Tips for Operating a Successful Car Dealership

Tips for Operating a Successful Car Dealership

Almost every car lover hopes to have a big garage filled with the vehicles they love one day. Whether you collect iconic muscle cars, vintage roadsters or classics from a single automaker, you may share the common dream of owning an expansive collection of your favorites.

While many people want to collect cars, not everyone sees them as collectable assets. Instead, entrepreneurs throughout the country see them as salable goods they can use to make money. From small, mom-and-pop dealerships, to individuals who sell a handful of cars in private transactions per year, to automotive conglomerates such as AutoNation and Penske Automotive that own well over 100 locations, auto dealers come in all shapes and sizes.

If you've gotten a taste of the auto sales business by selling cars independently in the past or you’ve earned experience by working for a dealership, you may have developed an interest in establishing your own car dealership or already have one up and running. Whether you want to sell new vehicles, used cars or both, there’s plenty of good news for people in the business of selling automobiles.

Car Dealership Statistics

According to the National Automobile Dealers Association, dealership sales of new and used cars, parts and automotive services generated an all-time high of $862 billion in revenue in the United States in 2015. This record-setting number marked a 6.9 percent increase over the industry’s revenue figure from 2014.

In its Used Car Dealers in the US: Market Research Report released in May, 2016, IBISWorld reports that the sale of pre-owned cars was responsible for $111 billion of the industry’s revenue, which was the result of a 3.2 percent annual growth rate between 2011 and 2016.

In a separate report entitled New Car Dealers in the US: Market Research Report, published in May, 2016, IBISWorld reported that the market for new cars grew by 5.9 percent between 2011 and 2016. In 2015, for instance, franchised new-car dealerships sold over 17 million light trucks and cars. Even though franchised new-car dealerships sold a record-setting number of new cars and light trucks last year, new vehicle sales only account for 25.8 percent of automobile purchases in the United States. This means 74.2 percent of automobile purchases are for previously owned vehicles.

Many car dealerships do more than sell new and/or pre-owned cars, too. They also sell factory-made parts and accessories. Additionally, many dealers also have auto service centers and a body shop that provide the fee-based services drivers need to repair, maintain and modify their vehicles. These services can add a significant amount to a dealership’s bottom line and give consumers reasons to return to a given location many times over in between the times they buy or lease a car. In 2015 alone, car dealerships located throughout the country wrote more than 200 million repair orders, generating $97 billion in service and parts sales in the process.

Over the past decade, the number of new car dealerships in this country has dropped by approximately 4,000, largely due to consolidation. Overall, this trend toward consolidating locations has led to greater profits per dealership. The New York Times reports that the number of new car dealer groups that posted annual revenue of at least $1 billion doubled between 2011 and 2014. Compared to 2011, the number of U.S. dealerships that had more than 30 locations increased by almost 50 percent by 2014.

While owning and operating a car dealership can give you the chance to make money off of the sale of vehicles, parts and services, a car dealership also gives your employees the chance to earn a living and provide for themselves and their families. According to IBISWorld, there are 133,029 used car dealers in the United States and they collectively employ 273,533 individuals. The same source reports that there are 18,150 new car dealers operating in America. Together, new car dealerships employ 1,115,301 people.

The average number of employees per dealership increased to 67 in 2015, up from 65 in 2014. The collective annual payroll of new car dealerships in the United States in 2015 equaled $62.8 billion, an increase of almost eight percent over the industry’s total payroll in 2014. The average annual payroll per dealership was $3.8 million in 2015, which also marked an increase of nearly eight percent over the average yearly payroll per dealership in 2014.

How to Start a Car Dealership

With the car sales industry holding so much potential for continued growth, you may be eager to jump in the market but are unsure how you should go about starting a dealership. The first step toward figuring out how to be a successful car dealer is deciding the kind of automobiles you want to sell. In general, starting a used car dealership is less expensive than establishing a new car dealership. If you’re on a budget, you may want to start a used car dealership with just a few vehicles. As you sell your cars, you can reinvest in your inventory and offer an increasingly larger selection of automobiles over time.

After you identify the sort of cars you’re going to sell, you need to conduct research to find a market that will support your business. You need to research the type of cars consumers are buying as well as the specific brands and vehicles that other dealers are selling in the area surrounding the prospective location of your future car dealership. If there is not enough demand or if the market is already saturated with vehicles similar to the ones you intend to sell, you’ll need to search for another location and start your research again.

Once you choose the kind of vehicles you want to sell and find a spot for your business, you need to prepare yourself for the additional steps and the related costs that are involved with becoming a car dealer. The amount you’ll have to pay to set up shop depends on many factors, including the number of staff you’re going to employ and your location. Across the nation, auto dealers have invested an approximate total of $234 billion in their businesses, which breaks down to an average of $11 million per location.

Studies show that you can generally find nine dealerships in areas with a population of at least 40,000 residents. The investment per dealership in these locations is estimated to be about $100,000. In areas with a population of 240,000 or more, consumers typically have around 90 car dealerships to choose from. The estimated investment in the car dealerships in these locales is approximately $1 million.

Whether you’re going to start a car dealership in a densely populated location or in one that is more sparsely settled, you’ll inevitably have to cover certain costs before you open your doors to the public for the first time. These startup costs and the critical tasks or steps associated with them include the following:

  • Retail space: How much you’ll pay for a retail space depends on a lot of factors, including where you’re going to establish your business and whether you’re going to buy or lease a retail location. The cost of buying commercial property can top millions of dollars regardless of whether it has a structure on it or it’s vacant. If you’re going to lease a commercial space, doing so can cost anywhere from $8,000 to $20,000 or more per month.
  • Business registration: Depending on the state in which you’re going to establish a car dealership, you can register your business as one of the following:
    • Sole Proprietorship
    • General Partnership
    • Limited Partnership
    • Limited Liability Company
    • Corporation
    The amount you’ll need to pay to register your company also depends on the state you’re going to operate in and the kind of entity you’re going to register your business as. If you want to register a limited partnership in Texas, for example, you can expect to pay $750 while registering this kind of business entity in California will only cost $70. Registering a corporation in any state usually costs less than $300.
  • Inventory fees: It doesn’t matter if you’re going to sell new or used vehicles. You’re going to have to invest in inventory to have actual cars to sell to your patrons. If you’re on a limited budget, you should consider securing floor plan financing to finance your purchase of a set number of automobiles. This kind of financing is a short-term, interest-bearing loan that ordinarily has to be settled within 30 to 90 days.
  • Dealer license fee: Depending on your location, your state may allow you to buy and sell three to seven vehicles per year without a license. If you’re going to start your own car dealership, you’ll clearly need to sell more than seven vehicles to keep your business afloat and make a profit. To do so while remaining in compliance with the laws governing your area, you’ll need to secure a dealer license. Dealer license fees vary widely by state, but they can easily reach a five-figure dollar amount.
  • Surety bond premium: To protect consumers from dealer fraud, states require car dealerships to have surety bonds. The cost you’ll pay to secure a surety bond depends on several things, including your bond’s face amount and your own credit history. If you have poor credit, a surety bond may cost more than $10,000 per year.
  • Liability Insurance Premium: While a surety bond protects consumers from fraud, liability insurance is designed to protect you and your business. Depending on your location, its size, the crime rate in your area, and other considerations, you can anticipate paying anywhere from a few thousand dollars to more than $10,000 per year for the liability insurance your car dealership will need.

Given the costs involved with starting a dealership, many entrepreneurs have to look beyond their own limited resources to finance their endeavors. Preparing a business plan that includes sales forecasts and a detailed summary of your work experience can help you secure the funds you need to open a car lot regardless of whether you are soliciting funds from private investors or a financial institution such as a bank or credit union. Getting the money you need and spending it judiciously as you go through the start up process are two of the most important steps you’ll need to take as you labor to establish your business.

How to Own a Dealership

Now that you know many of the vital steps to bring you closer to realizing your dream of becoming a car dealer, you might be wondering about how to run a car dealership. Some of the day-to-day things you’ll need to do before, during and after the time you figure out how to own a dealership include the following tasks:

  • Hire quality employees: Even though you may want to help every consumer who visits your car dealership yourself, it’s not likely you’ll be able to do it effectively, even if your dealership is on the small side. For this reason, it’s critical to hire quality employees to represent your business.

    Your sales staff has to be able to identify the needs a consumer has and find ways to satisfy them. Your salespeople must also possess the discipline to avoid pushing their own agendas and have the wherewithal to respond to clients with the best interests of both the customer and your operation in mind.

    Even if a consumer isn’t armed with information from the Internet that can be used to push back on dealer pricing, your salesmen and women need to be honest and transparent in every interaction they have with consumers. In addition, with more price negotiations and car sales being done online, you’ll need to hire honest, knowledgeable salespeople to handle your Internet sales as well as the face-to-face transactions that occur on your showroom floor.

    Besides hiring salespeople, you’ll also need to hire at least one highly-trained automotive technician. You’ll need to do this even if your dealership isn’t going to include a service center. You’ll want a seasoned technician on your payroll so they can help you determine the value of the vehicles people want to trade in and to fix any problems that occur with the automobiles in your inventory.

    You may want to consider hiring a professional to manage your social media accounts and online reviews as well. With studies showing that it’s three times more likely a car shopper will purchase an automobile if your dealership was reviewed positively online, managing your car dealership’s digital presence is important to your initial and ongoing success.

  • Embrace and use available technology: Third-party websites such as Edmunds.com have helped to revolutionize the car-buying experience for consumers and dealerships alike by giving shoppers the ability to search for available vehicles beyond their own locales. Even more importantly, these websites give consumers the ability to compare prices between dealerships almost instantly.

    You need to arm your Internet sales team with the computers they need to respond to customer inquiries in real-time. Your computer system should also be able to support a live chat feature which will enable your sales staff to interact with customers no matter where they are located.

    Make sure your Internet and showroom sales teams have the information they need to negotiate on your behalf before they engage with a client. The most critical piece of information they need is the “rock bottom” price you’ll be willing to accept for the car they’re about to discuss. You can generally determine this price by adding a five to 10 percent markup to an automobile’s total dealer cost.

    In addition to a modern computer system, you should get a dealer management system, or DMS, when you can afford to do so. A DMS includes a suite of services that can facilitate and support your daily operations. A DMS can track your inventory, sales and warranty claims, for instance. This kind of system can also tell you how much state tax you owe for the vehicles you sell, which can help you remain in compliance with your state’s Department of Revenue. A DMS can improve your dealership’s relationship with customers as well because it makes it easier for your staff members to follow up with customers after a sale, and it can provide customer-specific information for your employees.

  • Promote your business: Even if you’ve hired a social media manager to promote your car dealership online, you need to do more to promote your business. Based on your target market, you’ll need to identify where you should place advertisements that will draw people to your business. Some possible places where you may want to put an ad include local newspapers, group-specific publications such as community or college newsletters, billboards, radio spots and the sides of public buses.

    It’s often easier to promote your business when you have something specific you want to tell people about, such as an upcoming sales event, the arrival of a new car or a fundraiser your dealership is either hosting or sponsoring. You may want to come up with some ideas that will resonate with your target market and develop your promotions and advertising strategy around them.

  • Keep it clean: Many consumers decide whether or not they’re going into a business based on its appearance and cleanliness. For this reason, it’s necessary to make sure your facility and your lot are properly maintained at all times. If you don’t have a maintenance team, you should assign responsibility for tasks such as sweeping the lot, cleaning the rest rooms and cleaning and restocking your customer waiting area to specific employees and make sure they’re getting done daily.

    In addition to making sure your property is presentable on the inside and outside, you also need to make sure the vehicles you’re trying to sell are clean and in working order. If you don’t have a professional detailer on your payroll, you may want to make arrangements with a mobile detailer to visit your location whenever you add a used vehicle to your inventory, before you make that automobile available for sale.

    Your employees have to look professional and well-kept as well. Establish a dress code for your employees and enforce it so that consumers will have visual evidence that you and your employees take your business and clients’ needs seriously. For many people, buying a car is the second most expensive purchase they’re going to make after buying a home. With thousands of dollars on the line, car shoppers want to know you’re serious about what you do.

  • Sell reliable automobiles at fair prices: It’s more than “just” dishonest and deceitful to sell vehicles when you know they are substandard. It’s also an illegal business practice that can get you into a lot of legal trouble.

    Even if you don’t have to grapple with legal consequences, though, selling vehicles that you know aren’t up to par can destroy your car dealership’s reputation and negatively impact your bottom line. The proliferation of online review websites coupled with consumers’ increased dependency on them and the broad reach of social media means that one bad deal can have a significant and nearly immediate affect on your business.

Managing Your Inventory and Space

One of the most important responsibilities you’ll have as the owner of a car dealership is managing your inventory and how you use your commercial retail space. While managing your inventory of cars may be as simple as replenishing your inventory of used cars by attending a car auction when you have too few pre-owned vehicles on hand or letting the manufacturer you represent know you need more brand-name cars, managing parts and tires is a bit trickier.

When you count all of the different car models and trims that are currently available for sale, there are still more parts that go into making an automobile. Just as you’ll have to have more than a few parts on hand in your parts and service centers, you’ll also need to have more than one kind of tire available. Even if you only sell one brand of car, drivers normally need to have different tires put on their vehicles at various times of the year. If a driver lives in an area that experiences a lot of snow and ice during the winter, for instance, part of the winterizing the individual’s car will involve replacing their summer or all-season tires with winter tires. This means you’ll need to carry an assortment of tire types and sizes in your parts and service departments.

Given the sheer volume of parts and tires a typical car dealership needs to satisfy the automotive needs of its clients, it’s critical to manage your parts and tire inventory efficiently and maximize your facility’s storage capabilities.

Too often, dealership owners simply rely on traditional static shelving systems to store their parts and tires, which are inherently inefficient. Static shelving systems occupy a tremendous amount of floor space, forcing employees to cover a lot of ground to get the parts they need. These outdated systems also get disorganized quickly because retrieving and restocking parts and tires is unnecessarily labor-intensive and time-consuming. Finally, a static shelving system is limited in its storage capacity because your shelves can only go so high before your employees are no longer able to pick products safely and without straining their bodies.

Fortunately, Summit Storage Solutions has developed a system that will make managing your inventory of parts and tires easy and efficient — vertical storage carousels. These carousels free up floor space by using your facility’s vertical area to store your parts and tires. This means you’ll be able to stock more parts and tires per square foot.

Vertical carousels make it simple and safe for your employees to get the items they need because they have user-friendly, intuitive controls that move the carousels up and down. Our vertical storage carousels will quickly deliver the parts your employees need at waist height, which means your staff members will not have to strain and risk injuring themselves to get the items they’re looking for.

It doesn’t matter if the parts in your inventory are stored in a tote, bin, box or bag, our vertical storage carousels are designed to accommodate them. It also doesn’t matter how many tires are in your inventory or what kind they are. We will custom-build a vertical storage carousel to store your tires and parts efficiently and enable you to get the most out of your commercial space.

At Summit Storage Solutions, all of our customized storage solutions are manufactured here in the United States. This allows us to control our costs and make our products as affordable as possible while maintaining high quality.

If you want to learn more about our custom storage solutions, fill out our online contact form or give us a call. We’ll answer all of your questions, discuss your unique storage needs and provide a free quote for you.

If you have additional questions about our carousels, feel free to call us at 610-921-1119 or email us at SummitSales@SummitSteelInc.com.