Investing in a car dealership franchise is a great way to make a healthy annual profit without the risks associated with building a brand from scratch. Car dealerships are a relatively safe business, as vehicles are a necessity for many people \u2014 and given that no vehicle lasts forever \u2014 there will always be a steady demand for cars. <\/p>\n\n\n\n
Opening a car dealership franchise can be a time-consuming and complex process, which is why it\u2019s crucial to do your homework before diving in. In this guide, I\u2019ll break down the process of opening a car dealership franchise step by step. I\u2019ll also detail some of the key benefits and drawbacks that you need to be aware of.<\/p>\n\n\n\n
Since the dawn of the car manufacturing industry more than a century ago, new cars in the USA have been sold under the franchise system. In this system, independent business owners pay car manufacturers for the rights to sell their vehicles. The franchise model is a crucial component to the success of the industry and is mutually beneficial for dealers, manufacturers, consumers, and local communities.<\/p>\n\n\n\n
But how does it work?<\/strong><\/p>\n\n\n\n The franchise model for the automotive industry allows franchisees to buy the rights from vehicle manufacturers to sell their vehicles. In most cases, when you buy a car dealership franchise, you\u2019ll have the right to sell a manufacturer\u2019s vehicle in a specific territory. <\/p>\n\n\n\n Franchising also allows manufacturers to distribute their vehicles via a wide distribution channel without having to cover all the startup costs of opening each new dealership. In essence, franchising is a win-win for both parties.<\/p>\n\n\n\n The way you profit from a car dealership franchise is relatively straightforward. As a franchisee, you cover most of the initial costs of setting up the dealership. Then, you\u2019ll pay a royalty fee to the manufacturer on every new car sold. <\/p>\n\n\n\n The average new car dealership earns a net profit of 3.9%<\/a>, which truthfully does not sound like a very high profit margin. That said, a brand-new vehicle may cost up to $50,000, so a car dealer can still bring in up to $2,000 in profit from a single sale.<\/p>\n\n\n\n Franchise dealerships may also gain the right to sell used cars by the same brand as their franchisor<\/a>, though this is usually separate from the franchise agreement for new cars. <\/p>\n\n\n A clear, step-by-step breakdown to help you decide if franchising is right for you\u2014and how to get started.<\/p>\n\n\n\n\t\t\t Buying a new car dealership is no walk in the park. In fact, there are quite a few hurdles to jump over and regulations you\u2019ll need to meet before you can start selling cars. To make things easier, I have broken down everything you need to know about buying a franchise<\/a>.<\/p>\n\n\n\n Opening a car dealership requires intense research. You\u2019ll need to become familiar with the automotive industry and the demand in the area you wish to open your dealership. How many vehicles are sold in your area annually? What percentage of those vehicles are cars, SUVs, trucks, etc.?<\/p>\n\n\n\n It\u2019s also important to have a strong understanding of the different brands of car dealership franchises. Not all brands are created equal, and some may have a much better reputation or franchising terms.<\/p>\n\n\n\n Let\u2019s say that you discover Ford cars make up a large portion of the vehicle sales in your area of interest \u2013 how many Ford dealerships exist already? Are there any gaps in the market that you could potentially exploit?<\/p>\n\n\n\n In addition to identifying current trends, you should also look to the future. For example, electric vehicles (EVs) are becoming increasingly sought after<\/a> in many areas, which is a trend that is likely to continue for the foreseeable future.<\/p>\n\n\n\n A key advantage of investing in a franchise is that it provides you with the opportunity to capitalize on a tested and successful business model. But that doesn\u2019t eliminate the need for you to draft a solid business plan<\/a> specific to your area of interest and local consumer base.<\/p>\n\n\n\n These are just a few of the most important questions that you should get answers to before you purchase a car dealership franchise. Drafting a business plan is a great way to create a blueprint for success. Not only do business plans keep things organized as you get started, but they also make it much easier to secure funding for the franchise when the time comes.<\/p>\n\n\n\n Your business plan should include, at the minimum, a competitive analysis, an outline of your target market, financial projections, and marketing strategies. Bear in mind that a well-crafted business plan may help you impress potential investors and lenders, so be accurate, honest, and thorough.<\/p>\n\n\n\n The Franchise Disclosure Document<\/a> (FDD) contains detailed information about the parent company, such as its history, parent or affiliated companies, the executives and their experience, past lawsuits, potential costs (such as training, equipment, and supplies), and the obligations of franchisees.<\/p>\n\n\n\n It may also contain information pertaining to the franchisor\u2019s financial records, though this isn\u2019t always obligatory.<\/p>\n\n\n\n In the US, the franchisor is legally obliged to provide potential franchisees with an FDD at least 14 days before the franchisee signs the Franchise Agreement or pays any fees. Essentially, the FDD gives you insight into the parent company before making any legally binding commitments. You can think of your 14 days with the FDD as the dating period \u2013 this is the time to pull out if anything seems off. <\/p>\n\n\n\n You shouldn\u2019t rely solely on the FDD when researching a franchisor. After all, it\u2019s in the franchisor\u2019s best interests to make sure the FDD conveys them in the best light possible. So, while there certainly will be some good information inside, it\u2019s also worth doing your homework.<\/p>\n\n\n\n The National Automobile Dealers Association (NADA)<\/a> is a fantastic place to start your research into a car dealership franchise. NADA represents around 16,500 new vehicle franchises in the USA, providing them with resources such as consulting, in-depth training, and a range of data that you can use to analyze the health of a particular car manufacturer.<\/p>\n\n\n\n Using NADA, you can analyze industry data and insights, market trends, manufacturer-dealer relationships, and much more. You can uncover a lot of information to determine a franchisor\u2019s position in the automotive market as well as current consumer trends.<\/p>\n\n\n\n In addition to exploring NADA, you should also carry out your own research into your company of interest. For example, you might want to speak to existing franchise dealerships for your company of interest. You can also work alongside a franchise expert to conduct financial projections independently of the franchisor\u2019s projections.<\/p>\n\n\n\n Naturally, if you want your car dealership to be a success, you need to choose a winning location. Two main factors you should consider are visibility<\/strong> and accessibility<\/strong>. If no one can see your car dealership, or if it is hard to get to, you are bound to lose potential customers.<\/p>\n\n\n\n However, these aren\u2019t the only important considerations. You also need to look at specific zoning laws for your area<\/strong>, which might mean contacting your local zoning or planning department.<\/p>\n\n\n\n Even in zones allocated for commercial purposes<\/a>, there may be restrictions that limit your ability to run a successful car dealership franchise. When analyzing commercial (C-3) zones, make sure that \u201cautomotive sales\u201d is explicitly listed as a permitted use. Also, check whether you may face any restrictions on activities like servicing and repairs, test drives, and outdoor displays. You may also need to analyze the fine details, such as minimum parking lot size requirements.<\/p>\n\n\n\n There\u2019s no denying that starting a car dealership franchise is an expensive business venture, particularly when it comes to startup costs. Just to gain the right to operate the franchise, you\u2019ll need to pay a franchise fee<\/a> to the parent company. Depending on the franchisor, this can range from $30,000 to a whopping $500,000<\/a>!<\/p>\n\n\n\n Beyond the initial franchise fee, you should also prepare for the startup costs, such as equipment, a showroom, renovations, employee salaries, and marketing expenses, to name a few.<\/p>\n\n\n\n Since most aspiring franchisees don\u2019t have this kind of start-up capital, the next step is to obtain funding<\/a>. Luckily, there are quite a few different ways to finance a franchise.<\/p>\n\n\n\n Pro tip<\/strong>: Have a solid business plan mapped out before attempting to secure funding. Lenders are much more likely to approve a loan if you have a solid blueprint for the future.<\/p>\n\n\n\n Now that you\u2019ve secured funding, you\u2019re ready to sign the Franchise Agreement (FA)<\/a>. This document is a legally binding contract between the franchisor and franchisee, containing all of the terms and conditions of the franchise relationship.<\/p>\n\n\n\nDownload the First-Time Franchisee Guide<\/h4>\n\n\n\n
How to Buy a Car Dealership Franchise: Step-by-Step<\/h2>\n\n\n\n
Step One: Research Different Car Dealership Franchises to Buy<\/h3>\n\n\n\n
Step Two: Draft a Strong Business Plan<\/h3>\n\n\n\n
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Step Three: Review the FDD<\/h3>\n\n\n\n
Step Four: Do Your Due Diligence<\/h3>\n\n\n\n
Step Five: Choose a Location<\/h3>\n\n\n\n
Step Six: Get Funding<\/h3>\n\n\n\n
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Step Seven: Sign the Franchise Agreement and Pay the Franchise Fee<\/h3>\n\n\n\n