Cost Analysis of Opening an Auto Dealership: Everything You Need to Know About Getting Into the Used Car Business

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Before you begin any business venture, it makes sense to analyze the pros and cons of doing so. After all, people start new businesses every day, and the difference between a successful business and one that fails in its first 6 months or year of operation often comes down to who planned their business carefully and who launched based only on a dream. Particularly in a field as crowded as the automotive industry, you must run a cost analysis on how much money is needed to start your dealership. Here are some factors to consider when running this analysis.

Factor in necessary registrations

Depending on the state that you are operating your auto dealership in, there are a variety of licenses and registrations that you must obtain before you can go into business. One of the most common things you will need to do is complete a business registration form and pay the applicable fee. This paperwork sets up your business as a legal entity able to hire and pay employees as well as operate in the city that you are opening your dealership in. 

Depending on how you structure your business and where you are located, the fee associated with registering a business can vary but is usually under $300 or $400. You will also need to obtain a business license to be able to operate like an automotive dealer. These sometimes have filing fees attached to them as well and are also generally a couple of hundred dollars. 

You will also most likely need to obtain an auto dealer bond which can vary in price based on your location as well as your credit score. In addition to getting a surety bond, you will likely need to purchase insurance for your employees, property, and customers to avoid expensive liabilities. All in all, while not cost-prohibitive, these fees can surprise you if you are not expecting them.

Consider the location

The location that you choose to operate your business will also have a major effect on your business costs. For example, some areas of town might have higher real estate prices but may also offer you a competitive edge by being farther away from competing dealerships. 

If you do wind up needing to choose a location where some of your competitors are nearby, consider using geofencing in your marketing approach to help attract local customers near you. One spectacular example of this type of marketing involved Burger King setting up geofences at McDonald’s restaurants to offer a special deal on their burgers. 

The location has a major role to play in the success of your business, both from a cost perspective as well as a marketing perspective. Be sure you weigh the financial costs as well as the opportunity costs of each location before selecting the site for your dealership.

Price out your inventory

By far one of the most expensive components of starting a dealership is sourcing your inventory. It’s best to start small as you build your inventory, although you may still need a loan of tens of thousands of dollars if you are going to be buying a fair amount of used vehicles. 

If you have connections to a good local mechanic and are willing to put in the time, it may be worth exploring listings with salvage cars for sale as a way to pad your inventory. As you look at used cars to purchase and resell, consider their condition and market value carefully. This will help you maximize profits in the long run. Additionally, once you have started to build a small collection of used vehicles, you can begin to offer trade-in credit towards other vehicles as a way to avoid needing to pay out cash on every car you buy.

Make sure your finances are in order before you decide to start a used car dealership. From inventory costs to important licenses, there are a host of things you’ll need to cash flow if you want to find success and sustainability as a dealer. Although it is hard work, if you are passionate and smart about running your dealership, you’ll be able to attract customers.

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