licensing Requirements
In most states, it is necessary to obtain a dealer’s license. Applications for this license will vary by state. This article offers general advice on how to get one.
Most businesses are required to collect sales tax on the goods or services they provide. To learn more about how sales tax will affect your business, read our article, Sales Tax for Small Businesses.
In addition, certain local licensing or regulatory requirements may apply. For more information about local licenses and permits:
- Check with your town, city or county clerk’s office
- Get assistance from one of the local associations listed in US Small Business Associations directory of local business resources.
STEP 7: Get Business Insurance
Just as with licenses and permits, your business needs insurance in order to operate safely and lawfully. Business Insurance protects your company’s financial wellbeing in the event of a covered loss.
There are several types of insurance policies created for different types of businesses with different risks. If you’re unsure of the types of risks that your business may face, begin with General Liability Insurance. This is the most common coverage that small businesses need, so it’s a great place to start for your business.
Learn more about General Liability Insurance.
Another notable insurance policy that many businesses need is Workers’ Compensation Insurance. If your business will have employees, it’s a good chance that your state will require you to carry Workers' Compensation Coverage.
STEP 8: Define your brand
Your brand is what your company stands for, as well as how your business is perceived by the public. A strong brand will help your business stand out from competitors.
How to promote & market a car dealership
Getting new customers can be difficult. Some new dealers hold a tent sale. This is a special sale conducted off-site (away from the primary business location) to attract new customers. Every state and county has different rules and regulations regarding tent sales. In some states, for example, you will be expected to give notice to the local authorities and pay a fee for a license to hold the sale.
How to keep customers coming back
Auto dealerships are relationship-driven. Many customers are past customers, so referral business and retaining customers through excellent customer service is key. Offer special incentives to customers, like special dealer financing or dealership perks (special deals on service) to attract new customers. Some dealers also go beyond sales and service to provide a unique experience for the customer. For example, a dealer might create a “play area” for children and offer day care services while parents shop.
STEP 9: Establish your Web Presence
A business website allows customers to learn more about your company and the products or services you offer. You can also use social media to attract new clients or customers.
Start A Car Dealership In Your State
Select your state below for an in-depth guide on completing each of these steps in your home state.
Is this Business Right For You?
This business is perfect for individuals who are auto enthusiasts and who have a good business sense. Former sales managers and car salesmen are also good candidates for this type of business. As the owner, you may have a flexible work schedule, but this is not guaranteed.
What happens during a typical day at a car dealership?
Day-to-day activities include checking invoices, talking to prospects and customers on the lot, negotiating deals, and managing a sales force. Dealerships have a strong sales culture and interpersonal communication skills are important. So salespeople (including the owner) who work for a dealership may spend most of their day speaking with prospects face-to-face.
What are some skills and experiences that will help you build a successful car dealership?
While there are no special skills required by the state, there are practical skills most business owners in this industry have. First, they have a strong sales background. They also have a strong business and management background. Some dealership owners have worked as a mechanic in the past, which helps them better understand the service side of the business.
What is the growth potential for a car dealership?
Small dealerships are usually used car dealers. These types of dealerships purchase used vehicles at auctions and mark them up for resale to consumers. This type of business can be highly profitable and doesn’t require a lot of overhead or inventory.
A larger dealership might secure a contract with a major manufacturer to sell new and certified used vehicles. This type of dealership business is typically large scale, requires significant upfront costs (including franchise fees), and may require high volume sales to keep the manufacturer’s contract.
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Take the Next Step
Find a business mentor
One of the greatest resources an entrepreneur can have is quality mentorship. As you start planning your business, connect with a free business resource near you to get the help you need.
Having a support network in place to turn to during tough times is a major factor of success for new business owners.
Resources to Help Women in Business
There are many resources out there specifically for women entrepreneurs. We’ve gathered necessary and useful information to help you succeed both professionally and personally:
If you’re a woman looking for some guidance in entrepreneurship, check out this great new series Women in Business created by the women of our partner Startup Savant.
How and when to build a team
Most dealerships need a crew of salespeople, accounting and bookkeeping professionals, and service technicians. Unless you’re a small one-man operation, you’ll probably want to hire a team of professionals immediately.
Read our car dealership hiring guide to learn about the different roles a car dealership typically fills, how much to budget for employee salaries, and how to build your team exactly how you want it.