How to Start a Car Dealership

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.

Step 1: 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.

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.((https://www.statista.com/statistics/502208/tesla-quarterly-vehicle-deliveries/))

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.((https://www.bls.gov/news.release/cpi.t01.htm))

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.((https://www.bloomberg.com/news/articles/2021-09-28/used-car-sales-vroom-carvana-shift-thrive-during-pandemic#xj4y7vzkg))

Industry size and growth

• Industry size and past growth – Market analyst IBISWorld values the US new car market at an incredible $1.2 trillion((https://www.ibisworld.com/industry-statistics/market-size/new-car-dealers-united-states/)) and the used car dealers market at $160 billion((https://www.ibisworld.com/industry-statistics/market-size/used-car-dealers-united-states/))  
• 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.((https://www.statista.com/statistics/267128/outlook-on-worldwide-passenger-car-sales/))
• Number of businesses – The US is home to more than 18,000 new car dealers((https://www.ibisworld.com/industry-statistics/number-of-businesses/new-car-dealers-united-states/)) and around 140,000 used car dealers.((https://www.ibisworld.com/industry-statistics/number-of-businesses/used-car-dealers-united-states/))
• Number of people employed – New car dealers employ more than 1.2 million people((https://www.ibisworld.com/industry-statistics/employment/new-car-dealers-united-states/)), while used car dealers have only around 290,000 employees.((https://www.ibisworld.com/industry-statistics/employment/used-car-dealers-united-states/))

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.((https://www.businesswire.com/news/home/20210624005254/en/Cost-of-Car-Ownership-in-the-U.S.-the-Average-American-Household-Spends-5435-a-Year-on-Auto-Loans-and-Auto-Insurance-Combined))
• Potential customer base – 91% of US households own at least one car((https://www.statista.com/statistics/551403/number-of-vehicles-per-household-in-the-united-states/))
• 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((https://www.kbb.com/car-news/average-new-car-price-tops-47000/)), while a used car was sold for an average of $28,205.((https://www.kbb.com/car-news/average-used-car-price-now-over-28000/))

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.((https://www.iseecars.com/most-expensive-cars-by-state-study))
• 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.((https://www.zippia.com/car-dealer-jobs/demographics/#gender-statistics))
• Average level of education – 41% of car dealers hold a bachelor’s degree.((https://www.zippia.com/car-dealer-jobs/demographics/#degree-level-types))
• Average age – The average age of a car dealer in the US is 41 years old.((https://www.zippia.com/car-dealer-jobs/demographics/#age-statistics))

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?

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.

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

Step 2: 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.

Market research will give you the upper hand, even if you’re already positive that you have a perfect product or service. Conducting market research is important, because it can help you understand your customers better, who your competitors are, and your business landscape.

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.

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

What? Determine your 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

In addition to a car dealership, you can also incorporate a motorcycle dealership into your business.

How much should you charge for cars?

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

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 car dealership location

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. 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

Step 3: Brainstorm a Car Dealership 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: “Premier Automotive Group” over “Electric Car Dealership”
• Avoid location-based names that might hinder future expansion

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.

Step 4: Create a Car Dealership 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:

• Executive Summary: A brief overview outlining the business’s mission, goals, and key highlights to provide a snapshot of the entire car dealership business plan.
• Business Overview: A comprehensive description of the car dealership, including its history, mission, vision, and key objectives, to give readers a clear understanding of the business.
• Product and Services: Detailed information on the range of cars and related services offered by the dealership, emphasizing unique selling points and value propositions.
• Market Analysis: An in-depth examination of the automotive market, identifying target demographics, market trends, and potential opportunities for the car dealership.
• Competitive Analysis: Evaluation of competitors in the automotive industry, highlighting strengths, weaknesses, and strategies to position the dealership effectively.
• Sales and Marketing: Strategies for promoting and selling cars, including advertising, promotions, and customer relationship management to drive sales and brand awareness.
• Management Team: Introduction and background of key individuals responsible for managing and steering the car dealership, emphasizing their expertise and roles.
• Operations Plan: Details on day-to-day operations, from inventory management to customer service, ensuring a smooth and efficient running of the dealership.
• Financial Plan: A comprehensive financial overview, including projections, budgets, and funding requirements, providing a clear picture of the dealership’s financial health and sustainability.
• Appendix: Supplementary materials such as charts, graphs, and additional data supporting the information presented in the business plan.

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

Step 5: Register Your Business

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.

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 an 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.

Step 6: 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.

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

Step 7: 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.

Step 8: Apply for Car Dealership Business Licenses and Permits

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

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 need to meet the requirements of your state to get a dealer license, and you need an Auto Dealer Bond as required by your state.

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.

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.

Step 9: 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.

Step 10: 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.

Step 11: 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.

Develop your website

Website development is crucial because your site is your online presence and needs to convince prospective clients of your expertise and professionalism.

You can create your own website using website builders. 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.

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. 

Marketing

To successfully market your car dealership, it’s crucial to blend a variety of strategies that emphasize the diversity and quality of your inventory, exceptional customer service, and the unique experience your dealership offers. Here are some powerful marketing strategies for your future business:

Professional Branding and Direct Outreach

• Establish a strong brand identity: This involves creating a consistent and professional image across all your marketing materials, from your logo to the design of your showroom. A strong brand identity helps in building trust and recognition.
• Engage with local businesses and community organizations: By creating partnerships and networks with local entities, you can tap into corporate sales opportunities and execute community-focused promotions, enhancing your local presence and reputation.

Digital Presence and Online Marketing

• Develop a user-friendly website optimized for SEO: A well-designed website that is easy to navigate and optimized for search engines will help potential customers find your dealership online, increasing your visibility.
• Utilize social media platforms for targeted advertising: Use platforms like Facebook, Instagram, and LinkedIn to reach specific audiences with vehicle highlights, promotional events, and customer testimonials. Each platform offers unique ways to target and engage potential customers.
• Implement targeted advertising and Pay-Per-Click marketing: Using digital advertising tools to reach potential buyers based on their online behaviors can increase your dealership’s visibility and attract interested buyers.

Content Marketing and Customer Engagement

• Launch an automotive blog: A blog with relevant content like car maintenance tips and vehicle reviews can attract and engage an audience interested in automotive topics, establishing your dealership as a knowledgeable source.
• Feature customer testimonials and success stories: Sharing experiences of satisfied customers builds credibility and trust with potential buyers.
• Develop helpful guides and infographics: Offering educational content helps in engaging customers by providing them with valuable information, thus enhancing your brand’s value proposition.

Experiential Marketing and Community Involvement

• Host test drive events and open houses: Giving potential customers firsthand experience with your vehicles can significantly influence their buying decision.
• Sponsor and participate in local events: Being visible and active in local events can improve your dealership’s community presence and appeal to local customers.

Innovative Promotions and Customer Loyalty Programs

• Implement referral and loyalty programs: These programs incentivize existing customers to refer new ones and reward repeat business, fostering a loyal customer base.
• Organize competitions and giveaways: Such activities generate excitement and engagement around your dealership, attracting new customers.

Additional Marketing Techniques

• Experiment with website calls to action: Optimizing elements on your website can significantly affect user engagement and conversion rates.
• Leverage local business platforms like Yelp and Google My Business: These platforms are essential for local businesses to increase visibility and credibility in their community.
• Engage in influencer marketing: Collaborating with individuals who have a significant social media following can broaden your reach and appeal to new market segments.
• Create a podcast: This helps in building a personal connection with your audience, diversifying your outreach and content strategy.
• Explore video marketing: Creative and engaging videos can enhance online visibility and have the potential to reach a wide audience.

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.

Step 12: 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.

Step 13: Run a Car Dealership – 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!