How to Start a Car Dealership

Starting a car dealership can be an exciting and rewarding business venture for entrepreneurs who love cars and want to create a dynamic, customer-focused business.

Having said that, you should keep in mind that launching a successful car dealership requires careful planning, significant investment, and a wide range of skills.

In this comprehensive guide, we’ll walk you through all the essential steps you’ll need to take to start your own car dealership, from conducting market research and securing funding to obtaining licenses, setting up operations, and attracting customers.

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Industry Overview

The car dealership industry in the U.S. is a major economic force, with a market size projected to reach $1.2 trillion in 2024, despite facing a slight decrease of 0.5% from 2023.

The market comprises a mix of independent dealers and larger franchise chains, with approximately 17,000 new car dealerships operating in the U.S. in 2023 alone.

Startup Costs

If you’re considering whether a car dealership business is right for you, the first thing you’ll need to know is whether it’s a) affordable, and b) worth the investment. I mean, how much can you actually make running your own dealership?

Well, it depends, and the initial investment for a car dealership varies widely based on factors such as location, size, and inventory.

Land purchase or lease costs, for example, can range anywhere between $500,000 and $3,000,000, depending on the location in question. Renovation and setup costs for the showroom and service areas typically range from $100,000 to $500,000, while permits and licenses usually cost between $5,000 and $50,000.

Inventory costs are a significant component of the investment that will also need to be considered. Stocking new cars can cost millions depending on the number and types of vehicles; used car inventory might range from $500,000 to $2,000,000, and equipment for servicing and maintaining vehicles can easily add another $100,000 to $500,000.

Maintenance expenses for the dealership and vehicles typically range from $50,000 to $200,000 annually; while this range may seem steep, it encompasses a variety of tasks needed to keep operations running smoothly.

These include regular calibration of diagnostic equipment, maintenance of car lifts and alignment machines, paint touch-ups and minor body repairs, upkeep of outdoor lighting for vehicle displays, and servicing loaner vehicles for customers.

Earning Potential

Revenue streams for a well-managed car dealership can be very substantial.

Surprisingly, however, car sales only account for a relatively small proportion of the profit, with new cars bringing in just 8% of the gross profit on average and used cars just 12%.

So where does the real profit come from? Well, the real backbone of a dealership’s profitability is the service and parts department, which, according to the National Automobile Dealers Association (NADA), makes up almost half of the average dealership’s total gross profit.

Another substantial revenue stream (contributing 25% to 30% of gross profit on average) comes from financing and insurance products, which are commonly referred to as F&I.

Car dealerships can earn significant commissions — up to $3,000 per deal — by arranging car loans directly with financial institutions, which makes this a highly profitable aspect of their business.

When you account for the fact that, on top of financing, dealerships also upsell things like extended warranties, gap insurance, tire and wheel protection, and other add-ons during the purchase process, you can see where the real profit is made.

Think about it: on a new car sale, a dealership’s profit margin is around 3.9%, meaning that even if you spend $20,000 to $30,000 on a vehicle, the dealer walks away with only about $780.

Now, compare that to an extended warranty. If the dealership buys it for $1,000 and sells it to you for $2,000, they earn a $1,000 profit — that’s a 100% margin.

In this scenario, you will make more as the car dealer from upselling a $2,000 warranty than from an entire new car.

Note: Trade-ins are another major source of profit, as dealerships often purchase used cars for less than their resale value, making a substantial margin when they are sold. For example, a car valued at $10,000 might be bought for $8,000, cleaned up, and resold for $12,000, resulting in a profit of around $4,000.

10 Steps to Starting a Car Dealership

In order to start a car dealership business, you’ll need to complete the following steps:

1. Planning Your Car Dealership
2. Registering Your Business
3. Setting Up Your Taxes
4. Establishing Relationships with Lenders and Financial Institutions
5. Finding and Securing the Right Location
6. Designing and Setting Up Your Dealership
7. Getting a Business Bank Account and Credit Card
8. Obtaining the Necessary Licenses and Permits
9. Getting a Surety Bond
10. Obtaining Business Insurance

We’ve broken each one of these down in more detail below.

Still exploring your options? Check out other small business ideas.

Step 1: Plan Your Car Dealership

Before diving into your car dealership business, you’ll need to spend some time conducting thorough market research.

You can do this by analyzing the local market to understand the demand for a car dealership, identifying potential competitors, and assessing the target demographic.

This will help you evaluate the financial viability of your project — including projected revenues and expenses — as well as determine the best location for your dealership.

Finding a Suitable Name

Choosing the right business name is both important and challenging.

Your name will need to be eye-catching, memorable, and (at least somewhat) related to your industry.

If you don’t already have a name in mind and need help, you can visit our How to Name a Business guide or use our Car Dealership Business Name Generator tool.

If you do have a name in mind, we recommend researching the following to confirm it’s available:

• Your state’s business records
• Federal and state trademark records
• Social media platforms

You will also need to make sure that your business’s name is available as a domain — this is your website’s URL address.

Note: If you’re planning to operate a sole proprietorship, you might want to operate under a business name other than your own name — known as a “Doing Business As” (DBA) name. Keep in mind that this is not recommended for a car dealership.

Selecting a Brand and Niche

You will also need to choose a niche for your car dealership, as this can greatly affect its appeal and overall success — this could be new cars, used cars, luxury vehicles, or a specific brand.

A well-chosen niche can create a unique and memorable experience for customers, encouraging repeat business. For instance, a luxury car dealership might focus on high-end brands like BMW and Mercedes-Benz, while a used car dealership might specialize in affordable, reliable vehicles.

When choosing your niche, make sure that you take the average annual salaries of your area into account; for example, if the average salary in your area is $65,000 per annum, you will likely benefit from steering away from the higher end cars.

At the same time, several dealerships market nationwide, meaning that this will (once again) ultimately depend on your business’s unique specificities.

Creating a Detailed Business Plan

A detailed business plan is essential for outlining your business strategy and securing funding.

When drafting one, be sure to include an executive summary, market analysis, organizational structure, product line, marketing strategy, and financial projections.

It should also detail your operational plan, including staffing, equipment, and maintenance.

For more information on this step, you can have a look at our in-depth How to Write a Business Plan guide.

Step 2: Register Your Business

One crucial aspect that cannot be overlooked when starting your car dealership is the importance of establishing a solid business foundation.

While sole proprietorships and partnerships are the most common entity types for small businesses, they’re a far less stable and advantageous option than LLCs — especially when it comes to car dealerships (with potential liabilities and debt).

This is because unincorporated business structures (i.e., sole proprietorships and partnerships) expose you as an owner to personal liability for your business’s debts and legal actions, while LLCs protect you by keeping your personal assets separate from your business’s liabilities.

In practice, this means that if your car dealership were to face a lawsuit or incur any debts, your savings, home, and other personal assets could not be used to cover these costs. On top of this, forming your business as an LLC also helps it to appear more legitimate and trustworthy.

Note: If you’re interested in more information before getting started, we recommend having a look at our state-specific How to Start an LLC guide (DIY) or our in-depth Best LLC Services review (for those opting for a professional service).

Step 3: Set Up Your Taxes

The next step you’ll need to take is to register your business for taxes. To do this, you’ll need to obtain an Employer Identification Number (EIN), which you can think of as your business’s Social Security Number.

Did you know?

An EIN is also needed in order to hire employees, set up a business bank account, or get a credit card. You can find out more information on this in Step 7.

If you decide to form your LLC through a specialized LLC formation service, this will likely be already handled for you in exchange for a small additional fee.

Even so, it’s important to make sure that you fully understand your business’s tax obligations; since these can depend on your location, it’s a bit difficult to accurately break down exactly which taxes you’ll be subject to.

Nevertheless, most businesses will typically be subject to income tax, sales tax, and employment taxes at the federal level. Some states also impose a vehicle inventory tax or other fees specific to car dealerships, and — depending on your location — city or county taxes may also apply.

Due to the complex nature of business taxes, we always advise our readers to seek the help of a professional accountant or business attorney for this step.

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Step 4: Establish Relationships with Lenders and Financial Institutions

Establishing strong relationships with lenders and financial institutions is crucial as a car dealership; this is because it can go a long way in helping you secure inventory, offer customer financing, and manage cash flow.

You can start by reaching out to banks and credit unions that have a history of working with car dealerships. These institutions understand the unique financial needs of your business and can offer tailored solutions. It’s important that you schedule these meetings and conduct introductions from early on, as building a rapport with these lenders can lead to more favorable loan terms and credit lines in the future.

In addition to traditional banks, you should consider working with specialized auto finance companies. These companies focus exclusively on the automotive industry and can provide financing options that are specifically designed for car dealerships. They often offer competitive rates and flexible terms that can help you manage your inventory and sales more effectively.

Another important aspect is setting up floor plan financing. This type of financing is used to purchase inventory and allows you to pay for the cars as they are sold. It’s essential to understand the terms and conditions of floor plan agreements, as they can impact your cash flow and overall financial health.

As previously mentioned, it’s generally recommended that you start small and avoid taking on significant debt before you’ve started selling and generating revenue; this is because your total overhead can become very substantial in this industry, and it can also take you a while to figure out the practical and sales-related aspects of your business (in order to start generating sufficient cash flow).

Step 5: Find and Secure the Right Location

Unlike several other businesses, car dealerships can have unique requirements and considerations when it comes to their location — as it can in itself be a great form of advertisement.

The most important factor when it comes to choosing a location for your dealership is visibility — a highly visible location will attract more potential customers, increase brand awareness, and ultimately drive more foot traffic, leading to higher sales opportunities.

You should also look for regions with growing populations, increasing disposable incomes, and a demographic that aligns with your inventory (e.g., luxury cars, family vehicles, used cars, etc).

Your location will also need to be sufficient in size — both in order to comply with local and/or state regulations and in order to allow you to adequately display a variety of vehicles, offer customer parking, and allow for service areas.

The property will also need to have sufficient space for the construction of a modern, appealing showroom and sufficient office space for your staff (if applicable).

Of course, there are also financial considerations that go into this decision, and you will likely have to decide between leasing or buying — both of which have unique benefits and disadvantages.

Did you know?

You will need to verify that your prospective property is zoned for automotive sales by checking with the applicable local zoning authorities. You will also need to comply with all environmental regulations, such as those pertaining to waste disposal, emissions, and hazardous materials.

Step 6: Design and Set Up Your Dealership

Creating an appealing and functional design for your car dealership is an essential part of attracting customers and providing a holistically positive experience.

We’ve provided a brief breakdown of the key areas to focus on when going about setting up your dealership.

Showroom

The showroom is the face of your dealership, where customers get their first impression — this means that you will need to ensure it is spacious, well-lit, and clean.

You should also use modern decor that reflects your brand’s image, arrange cars in a way that highlights their features, and provide comfortable seating areas, refreshments, and entertainment options — such as free Wi-Fi or TVs.

Finally, you should also ensure that the area is climate-controlled to ensure your customer’s comfort all year round.

Service Center

You will want to ensure that you have the necessary tools for servicing the types of vehicles you plan to sell. Including these in a Service Center is a great way to have access to them onsite within your dealership.

If your budget allows it, it’s a good idea to hire experienced and certified technicians, as offering manufacturer-certified repairs can be a significant selling point for your business.

Office Space

Depending on your county and/or state, there may be specific size requirements for your internal office, as well as what is required to be inside of it.

Regardless, we advise you to not invest in a massive office space from the start — even if your personal budget allows it — in order to try to limit unnecessary overhead as much as possible in the start of your venture.

Outdoor Lot

Since your outdoor lot showcases your inventory effectively, you will need to invest some time in order to adequately plan it out.

You can choose to group similar types of cars together (e.g., new cars, used cars, SUVs, trucks, etc), ensure cars are positioned for maximum visibility from the road — using flags, banners, and lighting to attract attention — and make sure the lot is easy to navigate for customers, with clear signage and pathways.

Tip: More is not always better when it comes to outdoor spacing and number of vehicles — especially if you’re relying on floor planning.

Step 7: Open a Business Bank Account & Credit Card

Opening a business bank account and credit card is essential for managing your car dealership’s finances separately from your personal finances.

This separation makes tracking expenses and income easier and is crucial for accurate accounting and tax reporting.

It also allows you to handle large transactions typical of car sales more efficiently. Establishing a business credit card can help build your dealership’s credit history, which can be beneficial for future financing needs.

You should also note that a separated bank account is essential for maintaining your business’s corporate veil, which is the legal mechanism that offers you limited liability in law.

This is because using your personal bank account instead is interpreted by some courts as evidence that you are not treating your business as a separate financial entity.

Recommended: Read our Best Banks for Small Business review to find the best national bank or credit union.

Step 8: Obtain the Necessary Licenses and Permits

Acquiring the proper licenses and permits is a critical step in establishing a car dealership. This is because operating without them can result in hefty fines, legal issues, and even the closure of your business.

In the sections below, we’ve broken down the main license and permit types you should focus on to ensure your dealership remains compliant.

Apply for a Dealer’s License

This license is mandatory for any business engaged in buying, selling, or trading vehicles.

The requirements for obtaining a dealer’s license vary by state but generally include completing an application, paying a processing fee, and passing a criminal background check.

Depending on the state where you plan to operate, you may also be required to obtain a surety bond (discussed more in Step 9).

Secure a Business License

Depending on the city or county in which you seek to establish your dealership, this license may be a requirement in order to legally operate your business.

Requirements often include submitting a business plan, providing proof of business address, and paying a licensing fee. You may also need to comply with local health and safety regulations, especially if you have a service department.

Keep in mind that this may not be required in all states and/or counties, so you’ll need to check your area’s requirements for the most up-to-date information.

Obtain a Finance License (If Applicable)

If you want your dealership to be able to offer financing, you’ll be legally required to obtain a finance license.

This license, often called a Motor Vehicle Sales Finance License or Auto Dealer Finance License, legally allows you to arrange or provide loans directly to customers.

The exact requirements for this will depend on your state, but (generally speaking) will involve registering with the state’s financial regulatory agency, meeting minimum net worth requirements (ranging from $25,000 to $100,000 or more), and submitting audited financial statements.

You’ll also need to show proof of a dedicated line of credit to ensure your dealership can cover the risks involved with offering in-house financing.

Comply With All Environmental Regulations

Dealerships often handle hazardous materials like oil and antifreeze, so you may need permits related to waste disposal and environmental protection.

Make sure that you continuously remain compliant with all applicable local, state, and federal environmental laws in order to avoid hefty fines and penalties.

Step 9: Get a Surety Bond

A surety bond is often a mandatory requirement for obtaining your dealer’s license, serving as a financial guarantee that your dealership will comply with state laws and ethical business practices.

In particular, it’s meant to protect your customers by ensuring that they can seek compensation if your dealership fails to adhere to its contractual obligations. This could include events such as fraud, failure to deliver a vehicle, or not honoring a warranty agreement.

The bond amount varies by state but typically ranges from $25,000 to $100,000; you will need to research the specific bond requirements in your state in order to ensure that you meet the necessary criteria. This information can usually be found on your state’s Department of Motor Vehicles (DMV) or equivalent agency’s website.

To obtain a surety bond, you’ll need to work with a licensed surety bond company — the company will evaluate factors like your credit history and financial stability, and then determine your premium, which is the amount you’ll pay to secure and maintain the bond.

The premium for most car dealerships’ surety bonds typically falls between 1% and 4% of the bond amount — though in extreme cases, it can reach up to 10%. This means that if you need a $50,000 bond, you would generally pay between $500 and $2,000 annually, assuming your credit history and financial standing are solid.

Once approved, you’ll receive a document, which you must file with the appropriate state agency as part of your dealer’s license application. Keep in mind that the bond must be renewed periodically, usually annually, to maintain your licensing status.

Step 10: Secure the Necessary Business Insurance

In addition to securing the necessary permits and licenses, you will need to obtain the right business insurance in order to protect your business’s assets from potential financial losses.

Dealers Open Lot Insurance

The most important coverage that you, as a car dealer, will absolutely need to secure is Dealers Open Lot Insurance, also known as Vehicle Inventory Insurance or Auto Physical Damage Coverage.

This insurance protects both new and used vehicles held for sale — including those on consignment — as well as customer vehicles left for service or repair. Moreover, depending on how comprehensive your policy is, it can also extend coverage to vehicles in transit or stored at other locations, such as auto shows.

Dealers Open Lot Insurance typically covers perils such as theft, vandalism, fire, weather-related damage (like hail or wind), and flood-related damage (though additional coverage may be required for high-risk areas).

It also protects against collision damage that occurs during test drives or while moving vehicles on the lot.

The policy limits are generally based on the maximum value of your inventory at any given time, but as a very general range, you can expect to pay anywhere between $1,000 and $5,000 annually for every $100,000 of coverage, depending on factors such as your location, size, and the specific risks involved.

General Liability Insurance

General liability insurance is a fundamental coverage that every car dealership needs. This is because it protects against claims related to bodily injury, property damage, and personal injury that may happen on your premises.

With the number of customers and staff walking into your car dealership every day, having general liability insurance is a no-brainer.

The average cost for general liability insurance according to recent data is $42 per month, or $504 annually, though costs can vary based on your business’s specific needs and risks.

Workers’ Compensation Insurance

You will need to obtain workers’ compensation insurance to protect your employees in case of work-related injuries — this is a legal requirement in almost all states.

The average cost of workers’ compensation insurance ranges between $45 per month, but this can vary based on factors such as payroll, location, and (once again) your business’s specific risk profile.

Ready to Get Started?

How to Start a Car Dealership FAQs

What happens during a typical day at a car dealership?

Day-to-day activities include checking invoices, talking to prospects and customers on the lot, negotiating deals, and managing a sales force. Dealerships have a strong sales culture, and interpersonal communication skills are important. So salespeople (including the owner) who work for a dealership may spend most of their day speaking with prospects face-to-face.

What are some skills and experiences that will help you build a successful car dealership?

While there are no special skills required by the state, there are practical skills most business owners in this industry have. First, they have a strong sales background. They also have a strong business and management background. Some dealership owners have worked as mechanics in the past, which helps them better understand the service side of the business.

What is the growth potential for a car dealership?

Small dealerships are usually used car dealers. These types of dealerships purchase used vehicles at auctions and mark them up for resale to consumers. This type of business can be highly profitable and doesn’t require a lot of overhead or inventory.

A larger dealership might secure a contract with a major manufacturer to sell new and certified used vehicles. This type of dealership business is typically large scale, requires significant upfront costs (including franchise fees), and may require high volume sales to keep the manufacturer’s contract.