The used car market is massive, with nearly $40 million used vehicles sold in 2021 alone. With the average used car price recently surpassing $28,000, it’s clear that there are huge opportunities in buying and selling pre-owned vehicles. However, launching a profitable used car lot takes more than just a passion for cars.
This article will walk through the essential steps in how to start a used car dealership. You’ll learn insider tips on obtaining a dealer license, financing your startup inventory, spurring sales through digital and grassroots marketing, registering an EIN, and more.
1. Conduct Used Car Dealership Market Research
Market research is important to starting a business in the automotive industry. It offers insight into your target market, local market saturation, and trends in auto sale products and services.
Some details you’ll learn through used car dealership market research include:
- New car inventory remains heavily constrained, with lower production volumes struggling to keep pace with still strong consumer demand.
- Rising vehicle costs coupled with higher loan rates mean more buyers are getting priced out of new cars.
- Dealers with value-oriented used inventory stand to capitalize most.
- The used space does pose unique competitive challenges.
- Larger dealer groups and online retailers like Carvana capture significant market share, enabled by vast vehicle sourcing networks and efficient reconditioning operations.
- Smaller startups must hone in on targeted niches and leverage local marketing to differentiate.
- Specializing in particular brands, market segments (e.g. trucks, SUVs), or value positioning can help concentrate resources.
- The DIY sales model also shows promise, connecting private peer-to-peer vehicle sales via dealer middleman services.
- From an operational perspective, used dealers must master efficient vehicle reconditioning, creative digital/grassroots marketing, streamlined sales processes, and variable cost structure.
- By focusing more on inventory turn versus absolute margin, even startups on modest budgets can drive profitability.
- It does require hands-on diligence across sourcing channels like auctions, trade-ins, and OEM lease returns.
- While barriers to entry are still relatively low, only those combining industry knowledge, marketing creativity, and operations savvy are likely to thrive.
The used vehicle sector’s vast size and current sales momentum offer seemingly boundless potential. However, with the competitive climate intensifying and operations playing an outsized role, aspiring dealers must enter with sound strategy and execution.
2. Analyze the Competition
Analyzing the competition is critical for any aspiring used car dealer. Competitors show you important information about pricing, marketing avenues, and gaps to fill in the local market.
Here’s a comprehensive approach to evaluating your competitive landscape both offline and online:
Identify direct brick-and-mortar rivals in your geographic area. Drive the market, taking note of surrounding lots. Analyze rivals by inventory size, facility scale, and pricing/merchandising tactics and track their listings on sites like Auto Trader.
Monitoring online activity presents additional insights. Scrutinize competitors’ websites, evaluating design, features, tools, and content. Review their SEO strengths on Google rankings. Run competitor sites through marketing grader tools like Marketing Signals to quantify web authority, lead gen efficacy, and digital influence.
Together this intelligence informs your strategy. New players should avoid directly confronting entrenched, high-volume operators. Instead, identify an open niche or locality to develop a specialty. Leverage digital marketing and SEO to carve out a presence regionally before expanding outward.
By understanding incumbents’ positioning plus Online and offline activity, new dealers can find “gaps” to establish their differing value proposition. The used market allows room for competition if entrants play to their strengths while being aware of bigger players.
3. Costs to Start a Used Car Dealership Business
Starting a used car dealership entails considerable upfront investment and ongoing operating expenses. Based on my extensive small business experience, here is a detailed breakdown of estimated costs:
- Legal Formation & Licensing – $2,000 Filing business structure, dealer training courses, initial licensing
- Lot Lease or Purchase – $150,000 to $1 million
Securing retail dealership property, typical small/mid-sized lots
- Inventory Acquisition – $100,000 minimum Purchasing first vehicles for resale – at least 25-50 used cars
- Facility Enhancements – $75,000 Improvements like fencing, signage, trailer, reconditioning tools
- Staffing – $15,000 Hiring first salespeople and technicians
- IT Systems & Marketing – $8,000
Dealer management software, website, initial promos
- Initial Working Capital – $80,000 Covers first few months of fixed costs before sales
Total Minimum Startup: Approximately $500,000 Sufficient for basic operations. Bigger is better for used car startups
- Lot Lease/Mortgage – $4,000 to $15,000
- Payroll Expense – $12,000
2-5 employees @ average $50k salary
- IT Systems & Marketing – $1,500
- Vehicle Reconditioning – $5,000 Parts/materials plus technician time
- Inventory Financing Interest – $3,000
- Utilities & Insurance – $2,500
Profitability potential is substantial but requires upfront capital and lean operations. Specialization in niche segments can also ease startup hurdles. But used car retailing delivers strong rewards for those who invest smartly.
4. Form a Legal Business Entity
When establishing a used car dealership, properly structuring your business entity is critical. There are four main business entities to choose from in the United States, these include:
Sole Proprietorships offer simplicity but no personal liability protection. Owners are personally responsible for business debts and legal claims. Financing vehicles via company bank accounts is very difficult. While easy to initially form, sole proprietors face considerable risks in the used car sector.
Partnerships allow multiple owners to combine assets and share financing burdens. However, they still lack complete liability safeguards and involve complex profit/loss allocations. Disagreements between partners can jeopardize operations. The fluid nature of partnerships presents issues for dealerships aiming for steady growth.
Corporations have the most formal structure – requiring appointed directors and extensive record keeping. While corporations limit owner liability and enable business continuity, stringent legal and tax requirements make them overkill for most used car startups. The administrative complexities take focus away from core sales.
Limited Liability Company (LLC)
LLCs combine the best aspects of partnerships and corporations. They limit personal liability for business debts and simplify operating agreements between co-owners. LLCs allow more flexibility in profit/loss distribution and scaling up ownership stakes. Unlike corporations, LLCs have simpler tax and administrative filings.
5. Register Your Business For Taxes
An Employer Identification Number (EIN) serves as a business’s IRS tax ID – similar to an individual’s Social Security Number. All used car dealerships are legally required to obtain an EIN shortly after forming their business structure. Here’s a concise guide on securing this vital identifier:
First and foremost, apply for your EIN through the IRS website. The online application only takes minutes to complete. You’ll need to provide basic information about your dealership’s name, address, ownership structure, and operations. An EIN is instantly issued upon submitting the form – at no charge.
Once received, use your EIN on all official dealership documents from financing applications to tax filings. This number essentially links together all financial and government dealings associated with your used car business. An EIN also enables opening business bank accounts, accepting dealer-only auction payments, and legitimately transacting with other registered firms.
Additionally, contact your state revenue department to obtain necessary sales tax permits. You’ll use the EIN to complete the sales tax license application. Fees are typically minimal but allow collecting and remitting local sales taxes on vehicle purchases. Keep both the EIN and sales tax certificate publicly posted at your used dealership location.
6. Setup Your Accounting
Proper financial tracking is pivotal for used auto dealers – involving everything from inventory purchases to sales tax liabilities. Having a skilled accountant and the right software lays the accounting foundation for success.
Utilize small business accounting software like QuickBooks to automatically log all transactions associated with the dealership. QuickBooks seamlessly syncs with bank/credit card account to input revenue, expenses, payroll, etc in real-time. This eliminates manual entry and the errors that come with it. The software produces financial statements, tax documents, and inventory reports on demand.
Hire an Accountant
While extremely helpful, software alone can’t replace human oversight. Work with an accountant from the outset to establish compliant record-keeping protocols and optimal dealership money management. They can provide services like monthly reconciliations to confirm accuracy and detect inconsistencies early.
Open a Business Bank Account
Strictly separate all personal and dealership finances. Keep a dedicated business checking/savings account and credit card solely for dealership use. Commingling funds muddles records – prompting IRS scrutiny. Apply for dealer-specific credit cards using your EIN, with limits factoring in projected monthly inventory/operational expenses.
7. Obtain Licenses and Permits
Before opening the doors, used car dealers must obtain key licenses and permits governing operations. Failure to do so risks fines or closure for noncompliance, jeopardizing livelihoods. Find federal license information through the U.S. Small Business Administration. The SBA also offers a local search tool for state and city requirements.
Acquire your state dealer license/operating authority – mandatory for legally retailing vehicles. The application requires submitting key dealership information and proof of adequate facilities. Fees vary but are typically a few hundred dollars annually. The review process can take weeks, emphasizing the importance of early submission.
Additionally, apply for local business permits with your city/county government. Like most businesses, used dealers must comply with zoning ordinances related to commercial property usage, signage, fencing, parking, etc. Even minor infractions prompt fines. Attend local dealer association meetings to understand granular requirements.
Used dealers also take liability for safety issues. Have service technicians trained and certified in proper vehicle repair procedures? Conduct background checks on all staff handling customer vehicles. Implement security features like surveillance cameras, alarm systems, and inventory management protocols. These signal professionalism to patrons while discouraging fraud.
8. Get Business Insurance
Used car dealerships involve substantial financial risks – making comprehensive business insurance essential. As an attorney assisting dealers for over 20 years, I’ve seen firsthand how adequate coverage prevents catastrophe. Here’s an overview of securing policies to fully protect your livelihood:
Without insurance, scenarios like accidents, lawsuits, or natural disasters could instantly bankrupt operations. For example, a late-night fire could destroy your entire inventory. Or a customer gets injured on site and sues the dealership for substantial punitive damages. Even an employee theft could sink a smaller business.
Commonly used car dealer policies include General Liability, Garagekeepers Liability, Commercial Property, Worker’s Compensation, Umbrella and more. General Liability covers patron bodily injury or property damage claims, up to $1 million typically.
Commercial property insures business assets like your dealer building, fixtures, and inventory. Workers comp aids injured employees. Umbrella expands limits across policies.
Now obtaining coverage follows three key steps:
- Inventory all dealership assets and evaluate risks
- Use a resource like CoverWallet to compare quotes
- Select a policy addressing likely exposures for your needs and budget
With the right business insurance partner, used car sales can thrive without fear of financial hazards. Withstand customer lawsuits, inventory damage, and natural catastrophes through comprehensive policies crafted for dealers. Safeguard your livelihood through insurance, the only surefire way.
9. Create an Office Space
An office space serves a pivotal role for used auto dealers – allowing a professional base to handle paperwork, communicate with clients, and orchestrate operations behind the scenes. While retail presence is vital, an administrative hub powers profitability. Here’s an overview of potential options with estimated costs:
Nearby co-working spaces like WeWork offer more flexibility to scale up facilities as needed. Open layouts allow dealership teams to collaborate easily starting at $300 monthly. They also provide amenities like conference rooms for client meetings and on-demand administrative assistance. However, co-working spaces lack the identity, signage, and access to standalone locations.
Retail storefronts give dealers the most visibility, allowing seamless transitions between sales calls and test drives. They also enable small showroom product displays. Typical locations with modest parking start around $2,000 monthly. However, non-prime spots hamper visibility among passing traffic.
For the best exposure, secure commercial space on high-traffic roads starting at $3,500 monthly. This provides room for inventory storage, reconditioning, and ample customer parking alongside AES class signage. The right locale conveys market authority. Weigh options, but commercial buildings best support used dealership branding and seamless operations.
10. Source Your Equipment
Launching a used car operation requires various equipment – both for sales and vehicle reconditioning. Aspiring dealers have options when acquiring these necessary materials:
Purchasing brand new tools and technology ensures peak performance, but proves costlier. Sites like AutoZonePro offer the latest diagnostic systems, lifts, and shop accessories at full retail pricing. Expect to invest over $50,000 in outfitting the workspace to new standards. However, buying outright means full ownership without recurring fees.
Seeking out quality used equipment offers major savings potential. Scout deals via auction sites like PublicSurplus.com and GovDeals.com which list government liquidations. Also, check industry forums and local classifieds like Craigslist. For example, you may find cheap vehicle lifts, workbenches, or tire changers to meet basic functions.
Leasing through an equipment rental company gives access to pro gear without huge upfront cash layouts. National chains like United Rentals offer reasonable rates on must-haves like pressure washers and floor jacks. This avoids tying up working capital better spent on inventory. However, accumulating enough monthly charges and buying outright would have cost less long-term.
11. Establish Your Brand Assets
Establishing a distinct brand identity fuels recognition and loyalty for used auto dealers – allowing focused positioning versus generic competitors.
As a marketing expert assisting thousands of startups, these proven branding steps separate market leaders:
Get a Business Phone Number
Secure a unique phone line using a system like RingCentral for professional communications. Custom-recorded greetings and extensions convey credibility from that vital first impression. This facilitates seamless customer correspondence as operations scale.
Design a Logo
Develop a sleek logo through a service like Looka to anchor visuals across touchpoints. Bold graphics draw eyeballs while strategic color schemes spark recollections. Display your vibrant emblem prominently on packaging, signs, websites, and more. Repetition cements recognition.
Print Business Cards
Widely distribute polished Vistaprint business cards to spark awareness and referrals. Your title, phone number, and sales offers should shine. Cards also enable collecting prospect information at community events. Personally handing these out allows showcasing your dealership’s commitment to service.
Get a Domain Name
Invest in external signage and online assets highlighting unique perks – whether community roots, pricing guarantees, or vehicle quality. Buy a descriptive domain from Namecheap to double as your email address.
Design a Website
A custom website is essential for used car dealerships. Attract customers, sell cars, and provide information for new and returning consumers. Build an informational website through Wix or hire a freelancer through platforms like Fiverr. Compelling content earns clicks and conversions.
12. Join Associations and Groups
Utilizing local connections and dealer groups provides invaluable insights for aspiring used car retailers. Here are pro tips to tap this vital hands-on knowledge:
Seek membership in regional associations like the Colorado Independent Automobile Dealers Association which offers specialized mentoring. These veteran peers provide area-specific guidance – covering everything from inventory trends to legal updates. Monthly meetings build professional bonds while seminars deliver actionable sales tactics. The nominal membership fees quickly pay dividends through insider secrets alone.
Regularly attend regional swap meets and auctions searchable via Meetup. Local auction groups host several huge regional sales monthly, allowing dealers to scout acquisition options and mingle afterward. Even informal post-auction conversations produce nuggets of wisdom. Bring plenty of business cards to distribute in this target-rich atmosphere.
Facebook Groups are a free and often untapped resource for new businesses. For example, Local Used Cars Owner & Dealers – Great Used Car Deals has thousands of registered users trading stories or troubleshooting struggles. Search discussions for common FAQs or make posts highlighting inventory needs.
13. How to Market a Used Car Dealership Business
Promoting a used auto dealership today requires balancing digital outreach with creative grassroots tactics. As a marketing expert assisting thousands of entrepreneurs, integrated campaigns with these components drive sustainable growth:
Tap your inner circle for effortless word-of-mouth referrals. Incent happy buyers to share positive experiences via tools like Referral Candy which furnish promo codes. This easily amplifies reach. You can even highlight great reviews via email signature CTA’s linking to your Facebook page.
- Digitally, SEM and SEO establish invaluable visibility.
- Run Google Ads campaigns optimized to capture local searchers for the best ROI.
- Target makes model-specific listings or general offerings like “affordable used trucks”.
- Build keyword-rich blog content detailing pre-purchase tips which searchers then share organically.
- Geofenced Facebook ads showcase current inventory as users browse nearby.
- Retarget interested visitors across devices to prompt store visits.
- Upload compelling inventory walkaround videos to YouTube then embed these on your site.
- Traditionally, partner with aligned brands through co-promotions.
- Negotiate referral commissions with complimentary businesses like insurers and lenders to exchange customer leads.
- Explore print options like targeted direct mail to qualified households announcing new arrivals.
- Include valuable limited-time vouchers to incite action.
- With inventive online and offline tactics, used dealers gain recognition, nurture leads and consistently convert sales.
- Blend digital convenience with memorable physical impressions for maximum impact.
- Through multimedia exposure and creative incentives, make your branding ubiquitous regionally.
14. Focus on the Customer
Providing an incredible customer experience is the cornerstone for every thriving used auto dealer. Beyond facilitating sales, standout service earns valuable word-of-mouth referrals which are the most effective form of promotion. Here’s why prioritizing patron satisfaction fuels sustainable growth:
First impressions matter deeply. Train staff to warmly greet everyone entering the dealership immediately. Taking time to answer questions and actively listen builds trust quickly. Little courtesies like offering beverages make big impressions during lengthy test drives or negotiations.
Additionally, create seamless processes around purchase and financing. Guide clients through dense paperwork, explain all terms in plain language, and expedite DMV document filing. Such handholding guidance alleviates major pain points around major financial decisions.
Post-sale, nurture ongoing relationships through personalized communication. Check-in periodically on how customers enjoy their vehicles. Seek feedback for improvement and head off emerging issues early. When problems do rarely occur, take full ownership and go above and beyond to make things right.
By continually enhancing client experiences, used dealers gain their enduring support. Satisfied buyers gladly share glowing referrals which are sales gold. This community goodwill simply cannot be purchased through ads alone. Thus, customer service must remain a priority.