By Bruce Hakutizwi
If you’ve thought about buying a car dealership, you’re not alone. With the popularity of cars in America, many entrepreneurs have noticed the popularity. In fact, 95 percent of U.S. households own a car, and 85 percent of Americans use a car to commute to their job. So it’s not surprise that 6.3 million cars were sold in 2017 alone.
Automobiles are a staple of American life, which spells opportunity for car sellers. Plus, the financial gains from selling a car don’t stop once the check clears. Most car owners will get their car serviced at some point during ownership, which gives sellers even more opportunity to continually profit from their sale.
With consistent market demand and ongoing upselling opportunity, it’s clear why a car dealership is a lucrative business investment. However, with significant financing required and an expensive inventory, there are serious financial considerations for buying a car dealership. Use the following guidelines to financially prepare for the road ahead.
When preparing for financing, it’s difficult to buy a business alone. Seek out a professional business broker to alleviate some responsibility and ensure profitable business decisions. A broker will help you negotiate contract details that you may or may not have considered and find an affordable space for your budget. They will comb through the details that a buyer may normally pass over, like how much inventory is included in the sale. While hiring a broker is another financial investment to consider, making the right business decisions upfront will save you money in the long run.
Lock Down Any Needed Financing
The average active American automobile dealer invests 11.3 million dollars into their business and has 4.6 million dollars in operating costs a year. Opening a dealership requires expensive inventory, the land for your car lot, showroom, repair service, employees, and ongoing operational expenses. Unless you are starting with significant savings, you’ll likely need external financing to make your business a reality. While there are several ways to acquire financing, a bank loan is most common. Work with an accountant to determine how much financing you’ll need and collaborate with your business broker to determine which dealerships are feasible.
Consider a Franchise
The first major decision you’ll need to make before buying a car dealership is whether or not you want to buy a franchise. In a franchise agreement, you sign to operate your business and pay a fee to the franchisor. For example, if you bought a Honda dealership, you would pay a fee to the Honda manufacturer to run your business. In return, Honda would grant you the right to use their logo and supply your dealership with their cars, making it easier to operate and advertise your business.
Owning a franchise relieves some financial stress around obtaining financing and initial startup costs. Franchises have solidified authority in the marketplace, making them a less risky investment for lenders. As a result, choosing a franchise can improve your chances of getting the necessary starting capitol you need for a dealership. Plus, franchises are generally cheaper to start because they require less marketing than new businesses.
While there’s no right or wrong answer when it comes to franchising or not franchising, buying a franchise is generally cheaper from the beginning and a smart choice for entrepreneurs on a budget.
Used, New, or Both?
As with any business, one of the first decisions you’ll need to make is which products and services you want to offer. As a car dealership, you can provide either used or new cars, or both. Offering both will expand your target market to customers with varying budgets, but will also require a larger inventory and in result, more initial investment, on your end. You should consider what you’ll be able to afford while taking your surrounding demographic into account. If your area is very wealthy, used cars may not be worth the investment. Do your research and determine your product offerings accordingly.
You will also need to determine whether or not your business will provide repairs and ongoing services. Many car owners will utilize their dealership for services like oil changes and parts replacements. Providing these services will require additional space and employees and will need additional initial funding. However, these services will be a profitable post-purchase service, especially if you sell used cars. Having a service team is also a good opportunity to connect with your customers, provide a positive experience, and stay in touch for future sales.
The type of inventory and services you choose to provide entirely depends on what you can feasibly afford upfront and sustain in the long-term.
Buying a car dealership can be a worthwhile investment that sets you up for a successful financial future. By making important financial decisions early and resourcing the help you need, your car dealership is on the road to success.