Tips for Operating a Successful Car Dealership

Almost every car enthusiast dreams of owning a large garage filled with their favorite vehicles. Whether you collect iconic muscle cars, vintage roadsters, or classics from a single manufacturer, the aspiration to have an expansive collection is common.

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While many individuals wish to collect cars, not everyone views them as collectible assets. Entrepreneurs across the country see cars as salable goods that can be monetized. Auto dealers come in various forms, from small family-run dealerships to large companies like AutoNation and Penske Automotive, which own over 100 locations.

If you've gained experience by independently selling cars or working for a dealership, you might have developed an interest in starting your own car dealership. Whether your focus is on new vehicles, used cars, or both, the automotive sales industry has promising prospects.

Car Dealership Statistics

According to the National Automobile Dealers Association, dealership sales of new and used cars, parts, and automotive services generated a record-high revenue of $862 billion in the United States. This figure represents a 6.9 percent increase from previous years.

IBISWorld's "Used Car Dealers in the US: Market Research Report" indicates that pre-owned car sales contributed $111 billion to the industry's revenue, resulting from a 3.2 percent annual growth rate.

In a separate report, "New Car Dealers in the US: Market Research Report," IBISWorld notes that the new car market grew by 5.9 percent. In 2022, franchised new car dealerships sold over 17 million light trucks and cars. Despite this record number, new vehicle sales account for only 25.8 percent of total automobile purchases in the United States, highlighting that 74.2 percent are for previously owned vehicles.

Many dealerships go beyond just selling cars; they also provide factory-made parts and accessories. Additionally, many dealers operate service centers that offer necessary repair and maintenance services. This further contributes to a dealership's revenue and encourages repeat business. In one year alone, car dealerships across the country wrote over 200 million repair orders, generating $97 billion in service and parts sales.

Over the last decade, the number of new car dealerships has decreased by approximately 4,000 due to consolidation. This trend has allowed dealerships to achieve greater profits. The New York Times reports a doubling in the number of new car dealer groups with annual revenues over $1 billion between 2010 and 2020.

Operating a car dealership not only has the potential for profits but also provides employment opportunities for individuals. The U.S. has around 133,029 used car dealers that collectively employ 273,533 individuals, while 18,150 new car dealers employ 1,115,301 people.

The average number of employees per dealership rose to 67 in 2021, from 65 in 2020. The total annual payroll for new car dealerships in the U.S. reached $62.8 billion in 2021, marking an almost eight percent increase over the prior total, with the average annual payroll per dealership at $3.8 million in 2021.

How To Start A Car Dealership

The car sales industry holds significant potential for growth, which might entice you to enter the market. The first step is determining the type of vehicles you want to sell. Generally, launching a used car dealership is more cost-effective than starting a new car dealership. If budget constraints exist, consider beginning with a few used cars and reinvesting profits to expand your inventory over time.

After selecting the types of cars, research the market to support your business. Analyze what types of cars consumers are purchasing and what other dealers in your desired location sell. If demand is insufficient or the market is saturated, consider a different location.

Once you've identified the types of vehicles to sell and secured a location, prepare for the associated costs of becoming a car dealer. The setup costs will vary based on factors such as staff numbers and location. Nationwide, auto dealers have invested approximately $234 billion in their businesses, averaging $11 million per location.

Typically, you’ll find nine dealerships per 40,000 residents, with an estimated investment of around $100,000. In more populated areas, with 240,000 residents or more, consumers may choose from about 90 dealerships, necessitating an investment of approximately $1 million for those locations.

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Regardless of your chosen location, certain costs must be covered before opening your dealership’s doors. The following are important startup costs and associated tasks:

• Retail Space: Your retail space costs depend on various factors, including whether you buy or lease the property. Purchasing can cost millions, while leasing may range from $8,000 to over $20,000 monthly.

• Business Registration: Depending on your state, you can establish your dealership as a:
  • Sole Proprietorship
  • General Partnership
  • Limited Partnership
  • Limited Liability Company
  • Corporation

  Registration costs vary by state and business type; for instance, registering a limited partnership in Texas costs around $750, while in California, it’s about $70. Registering a corporation usually costs under $300.

• Inventory Fees: Regardless of whether you sell new or used vehicles, you need to invest in inventory. For budget constraints, consider floor plan financing, which is a short-term loan typically due within 30 to 90 days.
• Dealer License Fee: Depending on your state, you may sell between three to seven vehicles per year without a license. To operate a dealership legally, you’ll need a dealer license, and the fees for this can be substantial.

Given these costs, many entrepreneurs seek funding beyond personal resources. Creating a business plan with sales forecasts and experience summaries can help secure financing from investors or financial institutions. Obtaining the necessary funds and managing them wisely are critical steps in starting your dealership.

How To Own A Dealership

Now that you’ve learned essential steps toward becoming a car dealer, you may wonder how to manage your dealership. Daily tasks may include:

• Hire Quality Employees: While you might wish to assist every consumer personally, it’s essential to hire a capable sales team. Employees must identify consumer needs and fulfill them while maintaining transparency and integrity. As online sales grow, honest salespeople are vital for both online and in-person transactions.

• Embrace Available Technology: Websites like Edmunds.com have changed the car-buying landscape, enabling consumers to search and compare vehicles easily. Equip your sales teams with technology for real-time engagement and information exchange. A dealer management system (DMS) can streamline your operations and enhance customer relationships.
• Promote Your Business: Beyond social media, identify advertising avenues that reach your target audience, such as local newspapers or radio ads. Create promotions that resonate with consumers, focusing on specific events or new arrivals.

• Keep It Clean: Consumers often judge businesses based on appearance. Ensure your facility is well-maintained and that vehicles are clean and functioning. Properly dressed employees also contribute to a professional appearance and foster consumer trust.

• Sell Reliable Automobiles at Fair Prices: Selling substandard vehicles is both dishonest and illegal. Such practices hinder the reputation of your dealership and can lead to legal trouble, damaging your bottom line.

Managing Your Inventory And Space

A significant responsibility for dealership owners is managing inventory and commercial space. Effective management of car inventory might be straightforward, but organizing parts and tires requires more strategic planning.

Dealerships need various parts and tire types to meet client needs. This necessitates efficient inventory management and effective use of storage space.

Relying on traditional shelving can be inefficient, consuming floor space and leading to disorganization. Fortunately, solutions like vertical storage carousels utilize vertical space to optimize storage and improve accessibility for employees.

These systems enable safe retrieval of items without straining employees. They can accommodate various inventory types, enhancing the efficiency of your dealership's operations.

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