Running a car dealership is the ideal profession for anyone who is passionate about automobiles. Just like any business venture though, there’s plenty of risks involved when deciding to invest in this enterprise. You can lower that risk by doing your research and knowing the costs involved with this business and how much funding you’ll need.
It’s necessary to have a solid plan in place that details what kind of dealership you want to invest in, and your plans for how you’ll acquire financing to cover start-up costs, licensing fees, overhead costs, inventory procurement, space rental, and labor.
Below is a checklist of the most important expenditures that are commonly associated with opening and operating a car dealership. You can use it as a guide to planning your financial approach. Sufficient planning ensures that you can establish your business without any trouble. Read on for a breakdown of how much you can expect to spend when opening your own dealership.
Types of Dealerships
There are two main kinds of car dealerships that you can decide to open. Each type has its own respective benefits and drawbacks, and your choice depends on your preferences and financial standing.
The first type of dealership is one that deals with used cars. Use car dealerships operate on a small scale, and usually require less operating expenses and less start-up capital. This is because you usually have a manageable inventory size that isn’t limited to one auto manufacturer, which means that you won’t need to cover licensing fees for a particular brand.
On the other hand, you have new car dealership franchises that are more expensive to open and operate. New vehicles can only be sold through franchised dealerships, so established auto manufacturers provide franchising opportunities to aspiring dealers who will sell their vehicles for them. This is the more costly option since you have to shoulder licensing fees on top of franchise fees and in some cases, purchasing inventory and equipment.
Costs of Opening A Dealership
Whether you’ve chosen to open a new car dealership franchise or a used car dealership, these are the expenditures you should expect to shoulder when launching your business.
Start-up Costs
Start-up costs include all the expenses that you incur as you prepare everything for the opening of your business. The following are some of the most common start-up costs you should plan for:
- Inventory acquisition ($30,000 to $150,000)
- Retail space rental ($0.40 to $4.00 per square footage)
- Office supplies (e.g. paper, pens, staplers, etc.) and equipment (e.g. telephones, computers, fax machines, printers, etc.) ($1,000)
- Labor (e.g. sales associates, accountant, mechanic, etc.) ($1,000)
- Miscellaneous (e.g. furniture, internet connection, website, etc.) ($1,000)
Take note that these prices could be higher or lower, depending on where you live, what brands you buy, and what you actually need.
Business License
One of the first things you need to take care of is your business’ registration. You’ll need to establish a business entity — either by forming a partnership, LLC, or corporation — and then apply for a business license. Partnerships generally don’t need to be registered at all, except to trademark the company name.
Application fees for registering and applying for a license vary depending on the type of entity the business is and the state you live in. For example, registering a corporation in Texas costs $310, but will set you back $295 in Massachusetts.
Dealer License
A dealer license will authorize you to sell a specific type of vehicle in your state. You’ll need a specific license for every kind of vehicle you want to sell, whether it’s a truck, car, or motorcycle. They usually cost between $100 and $250, but as usual, these prices vary depending on the state you’re operating in. For example, registering for a dealer license in Texas can cost you $700.
Insurance
Just like every business, you’ll need to acquire insurance to protect your business. The two most basic forms of insurance that you should get are commercial property insurance (CPI) and commercial general liability (CGL) insurance. CPI helps business owners protect their physical assets against theft, fire, natural disasters, and vandalism, while CGL protects the business in the event that an accident happens to a third party on the business’ premises. The standard costs for insurance premiums are usually $10,000 for CPI and $25,000 for CGL.
In total, you can expect to spend anywhere between $100,000 and even $950,000 to set-up a car dealership business. This price range will vary greatly depending on what type of dealership you want to launch, what state you’re in, how big of a scale your operations will be, and other miscellaneous costs. Keeping these costs in mind when planning for your dealership business will minimize the risk involved when pursuing this venture and guarantee a better chance at success in the long run.