How to Open a Car Dealership

Last Updated: February 26, 2023 References

Nearly everyone uses a car for business or personal use. If you use a car, you also need repair and maintenance on your vehicle. As a result, consumers need to seek out car dealers to buy cars and get them serviced. The cost of opening and operating a dealership, however, can require millions of dollars. Before you open a car dealership, think carefully through the entire process.

Part 1

Part 1 of 3:

Assessing Customer Needs

1
Perform market research. The first step in any business venture is to determine if there is a demand for your product or service. Once you determine the demand, you need to consider how your company might attract some of that customer demand.^{[1]
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- Determine the number of cars sold in your area. Assume, for example, that the typical car buyer is willing to visit a dealership within 10 miles (16.1 km) of their home. Try to determine the number of cars sold within a 10-mile radius of your proposed car dealership. Assume that 50,000 cars are sold in that area each year.
- Once you know the total number of cars, research those purchases by category. For example, how many cars are purchased, compared to trucks? What percentage of the cars sold are new, and how many are used? You may even be able to determine the number of cars by model (Honda, Ford, etc.)
- Assess the existing car dealers in the market. Say, for example, that 3,000 new Hondas are sold in your area each year. You’re considering a Honda dealership. How many existing Honda dealers are in your area? Of the Hondas sold, how many were purchased by consumers who went online and bought a new car from a dealership located out of town?
- This analysis will help you determine if there is a need for a new dealership in your market.
2
Determine your ideal customer. Every business needs to identify their ideal customer. Your ideal customer is a summary of the traits that your best customers have in common. When you identify the ideal customer, you can design your business to meet their needs.^{[2]
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- Look at the age, gender, occupation, and income level of the customers you are trying to attract. Assume that you want to open a Honda dealership. Do some research to determine the type of people who buy a Honda.
- You may find that the ideal Honda customer is a male between the ages of 27 and 50 years old. That customer is a white-collar professional with an above-average level of income. The Honda customer has owned a Honda previously or has a family member who owns a Honda.
- Many car dealers build relationships with customers by selling cars and providing a service department. Some customers go back to the car dealer to get service on their vehicle.
- Find out where the ideal Honda customer gets their car serviced. Do they go to their dealership, or to their local repair shop? This information can help you create a service department that will attract customers.
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3
Calculate the size of your market. The goal of your dealership market research is to determine if there is sufficient demand for your product. Ultimately, you need to know the dollar amount of sales for your product, and estimate how much of that customer demand you can attract.^{[3]
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- Assume that 3,000 new Hondas are sold in your area each year. You’re also considering selling used Hondas, which generate 2,000 in sales each year. The size of your market is 5,000 Hondas.
- Based on your research of existing car dealers and customer demand, you believe that your new dealership can attract 20% of the existing Honda car market. That 20% figure would mean (5,000 new and used car sales multiplied by 20% = 1,000 car sales).
- Assume that the average profit per car (considering both new and used) is $500. If your dealership sold 1,000 cars, the business would generate (1,000 cars X $500 = $500,000 in profit). In addition, you estimate that your service department would create a $300,000 profit. The total profit for your dealership would total $800,000.

Part 2

Part 2 of 3:

Deciding What Type of Dealership to Open

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Consider opening a franchise for your business. Nearly all of the larger car dealerships are franchises. In this arrangement, you are the franchisee who pays a fee to the franchisor. You also sign a franchise agreement to operate your business. ^{[4]
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- To open your Honda dealership, you would need to complete a long process to become a franchisee. Honda would require you to provide extensive financial disclosures to determine if you have the financial means to open and operate a Honda dealership.
- The franchisor (Honda) grants you the right to use the Honda logo and other marketing tools to operate a franchise. You will participate in local advertising and promotion of Honda cars. The franchisor will also agree on a process to supply your dealership with Honda cars.
- If you enter into an agreement with a popular car brand, it gives your car dealership credibility in the marketplace. That credibility can help you generate sales. However, the franchise agreement includes many restrictions on how you can advertise and sell their cars. To comply with the franchise agreement, you need to follow the requirements.
2
Decide on selling new cars, used cars, or both. If you sell both new and used cars, you have the opportunity to serve two types of consumers. Selling to both markets, however, will require a larger investment of time and money.^{[5]
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- If you sell used cars, you will attract customers who want to spend less money on a vehicle. Instead of buying the $25,000 new car, for example, they may buy a $15,000 used car.
- Used cars typically require more service and maintenance. As you sell more used cars, you may be able to grow your service business.
- A growing number of customers shop for cars online. When a customer enters your dealership, they may have checked 4 or 5 dealerships to price a particular car. You may find heavy competition for new car sales, in particular. In order to drive total car sales, you may need a used car sales department.
3
Assess the need for a service department. Everyone needs to get his or her car serviced eventually. Operating a service department is a great way to build a relationship with a car owner.
- You can develop relationships with customers who bought their vehicle somewhere else. If you do a great job on their car, they may buy their next car from you.
- The need for service on your car can be stressful. It’s inconvenient to be without a car while it is being repaired. Your great customer service can help reduce that anxiety.
- After you service someone’s car, stay in touch with the customer. Promote your car sales and service through emails and mailers. Your efforts will increase your chances of selling the customer a car in the future.

Part 3

Part 3 of 3:

Planning Your Finances

1
Add up the costs needed to start your car dealership. The typical car dealership may require millions of dollars to open and operate. Your biggest cost will be your inventory of cars.
- Floorplan refers to the cost of the vehicles you have on your car lot. In addition to the cost of your floorplan, you’ll need to buy or lease property. You’ll build or renovate buildings on the property for your showroom and possibly for a repair department.
- If you operate a franchise, you will pay the car company an initial franchise fee. Once you’re operating, you’ll pay annual fees for your franchise agreement.
- Car dealers also have to constantly train employees on new car features, so that they can explain those features to customers. You incur large costs for training.
2
Decide on how you will finance the cost of your dealership. Financing your dealership is a huge commitment. You’ll need to think carefully about how you will find the money to open your dealership.^{[6]
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- Most car dealerships finance their floorplan through a bank. The cars on the lot serve as collateral for the floorplan loan. A dealership may also incur huge costs to design and build its showroom and repair center.
- In addition to car inventory, you may need to hire dozens of employees. You’ll need cash to meet payroll each month.
- If you borrow money, you’ll need to provide sufficient collateral for your loan. You may need to pledge personal assets as collateral to obtain your loan. The bank will also need to see detailed financial projections. These projections will explain how your business will generate a profit and repay the bank loan.
3
Consider the regulatory requirement to start and operate your dealership. Your state, county, or city will have requirements to operate your dealership. Many of these rules are set up to protect the consumers who are making a large investment in buying a car. ^{[7]
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- Your state will require you to obtain a license to sell cars as your primary business. While individuals can sell cars to each other, a car dealer who sells many cars a year will need a license to operate.
- To build your dealership, you will need to get building permits from your city or county.
- Your state will require you to have several forms of insurance to operate your dealership. One type of required insurance is a surety bond. This bond is put in place to protect the car buyer from any fraud related to a car purchase.

Community Q&A

Question

What sort of education do I need to have?

Community Answer

A business background would be helpful. You also have to know your math for taxes.
Question

Will an indoor dealership be subject to stricter rules and regulations?

Community Answer

Yes it will. You will need proper ventilation due to the vehicle exhaust in an enclosed building.
Question

Do I have to pick a franchise when starting my own dealership?

Community Answer

No, I think that's a bad idea. By picking a franchise, you're forced to let them make most of the profit. For example, if you sell new Fords, Ford manufactures a vehicle for maybe $10,000 and sells the vehicle to the dealership for about $49,500. The dealership then sells the car for $500 over cost. If you open an independent dealership and sell used cars, you can buy a car for 140% of the book value if you're securing financing for the customer, and as much as you want if the customer pays cash. Most used car dealers make about $3000-$5000 per vehicle, and most new car dealerships make $200 to $500 in profit. Sales staff usually work on commission, receiving 12-25% of the gross profit in the front end.