From old beaters to new metal, every auto enthusiast dreams of a spacious garage filled with exciting cars. A few take it a step further: They buy a few, they sell a few, and pretty soon they reach a point where becoming a car dealer appears to be a potentially lucrative career path.
It's a tremendous leap for a new business, and to do it right, you need a lot more than a love for cars.
Start small and educate yourself
In most states, you can buy anywhere from three to seven vehicles a year under your own name. Before making a five-figure investment in a state-issued dealer license, a lot of small operators will end up using their spouse, relatives, friends, acquaintances, and driving-age kids as temporary owners of those vehicles.
If your business outgrows your pool of names, the next step is usually to get a wholesale dealer license. Indiana has become a hotbed for this activity, and often times the cost is a small fraction of a retail dealer license.
The good news with that wholesale license is that you have access to the vehicles at the wholesale dealer auctions that are generally off limits to the public. The bad news is that once you buy a car, you will not be able legally to sell it to a customer unless a retail used car dealer is willing to “buy” your vehicle for a fixed fee (usually $100 to $300 per car), and then retail it to a consumer under their own license.
So business looks good, and you now have a license to sell. The first step: Finding a place to launch your car dealing career. Get ready for a fight.
Many county and city governments require at least a half-acre of paved surface, an office, and the most crucial ingredient of all, proper zoning. Most local governments will try to keep car dealers within a narrow strip of roadside and limit the available real estate to as small of a supply as possible.
Want a prime location? It will cost several thousand dollars at a minimum. The smarter alternative for most dealers new to this business is to find either a more rural location at a lower cost, or get a small office that has limited space for vehicles. That means lower drive-by traffic, smaller inventory and perhaps more money in advertising. Pick your challenge.
Ever see those news reports where an unknowing buyer finds their recently purchased car is a rolling deathtrap or actually owned by someone else? Cars sold with unpaid liens, undisclosed salvage histories and washed titles are a brutal reality that hurts thousands of consumers every year.
To deter these criminal activities, states require dealers to buy a surety bond. This is done to protect the public from fraud — a frequent occurrence in the car business where basic guarantees can be anywhere from counterfeit to non-existent.
Such bonds always take the dealer’s own credit history into account. If you’re credit rating lacks sparkle, be prepared to spend anywhere upwards of $10,000 a year on a surety bond.
You also have to obtain liability insurance for your dealership in order to receive a used car dealer license. That additional expense cost anywhere from a few thousand dollars to well into the $10,000-plus for a large property in a high-crime area.
After all those fixed costs, you still need to buy the cars. It takes money to make money in the car business. That often requires obtaining other people's money in the form of a floorplan.
A floorplan allows you to buy a given amount of vehicles on credit. Most companies lend out anywhere between $25,000 to $50,000 for a novice car dealer with a decent credit history. This credit line does not come cheap. The net cost is usually anywhere between a few hundred a month to thousands of dollars, depending onhow much you borrow and how quickly you can sell your vehicles.
The big decision
Auto dealer associations, county commissioners, zoning boards, and professional lobbyists spend an awful lot of money keeping emerging entrepreneurs out of the car business.
If you sincerely want to become a car dealer, start small and keep your costs minimal. Most successful sellers focus on buying one vehicle at a time in the beginning, and maintaining a side income until wealth and experience make the critical decision an easy one.
Photo: Jim Belford via Flickr
Steven Lang has been a car dealer for over ten years in the metro-Atlanta area. He has also been a part owner of an auto auction and spent his early days traveling around the country liquidating vehicles for Capital One Auto Finance.