How to Start a Used Car Dealership

Used car dealerships brought in more than $118 billion in revenue this year. This business may be perfect for those who are interested in selling cars without having to franchise through a major automotive manufacturer.

Many used car lots are independently owned and include cars of various makes, models, conditions and prices. So there’s plenty of room for you to make the business your own. Here’s how to start a used car dealership.

How to Start a Used Car Dealership

 

If you’re interested in getting started in this industry, here are some of the basics you need to know.

Perform Market Research

Before you can get started as a used car dealer, you need to know what your market looks like. You should learn about the consumers in your area first. What types of cars are they looking for? Where does price come in? What attracts them to a particular dealer?

Then you should get to know the competition. Is there already an influx of one particular type of car dealer in your area? Is there an opportunity for you to stand out in another way or should you focus on a market that is less saturated?

Go beyond just identifying customer preferences and competition. Investigate the economic trends in the automotive industry, the impact of technology on car buying habits, and the potential for electric or hybrid vehicles in your inventory.

Choose a Location

During your research, you need to zero in on a location for your used car lot. Ideally, it should be somewhere easy to access with enough vehicle traffic to attract customers. Start by getting a general idea for the area you want, then focus down further to find an open lot with enough space for all the cars you want to eventually include in your inventory.

Key Location Considerations:

• Accessibility: Ensure the location is easy for customers to find and access, ideally near major roads or intersections.
• Vehicle Traffic: Choose a spot with high vehicular traffic to naturally attract potential buyers.
• Lot Size: Ensure the space is sufficient to accommodate both your initial and potential future inventory.
• Visibility: Opt for a location that is easily visible from the main road, enhancing spontaneous visits.
• Safety and Security: Evaluate the safety of the area, considering factors like lighting and the general neighborhood reputation.
• Nearby Businesses: Consider proximity to complementary businesses, such as auto repair shops or car washes, which can bring additional footfall.
• Cost Effectiveness: Ensure the rent or purchase price aligns with your budget while also factoring in future growth prospects.
• Potential for Future Expansion at the Location: Look into zoning laws that could affect your business, and consider the convenience for customers in terms of public transportation access.

Identify a Niche

Even though many used car dealers do not specifically affiliate with a single auto manufacturer, you still might find it useful to choose a niche for your business.

You could sell just one brand of vehicle or even just focus on a specific price point. This will help you more effectively market to your target audience. As you grow, you could always branch out into new brands or price points as well.

Consider specializing in vehicles that are in high demand but underrepresented in your market, such as fuel-efficient cars, luxury used cars, or vehicles suitable for ride-sharing services. Tailoring your inventory to a specific niche can set your dealership apart.

Learn About Regulations

Used car dealerships do need to comply with the Federal Trade Commission’s used car rule, which states that dealers must include a buyer’s guide for each vehicle and allow buyers to inspect the vehicle before purchasing, among other requirements.

Some states and local communities also have rules that apply to car dealerships. So make sure you do your homework about compliance standards before starting up.

Stay informed about changes in automotive regulations, especially those related to emissions, safety standards, and consumer protection laws. These can impact the types of vehicles you can sell and how you conduct business.

Register Your Business

In order to officially get started, you’ll need a business license, dealer’s license and you’ll probably need to register with the DMV in your state.

Specific processes vary by state and local community. So check with your state and local governments or converse with someone from your local chamber of commerce to make sure you meet the necessary requirements in your area.

In addition to obtaining the necessary licenses, consider the legal implications of your business structure on liability, taxes, and investment opportunities. A consultation with a legal expert in the automotive sector can provide valuable guidance.

Build an Inventory

When starting a used car dealership, you probably aren’t franchising with a manufacturer who provides you with vehicles. So you need to source them yourself.

Register with auctions in your area so you can find low cost vehicles to sell, or source cars from social media. Most independent dealers will need to start small and then build inventory as you earn money over time.

Jamie Jones, who has managed car dealerships across the U.S. for more than 25 years, said in a video “As your cash flow builds, you’re workflow has got to build. That’s just how it works. You kind of have to crawl a little bit. Then you get a little bit faster pace. Then you start to walk. And then you start to run.”

Explore partnerships with local businesses or government agencies to acquire fleet vehicles that are being retired. These vehicles often have detailed maintenance records, which can be a selling point.

Develop Buying Policies

Moving forward, you’ll need to come up with a plan for keeping your lot stocked with vehicles without draining all of your resources. Whether you’re in charge of stocking your inventory or relying on a team member or partner to do so, it’s important to have a limit or number in mind.

Dale Pollak stated in his book, Like I See It: Obstacles and Opportunities Shaping the Future of Retail Automotive, “I propose that every dealer institute a hard cap or limit on their used vehicle inventory investment. Managers have X dollars to spend and manage in a given year, and that’s it.”

Key Buying Policies to Consider:

• Inventory Limit: Establish a maximum number of cars to have on the lot at any given time.
• Budget Allocation: Determine a fixed budget for acquiring new vehicles each month or year.
• Vehicle Source Preferences: Identify preferred channels for acquiring cars, such as auctions or direct purchases.
• Vehicle Type Focus: Decide on the types or brands of cars that align best with your niche and customer demand.
• Turnover Time: Set a target timeframe for how long each vehicle should ideally stay on the lot before being sold.
• Periodic Review: Regularly review and adjust policies based on sales performance and market conditions.

Implement a rigorous vehicle inspection process to ensure the quality of your inventory. Consider factors like vehicle history, mileage, and potential for future maintenance when making purchasing decisions.

Develop an Online Presence

Today, car shoppers do a ton of research online before even heading to a dealership. That means there needs to be enough information about your business and the products you offer on those relevant online platforms.

According to Garrett Smith of RepCheckup, it’s important to have accounts and accurate information on online business directories, social media sites and review platforms. You might also list cars on your website and other marketplaces that people can easily find online in order to bring more traffic to your dealership.

Utilize digital tools like virtual car tours, online financing calculators, and chatbots to enhance the customer experience. Leverage data analytics to understand customer behavior and preferences on your website and adapt your online strategy accordingly.

Consider a Service Department

Used cars tend to need more repairs and service than newer models. So you have the opportunity to build in a significant extra income by offering a service center right at your dealership. This might be something you choose to open after building your dealership income for awhile.

In order to do this, you’ll need a garage, some equipment and skilled mechanics. Then you might offer specials or incentives to keep your car buyers coming to your service centers over other auto repair shops.

Develop service packages or loyalty programs to encourage customers to return for maintenance and repairs. Consider offering specialized services, such as customization or upgrades, that align with your niche.

How to Start a Used Car Dealership Summary

Steps to Start a Used Car Dealership	Description
Perform Market Research	Understand consumer preferences and analyze local competition. Identify gaps in the market and potential opportunities.
Choose a Location	Find an easily accessible spot with high vehicle traffic. Ensure there's enough space for your intended car inventory.
Identify a Niche	Focus on a specific car brand or price point to effectively target a specific market segment.
Learn About Regulations	Familiarize with the FTC's used car rule and other relevant state and local regulations. Ensure compliance before starting.
Register Your Business	Obtain a business license, dealer's license, and registration with the DMV. Procedures may vary by state.
Build an Inventory	Source cars through auctions, social media, or direct purchases. Begin with a small inventory and grow over time.
Develop Buying Policies	Set clear guidelines on maintaining car inventory, managing expenses, and setting purchase limits.
Develop an Online Presence	Establish online profiles on business directories, social media, and review platforms. Ensure accurate listings and information availability.
Consider a Service Department	Explore the potential of adding a service center for repairs and maintenance, increasing revenue opportunities and customer loyalty.

Things to Work on Once Your Used Car Dealership is Up and Running

Once your used car dealership is operational, it’s crucial to focus on strategies that not only sustain the business but also foster growth and enhance your market presence. Beyond the initial setup and launch, certain key areas require ongoing attention and development.

These aspects are essential to adapt to the dynamic automotive market, meet customer expectations, and stay competitive. Here are some critical focus areas to consider for the continual success and growth of your used car dealership:

Financing Options for Customers

Explore partnerships with financial institutions to offer attractive financing options to your customers. This can increase sales by making vehicles more affordable for a broader range of customers.

Sustainability Practices

Consider implementing environmentally friendly practices, such as recycling parts or offering electric vehicle charging stations. This can enhance your brand image and appeal to environmentally conscious consumers.

Community Engagement

Get involved in local community events and sponsorships. This not only raises your dealership’s profile but also builds goodwill in the community.

Customer Relationship Management

Invest in a robust CRM system to manage customer interactions, follow up on leads, and maintain customer relationships. Personalized communication can lead to repeat business and referrals.

Staff Training and Development

Regularly train your staff in customer service, sales techniques, and the latest automotive trends. Knowledgeable and courteous staff can significantly improve the customer experience.

Market Analysis and Adaptation

Continuously analyze market trends and adapt your business strategy accordingly. Be prepared to adjust your inventory and services to meet changing customer demands and market conditions.

Monitoring Industry Trends

Keep an eye on industry trends, such as the shift towards electric vehicles, changes in consumer buying behaviors, and advancements in automotive technology, to stay ahead in the market.

By actively working on these areas, your dealership can not only maintain its relevance in the market but also create opportunities for expansion and improved customer relations. These efforts will contribute significantly to the long-term success and reputation of your used car business.

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