How to Start Your Own Auto Dealership (Used Car)
Do you love cars? Do you want to make a living buying and selling cars? Do you want to be able to drive around in different cars each day because they are your inventory? And do you want an opportunity to try to make the Forbes 500 and possibly a multi-millionaire or even a billionaire? Starting up your auto dealership may just be the next best move that you make.
In this Hub, I would like to try to explain the steps needed to start up your own auto dealership. Initially, a lot of your work will involve working with the city, landlords, and the DMV. They will be your first series of challenges before you go into business. And once you setup your business, you’ll then need to learn the business - managing inventory, obtaining financing, marketing your business, and customer service. So here we go with this Hub,
“How to Start Your Own Used Car Dealership.”
Step 1: Understanding the Business Model of the Auto (Used) Dealership
First of all, as always, I like to talk about the money involved in the auto dealer business right from the start. Let’s go over how you make money in this business, how much money you can make in this business, and what some of the drawbacks are in this business. By going over the business model from the start, it should help you to figure out if this business is right for you at this time or not.
*Also as a caution, when I refer to the “auto dealer business” I mean the “used car dealer business.” New and used car dealer businesses are different, and in this Hub, I will be going over How to Start Your Own Used Car Dealership.
The auto dealer business is a business that has enough potential to propel you to become a millionaire if you run the business right. If run your business extraordinary well, this industry also has the potential to get you up to a billionaire status. The best run businesses in this industry can be found on the Forbes 500 which means that the auto dealer business has a lot of upside profit potential.
The Business Model
In the used car business, there are three main methods of making money. The three methods are:
- Selling Used Car Retail
- Selling Used Car Wholesale
- Broker New or Used Car
These are the three main sources where you make money in this business. We’ll cover each one of these in detail below. Here is a table that summarizes how much money you can expect to make per sale as a used car dealer for each sale that you make.
- Selling Used Car Retail: $500-$2,000 per sale
- Selling Used Car Wholesale: $300-$700 per sale
- Broker New or Used Car: $250-$500 per sale
So as you can see, the profit you make per car is pretty big. Let’s try to go over each of the three business models above in detail.
Selling Used Car Retail
Retail sales of a used car occur at a dealership or on a car lot. On the lot, customers will visit you, browse the cars that you have in inventory, and talk to your salespeople. The customer will find a car that they like and purchase it from your dealership. This typical transaction is the retail used car dealership.
Other than the typical retail dealerships, there are other situations that allow a person to sell used cars in a retail setting. You are actually permitted to sell used cars retail at a small office location if you can pass all of the legal requirements. A good example of this will be an auto repair shop selling cars that they fix up, direct to their customers. If the repair shop has passed all of the legal requirements, this is perfectly a legal way of selling cars.
When you sell used car retail, the average profit margin is around $1,000 per used car sold. As a used auto dealer, this is the profit margin that you will target for. Of course in each sale the profit margin does fluctuate rather significantly. It is typical to sell your cars at a profit margin that is significantly higher or lower than the average profit margin of $1,000 per car. There are many reasons why this happens, and I have listed it here. Keep in mind that it is the combination of the factors described below that will determine the profit margin of your sales.
Reasons of Higher Profit Margins
- You may have had a car that sell very well or is in high demand
- You may have purchased the car at a below wholesale price
- You may have had to do very little repairs or the repairs cost very little to do
- The customer was a no haggle kind of person that purchased the used car at its full retail price
- You may be selling a higher end car that may allow you to charge a premium at your dealership
- You may have great service allowing you to charge a premium at your dealership
- You may have a great financing plan allowing you to charge a premium at your dealership
- The economy is booming, and people are spending a lot of money
Reasons of Lower Profit Margins
- You may have had a car that is in poor demand of the car has been in inventory for a long period of time
- You may have purchased the car at above wholesale price
- You may have had to do a lot of repairs or the repairs cost a lot to do
- The customer was very demanding, negotiating the purchase price down to below average levels.
- Your dealership may compete based on price thereby lowering the profit margin per car
- The customer is unable to secure financing
- The economy is in a recession, and consumer spending is low
A combination of these factors will influence how much profit you will make per used car sales at your retail car lot.
Here is a simple formula that will help you to understand and determine the profit margin per each sale:
Retail Sale Price – Purchase Price of Inventory – Costs to Tune Up the Car = Profit Margin
To increase your net profit, you can either increase your sale price, or decrease your wholesale purchase price, or the repair price of the car. Many dealers that are also repairman are capable of doing their own repairs, and hence may have a higher margin then other dealers. You can also have an exceptionally good sales team, allowing you to sell your cars for more then what it would usually go for. It’s not uncommon for dealers to make $2,000-$2,500 per used car sale if you can do any of the above.
Selling Used Car Wholesale
Next way you can make money is by selling the cars you buy at an auction or through a customer wholesale to other dealers, or back to the auction. Usually, dealers that do wholesale sales are able to fix vehicles or find them at a bargain to sell it back to other dealers for a profit. In this market, and average profit margin is about $500. But since there is less work and hassle involved in this business, there are many extremely successful wholesale dealers out in the market today.
Broker New or Used Car
One other way that you can make money in the auto dealer business is to broker new or used cars. There are many people out there that may not have the time or just want other people to do the purchasing the car for them. You, as the dealer, will work with other dealers in order to broker a deal with the customer, and collect a broker fee. Broker fees can be collected from either the customer or the dealer, and you should be looking to get somewhere between $300-$500 per transaction.
So these are the three basic business model of the auto dealership. At this point, I am hoping you understand when I say that it’s not very difficult to make your first million dollars in this business. At $1,000-$2,000 per car, you’ll need to sell somewhere between 500-1000 cars to hit that number. Breaking it down to days, that’s 1.3 to 2.7 cars a day. Even if you do 1/10th that amount, you still have the potential to make $100,000 in income. Not bad.
This is indeed a business where someone with the right amount of smarts, passion, and hard work can become a definite millionaire. So good luck!
If you're still interested, this Hub continues into Part 2 and on. Part 2 of this Hub will go over some of the legal requirements that you need to meet to get licensed as an auto dealer. Click here to read on...