How to Start a Car Dealership

Part 1 - How to start a Car Dealership business - Background

Starting a car dealership can be an exciting and rewarding business venture for entrepreneurs who love cars and want to create a dynamic, customer-focused business.

Having said that, you should keep in mind that launching a successful car dealership requires careful planning, significant investment, and a wide range of skills.

In this comprehensive guide, we’ll walk you through all the essential steps you’ll need to take to start your own car dealership, from conducting market research and securing funding to obtaining licenses, setting up operations, and attracting customers.

Our guide is in 3 parts:

• Part 1 - How to start a Car Dealership business - Background
• Part 2 - Our planner tool to see if this idea is the right fit for you
• Part 3 - Action plan to get started

Industry Overview

The car dealership industry in the U.S. is a major economic force, with a market size projected to reach $1.2 trillion in 2024, despite facing a slight decrease of 0.5% from 2023.

The market comprises a mix of independent dealers and larger franchise chains, with approximately 17,000 new car dealerships operating in the U.S. in 2023 alone.

Startup Costs

If you’re considering whether a car dealership business is right for you, the first thing you’ll need to know is whether it’s a) affordable, and b) worth the investment. I mean, how much can you actually make running your own dealership?

Well, it depends, and the initial investment for a car dealership varies widely based on factors such as location, size, and inventory.

Land purchase or lease costs, for example, can range anywhere between $500,000 and $3,000,000, depending on the location in question. Renovation and setup costs for the showroom and service areas typically range from $100,000 to $500,000, while permits and licenses usually cost between $5,000 and $50,000.

Inventory costs are a significant component of the investment that will also need to be considered. Stocking new cars can cost millions depending on the number and types of vehicles; used car inventory might range from $500,000 to $2,000,000, and equipment for servicing and maintaining vehicles can easily add another $100,000 to $500,000.

Maintenance expenses for the dealership and vehicles typically range from $50,000 to $200,000 annually; while this range may seem steep, it encompasses a variety of tasks needed to keep operations running smoothly.

These include regular calibration of diagnostic equipment, maintenance of car lifts and alignment machines, paint touch-ups and minor body repairs, upkeep of outdoor lighting for vehicle displays, and servicing loaner vehicles for customers.

Earning Potential

Revenue streams for a well-managed car dealership can be very substantial.

Surprisingly, however, car sales only account for a relatively small proportion of the profit, with new cars bringing in just 8% of the gross profit on average and used cars just 12%.

So where does the real profit come from? Well, the real backbone of a dealership’s profitability is the service and parts department, which, according to the National Automobile Dealers Association (NADA), makes up almost half of the average dealership’s total gross profit.

Another substantial revenue stream (contributing 25% to 30% of gross profit on average) comes from financing and insurance products, which are commonly referred to as F&I.

Car dealerships can earn significant commissions — up to $3,000 per deal — by arranging car loans directly with financial institutions, which makes this a highly profitable aspect of their business.

When you account for the fact that, on top of financing, dealerships also upsell things like extended warranties, gap insurance, tire and wheel protection, and other add-ons during the purchase process, you can see where the real profit is made.

Think about it: on a new car sale, a dealership’s profit margin is around 3.9%, meaning that even if you spend $20,000 to $30,000 on a vehicle, the dealer walks away with only about $780.

Now, compare that to an extended warranty. If the dealership buys it for $1,000 and sells it to you for $2,000, they earn a $1,000 profit — that’s a 100% margin.

In this scenario, you will make more as the car dealer from upselling a $2,000 warranty than from an entire new car.

Note: Trade-ins are another major source of profit, as dealerships often purchase used cars for less than their resale value, making a substantial margin when they are sold. For example, a car valued at $10,000 might be bought for $8,000, cleaned up, and resold for $12,000, resulting in a profit of around $4,000.

Day-to-Day and Growth

What happens during a typical day at a car dealership?

Day-to-day activities include checking invoices, talking to prospects and customers on the lot, negotiating deals, and managing a sales force. Dealerships have a strong sales culture, and interpersonal communication skills are important. So salespeople (including the owner) who work for a dealership may spend most of their day speaking with prospects face-to-face.

What are some skills and experiences that will help you build a successful car dealership?

While there are no special skills required by the state, there are practical skills most business owners in this industry have. First, they have a strong sales background. They also have a strong business and management background. Some dealership owners have worked as mechanics in the past, which helps them better understand the service side of the business.

What is the growth potential for a car dealership?

Small dealerships are usually used car dealers. These types of dealerships purchase used vehicles at auctions and mark them up for resale to consumers. This type of business can be highly profitable and doesn’t require a lot of overhead or inventory.

A larger dealership might secure a contract with a major manufacturer to sell new and certified used vehicles. This type of dealership business is typically large scale, requires significant upfront costs (including franchise fees), and may require high volume sales to keep the manufacturer’s contract.

Part 2 - Is a Car Dealership business the right fit for you?

Part 3 - Action plan to launch your Car Dealership business in 90 days