Opening a car dealership requires careful planning. Aspiring dealers must take into account the specific legal requirements they will need to comply with to open a dealership in their state.
You must also consider other aspects such as your local market, whether to offer new and/or used cars, what startup expenses you will be facing, and how to develop a solid business plan. You’ll need to account for all of these areas and more if you want your business to take off strong and keep going for a long time.
For a list of the most important things to consider when opening a car dealership, read on!
1. Dealership location
The location of your dealership has an impact on the number of sales and profit you make in a given year. Some states are more profitable and provide a better business climate than others.
What makes a state a good place to open a dealership? Average yearly sales, the costs associated with opening the dealership, as well as average payroll costs and weekly employee salaries in your area, are all factors that you need to consider.
At the same time, there are also some downsides to opening a dealership in the most profitable states. For example, despite great demand in many of these states, business conditions are not necessarily always optimal or easy (among other factors, you need to consider GDP growth, annual payroll expenses, and crime rate). And what’s more, if you do open your dealership in one of these business-friendly states, you will contend with plenty of competition.
In picking your dealership location, you must also think about what kind of dealership you wish to open. The National Automobile Dealers Association’s (NADA) midyear and annual reports can offer you plenty of information to make an informed choice.
2. Type of dealership
Do you know what kind of dealership you want to open? Will you be opening a new (or franchised) vehicle dealership, or will you specialize in used vehicles—or perhaps both? You could also focus on offering electric vehicles, luxury vehicles, or primarily foreign vehicles. This is related to the location of your business and your target audience.
Some states, such as Florida, are known for their preference for Asian cars. And when it comes to used cars, while the majority of states have a clear preference for pickups, other states prefer SUVs and more compact cars instead. In other words, understanding local tastes will be essential to your success.
An additional consideration you could also have at this point is whether you would want to include a service department to offer maintenance and repair work. According to the NADA data report, dealership service and parts sales across the U.S. have nearly doubled over the last eight years, resulting in a total of $114.15 billion of sales for all new-vehicle dealerships. It could be a source of additional income for your dealership.
The important thing to bear in mind here is that whatever you choose will determine the course of your business. For example, opening a new vehicle dealership will require more financing, while a used dealership will require less financing but is also likely to yield fewer profits.
3. Business and financial plan
Your business and financial plans are two other important pieces of the dealership puzzle. Ultimately, these two will be informed by the choices you make with regards to where and what kind of dealership you wish to open. Based on that, you start to develop your plans for how you will run the business, from A to Z, and how you will finance it.
To develop a sound business plan, you will need to reflect on and determine:
If you’ve never developed a business plan before, it may be wise to consult specialists on the issue, or at least take a look at a sample business plan to see how they’re structured.
There are different kinds of business plans too, so think about why you need one—to get a bank loan, outside investment, or as an internal strategic plan to guide your growth. Any money you invest in developing a business is well-spent and will likely help you save a lot more down the road by reducing trials and errors you may make due to lack of strategy or experience.
The above is also true for your financial plan. Moreover, if you plan on looking for investors or applying for a loan to get your dealership rolling, you will be asked to present detailed and comprehensive business and financial plans. To make a rough calculation of your startup costs, try the SBA’s startup costs spreadsheet.
4. Licensing requirements
To open a dealership in any state, you will need to obtain a business license allowing you to sell vehicles of a particular kind. License requirements vary significantly between states. Some states have minimal requirements and few fees, whereas others have strict, lengthy and at times expensive licensing procedures.
Licensing requirements you will frequently encounter are:
- Lease or own a property for your dealership
- Comply with specific location requirements for your office and showroom
- Pass a criminal background check or personal history questionnaire requirement
- Obtain an Employee Identification Number (EIN) from the IRS
- Obtain a state tax number from your local tax department
- Provide copies of your insurance policy and your auto dealer surety bond agreement
- Provide a copy of a franchise agreement (if selling new cars)
- Pass a state-mandated dealer training course
- Pass an inspection of your dealership premises
- Complete and submit your dealer application form, along with all other required documents
- Pay all application, licensing, and dealer plate fees
5. Legal provisions and requirements
Once you begin selling vehicles, you will be required to comply with various state and federal laws. These include the specific dealer licensing laws that apply to you based on the state you’re in, the Federal Trade Commission’s Used Car Rule, as well as your state’s used car lemon law if one exists.
One of the specific requirements included in most states’ dealer licensing laws is the requirement to obtain a surety bond. Dealer bonds are financial guarantee agreements that guarantee that dealers will comply with the state laws that govern the sale of cars. They are a form of protection for consumers and the state government and offer compensation in cases in which dealers violate the laws and cause losses or damages to either of these parties.
When you apply for a license, you will need to provide a surety bond in a certain amount which is the amount of maximum compensation that the surety may cover in case of claims against your bond. Understanding federal and state laws that apply to your business is essential for staying out of costly claims.
Under the FTC Used Car Rule, on the other hand, you must create a Buyer’s Guide for every vehicle you are selling that includes various types of information concerning the vehicle, your dealership, the vehicle warranty, etc. Not doing so can result in penalties which can be very severe in certain cases.
As for lemon laws, though they are often erroneously thought to apply to dealers as well, new vehicle lemon laws apply to manufacturers of vehicles that are defective. Used car lemon laws, on the other hand, may apply to you but only if you are located in one of the six states that currently have instituted such laws. These states are Connecticut, Massachusetts, Minnesota, New Jersey, New Mexico, and New York. Certain states may also have a warranty requirement on the sale of used cars, so make sure to look into this as well.
Do you plan to open a car dealership, or are you in the process of opening? If you have a suggestion you’d like to add, reach out to us on Twitter @Bplans.