HOW TO START A CAR DEALERSHIP

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:
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:
  1. Fill out an application form.
  2. Get a surety bond (states specify the minimum amount based on your line of business).
  3. Buy liability insurance for your inventory (vehicles).
  4. Get your sales tax number.
  5. Establish your permanent business location.
  6. Take photographs of your business sign and location and adhere to your state’s specific photo and signage rules and regulations.
  7. Pay the mandated fees.
  8. Get your dealer’s tags from the local county courthouse.
  9. 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.

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.
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!

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. 
  • 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

STEP 7: Get Business Insurance

Insurance is highly recommended for all business owners. If you hire employees, workers compensation insurance may be a legal requirement in your state.

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.

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