Almost everyone needs a car for transportation to go about most of their daily engagements. While the vehicle doesn’t necessarily need to be yours for a start, the fact that it’s needed means when you can afford one, you probably will purchase it to make your transportation a lot easier.
This apparent demand for cars makes having a car dealership a lucrative business venture with good market potential. However, starting a car dealership (whether new or old cars) requires a lot of capital, which you wouldn’t want to lose by making avoidable mistakes. Much like every high-capital venture, you need a lot of planning in its infant stage if the business is going to thrive – there’s too much money at stake to be winging some parts of the process.
How to Start a Used Car Dealership: Things you should know
The work involved in starting a used car dealership isn’t very different from what’s needed when opening a dealership to sell new cars – the only difference is the type of car and customer you’ll be dealing with.
While that’s the case, it’s important to understand that before you launch that used car dealership, a couple of boxes need to be checked (if you haven’t done that already) to ensure the business’s success.
1. Perform Market Research
It’s a no-brainer that this comes first – every aspiring business owner needs to conduct market research to estimate their expectations for when the business eventually goes live. More so, without market research, it’s difficult to determine profitability which is the primary reason why you’d start a business in the first place.
- Find out the number of used cars sold in your area. For example, a potential car buyer in your state will typically visit a dealership within 20 miles (32.2km) of their residence. Then, you can estimate the number of cars sold in that (20-mile radius) area.
- Say you arrive at an estimated 20,000 cars; you can then survey the types of cars in the area and get their percentage share.
- After your analysis, say the number of used Camry vehicles sold in the area comes out at 30% (6000 cars).
- Up next is to study the number of Camry dealerships in the area. This allows you to know the market potential, whether there’s already a saturation or not, and your future competitors. If sales of Camry vehicles don’t seem to be in your favor, you can reanalyze other car models till you get something with good market potential and less saturation – you want to start there.
2. Understand your Preferred Type of Customer
While every paying customer is a good customer, you want to narrow down to those who are most likely to purchase the types of cars you choose to sell based on your market research. Identify their taste, and design your business model to meet their taste.
- Determine the age range, gender, occupation, and income level of the types of customers that are likely to patronize you. If you’re going to be selling used Camry cars, you want to know a thing or two about people who buy used Camry cars.
- Determine if they’re the type that is likely to fix their cars or turn them over to the junk and get a new one. This will help you determine whether adding a car service department to your dealership would be necessary. More so, most dealerships build relationships with their customers when they return for vehicle servicing.
3. Calculate the Size of the Market
This time, not the used car dealership market in general, but the part that has to do with selling used Camrys. This will give you insights into what the size of your first purchase should be and, of course, make you evaluate your chances of adding another service or car brand to your collection is necessary for optimal profitability.
4. Choose the Type of Dealership you want to open.
While starting with a franchisee is usually best, franchise dealerships aren’t always favorable in some locations. Thus, you want to also study your environment before choosing the type of dealership to run.
Setting up a franchise will mean getting into an agreement with the manufacturers to use their logo and their brand credibility for marketing. In most cases, there will be clauses regarding how it’ll be used and, ultimately, some limitations to running your business. However, becoming an independent distributor gives you the free will to carry out your business activities in the best way you fit. More so, sales of other car brands become more probable.
5. Determine if a Service Department in your Company is needed
This depends on the information from your market research and how much you understand your customer. While all cars will need servicing at some point, choosing the level of tools and the extent of service you’re offering will help optimize cost during your startup. At any rate, it’s always advised to add a service department to build relationships with your customers – you’ll never know when they’d want to get another car.
6. Consider the Financials
It’s one thing to have the intention of starting a used car dealership, and it’s another thing to understand the financial requirements associated with such a project. The last thing you want is to start and halt halfway because of the unavailability of funds.
Considering the financials involves determining how much it’ll take to get the business running – from the floorplan, cost of leased property, and franchise fee (if you run a franchise), all need to be sorted. Also, your financials will involve determining the mode of payment you’re willing to accept from clients. While it’s also linked to understanding your customers, you don’t want to run a business where customers owe you so much that you’re without cash most of the time.
7. Consider Licenses and Regulatory Requirements to Run a Dealership in your State.
Finally, you want to ensure you’re on the right side of the law by checking with regulators within your state on what it takes to run a used car dealership. These rules, although generic, the specifics are unique to each state, so you want to check with the authorities before you announce that you’re open for business.