If you love selling cars, and you've always wanted to own your own business, you might want to consider opening up a used car lot. Used car dealerships can be a great new business opportunity to rake in hefty profits without having to acquire as much capital as they'd need to open a new car dealership.
In this guide, we'll show you the ins and outs of having your own used car startup. We'll go over the resources you'll need to get your business started and the process for legally registering your company.
Necessary Skills and Certifications
Although no formal education or training requirements are needed to open a used car lot, dealership owners need general business management skills and product knowledge. They also need people skills, a knack for customer service, and sales abilities.
It's also important to have a solid knowledge base about the vehicles you're selling and the industry you're working in. Any experience working in the automotive industry or selling big-ticket items will come in handy when starting a used car business.
Different states have different rules about how many car sales you can make without a license. Generally, you can sell around five cars a year. If you want to sell more, you'll need a dealer's license. Be aware that some states, like California, have different licensing requirements for selling new cars than selling used ones.
You'll need a mechanic to service your vehicles and get them ready to sell. A mechanic with automotive service excellence (ASE) certification will have the skills and experience you need.
Planning Your Used Car Business
Take some time to plan and write out your business ideas. Who's your target market? What type of car do you want to sell? It's good for used car dealers to specialize in one brand or type of car. Do a little market research to see what people are interested in around your area. For example, if you're in an area where people have a higher income, you might sell luxury vehicles.
Some well-liked car brands that sell include Subarus, Hondas, Kias, and Toyotas. Some types of cars you might specialize in include SUVs, classic sports cars, and luxury vehicles. Whichever you choose will decide the type of clientele you need to attract.
The pricing for used cars has risen over time as developments in the automotive industry have made it possible for vehicles to stay in good condition longer. The average price for a used car is just over $21,000. However, you can specialize in a lower or higher price point depending on your target market.
You can use Kelley Blue Book to see what certain used cars are selling for. When deciding what price to charge, remember that you should charge enough to make up for things like the cost of your mechanic, the commission of your car salesman, and your business operations so that you still make a profit.
Have your repair technician take a look at any car you plan on buying to make sure the vehicle is in acceptable condition. Your mechanic can also make any repairs necessary for resale. Used cars tend to need more service than new ones. Having your own repair shop can be a great way to take care of your customers and earn extra income.
Your lot will have to abide by the Federal Trade Commission's (FTC) used car rules. You must include buyer's guides with each of your vehicles, let possible customers test-drive vehicles before buying, give customers a clear explanation of any warranty you offer, and follow several other regulations.
There's a lot of costs involved with starting a used car dealership business. Not only will you have to pay for your inventory, but you'll also have to pay a variety of other business expenses like legal help, insurance, and employees. The amount of capital you'll need to start a used car dealership will be different depending on factors like your location and what type of inventory you sell.
Here are a few things you might have to pay for:
- A rental property to display your cars with garages, a showroom, and whatever else you need
- Your starting inventory (the cars you'll sell)
- Hiring mechanics, salespeople, an accountant, and any other employees
- Office equipment like computers, phones, and printers
- A customer relationship management (CRM) tool
- A dealer's license
- Dealer plates for used vehicles
- Marketing material
- Insurance policies
- Surety bonds to protect customers (also known as a dealer bond)
- Fees for registering your business
- Signage
While it's more expensive to make new car sales, it still takes a sizable investment to start a used car dealership. If you don't have the money on hand, you'll probably be looking for investors or partners. They'll expect to see your business plan before they decide whether to invest in you.
A quality business plan will define how your business will run, bring in profits, and identify any problems you might run into. Here's what a quality business plan should include:
- An executive summary that outlines the key points of your plan
- Your company description
- A market analysis
- A list of all stakeholders and managers
- Your strategies for providing service and making sales
- How you plan to handle your financials, and how much funding you'll need
Legitimizing Your Business
When you get all your resources in place, you'll need to get your business legally registered. The next couple of sections will focus on how you can make your business legitimate with your state.
Getting Your Company Registered
The first thing you'll need to do is pick which type of business entity you want to start. There's a variety of business types you can choose from, and they all have their own advantages and disadvantages. Here are your primary choices:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
- Corporation
Sole proprietorships and partnerships are the easiest businesses to start, but they are legally considered to be the same as their owners. That means if you're the owner and your company gets sued, the other party can come after your personal assets.
LLCs offer some asset protection. They are legally considered separate from their owners, and they still offer "pass-through taxation." This means their owners report taxable income on their personal records. Corporations offer the greatest amount of asset protection; however, they get double taxed.
You'll likely want some level of asset protection if you're starting a dealership to protect yourself if you get sued by customers or employees for things like injuries or service errors. An LLC or corporation might be your best choice.
Naming your business is also important. You want a name that is different enough to set you apart but also captures your business in a way that's easily remembered. Registering your business name with the federal government isn't legally required, but it can be a smart move if you plan on expanding in the future. You also need to get in touch with your Secretary of State's office to see if anyone's using your name in your area. Usually, you can't use the name of another business in your state.
Depending on where your business is, you might also have to get different sales or retail licenses. The United States Small Business Administration (SBA) can show you what the federal rules are for your type of business. You can also reach out to the SBA office in your area to see what specific rules are for your location.
While car dealerships don't have to insure their cars individually, they need to have some insurance on their inventory as a whole. Here are a few insurance options you may need for opening a used car dealership:
- Auto dealer insurance
- Comprehensive property insurance
- Auto liability coverage
- Employment practices liability insurance (EPLI) for lawsuits
- Errors and omissions insurance (E&0) in case employees make service errors
- Business income insurance in case things like hail storms cut into your profit
- Workers compensation insurance
- Garage keepers liability in case customers' vehicles are damaged
- Dealer plate insurance so that customers can test drive cars
It's also necessary to get a business bank account to help separate your business finances from your personal finances. Having a business line of credit and a business credit card can protect your credit score if your company is sued, defaults, or finds itself in debt. To open a bank account, though, you may need an employer identification number (EIN), your business license, and some registration documents. If you have a sole proprietorship or partnership, you'll use your Social Security number in place of an EIN.
Knowing federal tax laws and those of your state is essential if you want to stay in compliance. Some tax laws can also be beneficial to your bottom line. For example, owners of used car dealerships with pass-through taxation (LLCs, sole proprietorships, and partnerships) can deduct up to 20% of their qualified taxable income.
Because your shop will run out of a physical location, you'll need a certificate of occupancy (CO). This form certifies that all building codes and rules have been followed. If you're leasing, it's the landlord's job to obtain a CO. Make sure they get a new one every time any renovations or changes are made to the building. Check your city's government website to ensure you're meeting all codes in your area.
Marketing Your Used Car Brand
The first thing you should do when marketing your business is to create a website. You can do this yourself by using a site like Weebly or Squarespace. You can also hire a web designer on sites like Upwork.
Advertising on social media is huge. Your business needs to be present on several social media platforms like Twitter and Facebook. You can market with great pictures of your used cars or advertise special deals or prices you're offering. You should also try to respond to reviews, comments, and messages from your audience. This can help you connect with potential car buyers.
Another thing your company needs is an original logo. Companies like Tailor Brands and Looka can help you make a logo that represents your company in a professional and appealing way. After you've created it, you can trademark your logo on the USPTO website.
An extremely effective way to encourage more business is through referrals from your current customers. Try to get a testimonial after every sale. You can do this by sending out customer satisfaction surveys or by reaching out directly. You can feature great reviews on your website, social media pages, or anywhere else they might influence potential customers. You can also use sites to get reviews and feedback for your business, like Yelp and Google My Business.
Make it as easy as possible for potential customers to get in contact with you. Add your business phone number, email address, and other contact information on your website, social media pages, and everywhere else you can.
Taking Care of Administrative and Accounting Tasks
If you want your used car dealership to have the best chance of making money, it's essential that you keep precise accounting records. Not only do you want to make sure that you're making enough of each car to turn a profit, but you also need to be sure you're complying with all tax laws.
Used car lots use several accounting documents. Whether you need to make a bill of sale, a receipt, or any other type of document, Skynova has business templates that can help you get the job done. Our accounting software can also help you manage things like expenses and deposits.
Step on the Used Car Lot With Skynova
Opening a used car dealership can require a large amount of capital and effort, but a well-run used car business can be very lucrative. If you effectively register, operate, and market your lot, you have a great chance of making huge earnings.
The more used cars you sell, the more profits you make. But when it comes to closing that luxury vehicle or sports car, you can't rush. Administration and paperwork can cut into the time you have to sell cars and make money. That's why you should look to Skynova's software products. See how much easier and quicker we can make your business's accounting and administrative processes.