The Complete Guide to Opening and Managing Your Own Used Car Dealership – Making Security Your Top Priority
By Pro-Vigil | February 15, 2016
In the United States, there are more than 210 million licensed drivers, with approximately 256 million registered vehicles on the roads. In fact, sometimes it seems as though every person in the U.S. either already possesses a motor vehicle, or is in the market to acquire one. And while the reality may not be quite so simple, the truth is that most licensed drivers either own or co-own, a car. In fact, many drivers own more than one car. However, many of those same drivers who are interested in owning a motor vehicle often find themselves unwilling to commit to purchasing one new. After all, new cars make a terrible investment, depreciating as much as 9% the moment they are driven off of the lot, and further depreciating as much as 40% after just five years of ownership.
But where that depreciation isn’t doing any favors for the original owners, it does offer second-hand buyers a unique opportunity to be able to acquire high-quality vehicles for significantly less than the original market value. In the United States, 74.2% of car purchases are for used vehicles, with only 25.8% of purchases being for new vehicles. Put these facts all together, and it becomes apparent that the used-car market is certainly a lucrative opportunity for those who might be willing to invest. However, there’s more to operating a used car dealership than simply knowing how to sell cars—high start-up costs, difficult licensing procedures, ongoing expenses, and issues related to security are only a few of the speed bumps prospective lot owners face on the road to success. And those who commit themselves to running a used car lot without putting in the necessary preparation time might just find themselves (and their investment) kicked to the curb.
If you’re interested in opening, purchasing, and/or operating a used car lot, take some time to familiarize yourself with Pro-Vigil’s Guide to Managing a Car Dealership—these instructions and tips will help you keep your dreams on track, no matter what obstacles might lay in your path.
Before you can cut the ribbon, throw open the gates, and begin matching clients to cars, there’s a bit of preparation work that needs to be done. And while these pre-opening-day procedures might seem tedious, they may well mean the difference between success and failure for your business. Here are eight important steps you’ll need to take before you sell your first car:
1. Research the market. Unless there’s a demand for used cars in your area, you’re used car dealership isn’t likely to turn much of a profit. So, before you really get down to business, you need to assess existing demand. Choose a potential location for your dealership, and then research the number of used cars sold within ten miles of that location over the space of a year. Research those purchases further, to determine the percentage of types of vehicles being sold (trucks vs. cars, for example). Make special note of makes and models that sell more frequently. Finally, make note of any competing dealerships, as well as what those dealerships offer. If you can see that there is an unfulfilled demand for used cars in your area, then you should be able to move forward with confidence.
2. Do the math. There’s a big difference between operating a used car dealership, and operating a profitable used car dealership. To get a better idea of the possible demand for used cars in your area, you’ll need to crunch some numbers. By identifying the number of used cars sold in your area every year, you can estimate what percentage of the market you’ll be likely to be able to corner. Then, by locating the average profit per vehicle, you can get an approximate idea of how much profit your dealership stands to make per year.
3. Identify your target clients. Your customers are the single most important factor to the success or failure of your business, so taking the time to identify who they are and what they care about is absolutely vital. Take a look at the types of cars you plan on selling, and then do some research to determine the age, gender, and income level of the average individual who owns those types of vehicles. Later down the line, this will allow you to tailor your marketing and advertising efforts towards those who are most likely to be interested in what you have to offer. Make sure to base any of your conclusions regarding your target clients on real, actionable data; don’t simply make assumptions.
4. Compare the advantages of franchising vs. self-owning. Building and opening a dealership from scratch is an expensive and risky endeavor. Because of this, many dealership owners choose to franchise. Franchising makes it possible for owners to sign franchise agreements with larger, more financially stable car manufacturers. This means that the car manufacturer allows the franchisee the right to use established branding and marketing materials, and to participate in promotional deals. The car manufacturer also helps to supply the dealership with quality used automobiles. In return, the dealership owner is required to prove that he or she has the money and the talent to be able to operate the dealership and turn an acceptable profit. The car manufacturer will likely also take a significant portion of those profits both as an initial fee, and as an annual due, but given that the dealership will be able to benefit from associating with an established manufacturer, the overall rewards are often more than enough to offset the costs.
5. Consider whether or not you want to include a service department. Used cars, even the newer models, tend to require more maintenance than those straight off of the factory line. By including a service department in your dealership plans, you’ll be able to offer repair work, emission testing, and other maintenance-related services. You’ll also be better situated to evaluate and appraise any cars that are brought in by customers as sales or trades. Service departments are a great way to instill confidence in used-car buyers, who will know that, should anything go wrong with a warranty-covered vehicle, you’ll be able to correct the problem quickly and easily. Likewise, highly-rated service departments can bring in new clients—clients who might be impressed enough with the quality of work being performed, that they’ll choose to make their next car purchase from you rather than a competitor. On the other hand, the cost of developing and operating a service department can be prohibitive, and the department may take some time to pay for itself.
6. Determine your startup costs. There’s no way around it—opening and operating a car dealership is an expensive prospect. You’ll need to locate and lease or purchase property, purchase used vehicles to act as merchandise, hire and train employees, provide tools and promotional materials, and pay any fees associated with licensing and franchising. Before you move forward, do some research and try to come up with an accurate idea of approximately how much startup capital you’ll need. This will give you a more accurate idea of what your initial costs may be.
7. Identify your financing options. While some owners may have the personal fortunes to be able to finance the opening of their own dealerships, the truth is that opening a used car lot can require hundred of thousand, or even millions of dollars—which is something that many prospective lot owners simply do not have. As such, you will likely find yourself needing to take out a loan from a bank. As collateral, the bank will use the cars on your lot, as well as any additional personal assets that might be needed. The bank will also want to see your financial projections, so that they can determine the safety of their investment.
8. Don’t forget about regulatory requirements. In order to legally operate a dealership in the United States, you’re going to need a license to sell cars. The stipulations and procedures that go along with obtaining this license will vary from state to state, which is why DMV.org has created a helpful resource detailing each state’s dealership licence requirements. If you are planning on constructing or even renovating any buildings on your lot property, you’ll also need building permits issued by the local government. You will also need to be insured against a variety of scenarios. In addition to basic property insurance, you will need liability insurance and a surety bond. These forms of insurance are there to help protect not only you and your investment, but also your prospective customers, and are thus a necessary factor of being allowed to buy and sell cars as an authorized dealer.
Operating Your Used Car Dealership
While the groundwork associated with opening a dealership can be time-consuming, expensive, and demanding, the real test of your dealership’s viability doesn’t begin until after you open your doors to the public. Without the right management of your dealership, all of the effort you put towards laying the foundation will be wasted. And while each state has it’s own rules and regulations, here are several important, universal aspects of operating a car dealership, and tips on how you can get the most out of your investment.
1. Hire the right people. As the owner and manager of your car lot, you are the one with the vision, drive, and determination to see your dealership become a success. Unfortunately, you probably aren’t the person that your clients are going to be working with. Instead, those potential customers are going to be working directly with your salespersons. As such, it is imperative that you find the right people for the job. The archetypal high-pressure, manipulative salesperson of yesteryear may seem like a good choice for selling cars. However, coercive sales tactics do little to foster sustainable business, producing instead short-term profits, followed by negative public perception and dismal sales numbers. The real victory of a successful used car lot comes not from tricking a buyer into paying too much for a vehicle; it comes from creating brand advocates who will not only choose to purchase future vehicles from your dealership but will also share their positive experiences with friends and family members, who in turn will choose to visit your lot when they find themselves in the market for a used car. In order to achieve this goal, hires need to be able to recognize the needs of the buyer and be empowered to help fill those needs in a way that is fair to all parties involved. This means hiring salespersons who are honest and helpful, and who recognize the value of a repeat customer. Salespersons should also be committed to the work that they do. Many dealerships see a high turnover rate when it comes to employees. As a result, the dealerships end up spending more money on locating and training new hires than those hires bring in. For your dealership to be successful, you’ll want to find employees who will put in the extra effort. Unfortunately, given the fact that many prospective employees are more than willing to misrepresent themselves during interviews, it can be difficult to separate strong candidates from weaker ones. When interviewing, take note of how the interviewee presents him or herself. Are they confident? Do they understand social etiquette? What about their qualifications and past work experience? If it feels as though the interviewee is embellishing or being untruthful, that should be a definite warning sign. Don’t be afraid to ask for further details or clarification, and always follow up with any listed references. Also, there’s nothing wrong with wanting the best people for the job. If the only difference between two candidates is that one was more punctual than the other, or that one had a slightly better grasp of the industry, then use those facts in your decision-making process. Good salespersons, who respect their clients as well as their employer, are the key to a profitable dealership.
2. Invest in the right tools. The modern world is a digital one, and that means that in order for a dealership to remain competitive, it needs to be able to keep up in the digital realm. As such, investing in the right dealer management system (DMS) is a must. DMS is a kind of bundled software suite, that is specifically designed to assist dealerships with the day-to-day operations and record keeping associated with sales, inventory, finances, warranty claims, administration, etc. A high-quality car dealership system will be able to help automate sales tracking, as well as parts ordering. Automated car dealership systems may also take advantage of advanced customer relationship management (CRM) technologies, providing help with client follow-up, and provide employees with a useful multi-platform database from which they can draw relevant customer-specific information. There are many dealership CRM and DMS options available on the market, so be sure to do your research, and find a car dealership system that meets your needs while fitting your budget. Additionally, investing in the right security tools should be a top priority. For criminals looking for a lucrative payoff, auto dealerships are an incredibly attractive target. Expensive merchandise, coupled with the fact that many dealerships operate on outdoor lots, means that investing in the right security for your auto dealership is essential. Again, digital solutions seem to be more effective than the security procedures of decades passed. Pro-Vigil’s remote video monitoring provides constant, software-enhanced surveillance that is capable of recognizing and evaluating threats, activating on-site deterrents, and (when necessary) contacting local authorities. When used in conjunction with motion sensors and gates, the right surveillance system can ensure that your investment stays safe.
3. Provide only the best merchandise, at reasonable prices. Purposefully selling sub-standard used cars isn’t only dishonest; it’s also illegal. Of course, establishing guilt when it comes to the sales of a low-quality vehicle can be difficult, and many dealerships have been known to try to bend the law rather than break it. However, if you want to ensure that your dealership remains operative and profitable for years or decades to come, then you’ll need to do more than just the bare minimum. Even when there are no laws being broken, customers tend to recognize when they are being taken advantage of. As a result, they refuse to do further business with the company in question, and may even pursue a campaign to discredit said company via friends, relatives, social media, or even local news media. In fact, the bad publicity generated by a single unhappy customer has the potential to cause significant harm to a dealership’s profits. Avoid this dangerous situation by selling only reliable automobiles, at honest prices. Hire a car expert (or team of car experts) to help you locate and acquire quality inventory, and bring a mechanic onto your payroll, so that you can ensure that every vehicle is running properly before you place it on the lot. Research the market value of each vehicle, and assign a ‘bottom dollar’ (minimum amount that the vehicle can be sold for in order to still generate a profit) for each vehicle that you intend to sell—you can find this number by adding 10% to the car’s total dealer costs. This number will help your salespeople while they negotiate, giving them an absolute minimum price that a car can be sold for. Lastly, provide a standard three-month warranty for any purchased vehicles. Warranties help inspire trust, and can go a long way towards convincing a client to make a purchase. Free car reports and vehicle history reports are also attractive incentives.
4. Focus on promotion. In this day and age, the general public has become adept at tuning out conventional forms of advertising. Television commercials are skipped thanks to the help of digital television recording, and newspaper and radio ads are reaching an ever-narrowing audience. However, this may be a mixed blessing. By focusing on focused advertising that reaches those most likely to be interested, you’ll be able to target the right clients, and get more out of your advertising investment. Refer back to the work you did in identifying your target clients, and place your advertisements where they are most likely to be appreciated. For example, if you sell mostly to local college students, then take out ad space in the school newspaper, or come up with college-specific promotional offers. Take advantage of online classifieds for your area, and hire a social media expert to optimize your various social media accounts. And don’t forget about the importance of being seen! By placing your most attractive vehicles in prominent locations where passersby can encounter them, you’ll be giving potential customers a first-hand look at what you have to offer. And, as customers commit to purchase from your dealership, ask them to fill out a short survey detailing how they first encountered your business (advertisement, social media, word of mouth, etc.), as this will give you a more complete idea of the effectiveness of your various promotional strategies. And don’t forget to offer special deals on special days (including holidays, long weekends, and even your dealership’s own grand opening), as these are the days when many buyers have the available time to be able to shop.
5. Keep up with the taxes. The state government is entitled to a percentage of every car that you sell, and if you want to be able to stay in business, you’re going to need to make sure that they get it. Contact your state’s Comptroller of Public Accounts, so that you can ensure compliance with state vehicle tax laws. A high-quality car dealership system can also help automate the process, and help keep your business up to date.
6. Spend your time wisely. If you are the owner of your dealership, then you are the one with the most invested in its success. Often, this means that you might be tempted to try to wear every hat in the business. But while you may be well suited to manning the telephones, or working the lot, or even sweeping the floors (because you want to make sure that it’s done right), your time will likely be better spent focused on training, reviewing, and business planning. If you feel as though you have to forgo your administrative duties in order to ensure that everything on the customer-facing side of the business is functioning properly, then you may need to find better employees that you can trust. Your job is to manage your dealership, and to provide direction. Their job is to take care of the rest of the work.
7. Be presentable. It should go without saying, but the overall appearance of your dealership will play a key role in how attractive it is to customers. As clients approach the lot, what are they encountering? Are they seeing a clean, well-organized space, or are they noticing general disorder and disorganization? Are the salespersons who greet them well groomed and well dressed, or do they look casual and unauthoritative? Are the cars themselves as presentable as they can be, or are they unwashed, with dirty interiors? How you present your dealership may mean the difference between closing a sale, and closing up shop, so don’t underestimate the value of appearances. Presentability extends beyond the physical world, as well. Your social media and other web pages should be a positive reflection of your business, so make sure that they are being maintained by someone who understands how to make them look exceptional.
8. Don’t forget about online reviews. One of the most effective means of advertising, isn’t really advertising at all. Studies show that car shoppers are three times more likely to make a purchase when a dealership has positive online reviews, and 24 percent consider review sites to be the “most helpful” factor when it comes to making purchase decisions. What does this mean for you? It means that you should encourage your clients to leave reviews. Ask them to share their experiences, and perhaps even provide incentives for those who do so. We’re not suggesting that you should bribe people for good reviews, just for reviews in general. If you are offering a good service at good prices, the reviews will naturally trend towards positive. Various automotive review sites exist around the web that offer reviews of individual car dealerships, but many customers will prefer to share their reviews directly on your social media page. Be warned, however, that even the most customer-centric dealership, will likely end up facing a certain amount of negative reviews. When these reviews show up on your pages, do not attempt to delete or refute them! Doing so will only draw negative public attention, and can make a potentially bad situation much worse. Instead, address the reviewer, and apologize for the negative experience. Offer to contact the reviewer directly, and see if you can’t work something out to help make things right. Even if the reviewer is unwilling to compromise, having a majority of positive reviews—thanks to the positive experiences you are providing your customers—will help preserve your reputation. See your reviews, both the positive and the negative ones, for what they are: invaluable feedback directly your clients.
Keep It Up
Given the high initial costs of opening and operating a car dealership, you might find that it takes a certain amount of time before your business begins to turn a real profit. Hang in there! If you can provide a needed service in a way that inspires customer loyalty, then you won’t have to worry about whether or not your dealership will find success. Focus on your customers (learn how to do this with video analytics), hire reliable people, provide high-quality merchandise, and keep your eye on the prize. After all, people need cars; it’s your job to show them that you have the cars that they need.
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