How to Start a Used Car Dealership
by NicoleD, Former Moderator
- Created: October 13, 2010, 2:04 pm
- Updated: June 2, 2011, 5:54 pm
Are you thinking about a used car dealership or auto business? Read on for a quick overview on how to start up - and the unique aspects of the auto business industry that requires extra attention.
Once you narrow in on your concept, yo;ll begin to follow the same basics steps that any business, regardless of industry, does to legally begin a business. Read 10 Steps to Starting Up to better understand and navigate the key planning, financial and legal decisions involved in starting a business.
Keep in mind that while these general steps are applicable to most businesses, you will need to thoroughly research the auto industry to understand the specific regulations that apply to your field. Below is a summary of topics that will help you get started.
- Retail vs. Wholesale- One of the initial decisions you will need to make is whether you will be selling automobiles as a retailer or as a wholesaler. Retail dealers can only sell to the public, while wholesalers sell to other dealers. Different licensing, advertising and zoning laws apply to retailers and wholesalers, so be sure to thoroughly research the appropriate path.
- Licensing- In addition to your general business licensing requirements, you will be required to obtain a dealers license. Individuals (non-businesses) are permitted to sell a limited number of automobiles without a license (for example, if someone where to sell their personal vehicle)' but do not try to bend this law for your business. If you plan to sell automobiles for profit, you must obtain a license to ensure that you will comply with consumer rights and safety laws. Failure to do so can result in hefty fines and even criminal penalties.
Typically, you can apply for a dealers license at your state department of motor vehicles (DMV) office or other approved provider. Fees and processes vary by state, but most states require that dealers pass an exam that covers the rules and regulations of the industry.
- Insurance and Bonding' Auto sale businesses require sufficient insurance coverage, including general liability, lot, and comprehensive plans. The following guides from Business.gov will help you understand your insurance requirements:Types of Business Insurance
Five Tips for Buying Business Insurance
A surety bond is a type of insurance that guarantees performance of a contract. Surety bonds are an expensive, but necessary, fact of the used auto business. Two common reasons businesses buy surety bonds are help prevent losses from a failed contract with a supplier or vendor, and to assure customers a satisfying delivery. If you are a retailer, for example, you may want to acquire a surety bond to safeguard your transactions with the wholesalers that you purchase your inventory from.
- Location - Every business owner will face some basic legal and regulatory issues when selecting a business location, as well as practical considerations such as proximity to customers and accessibility. As the owner of a used auto dealership, you will need to pay particular attention to your space requirements and the accompanying zoning laws. Regulations vary by state and dealer type (retail or wholesale). Contact your local planning agency or zoning office for information about how property is zoned.
- Inventory' You will need to determine how you will locate and store your inventory. It is a good idea to begin making contacts before your business breaks ground so that your opening is not delayed due to lack of inventory. Most small auto dealers acquire inventory through auto auctions or through personal sales and trade-ins.
- Consumer Rights and Safety Laws' As an auto dealer, you will need to familiarize yourself with the Federal Used Car Rule, which requires that dealers to post disclosures on used vehicles. The law applies in all states (except Maine and Wisconsin, which requires similar regulations at their state levels), the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, and American Samoa.
Part of the Rule requires that dealers post a Buyers Guide [pdf] before you offer a used vehicle for sale, that must disclose the following information:
- whether the vehicle is being sold 'as is' or with a warranty;
- what percentage of the repair costs a dealer will pay under warranty;
- that oral promises are difficult to enforce;
- to get all promises in writing;
- to keep the Buyers Guide for reference after the sale;
- the major mechanical and electrical systems on the car, as well as some of the major problems that consumers should look out for; and
- to ask to have the car inspected by an independent mechanic before they buy.
For details how to comply with the Federal Used Car Rule, read A Dealer's Guide to the Used Car Rule from the Federal Trade Commission (FTC).
Additionally, dealers should familiarize themselves with their stat's'lemon law' and'cooling off rules that are in place to protect consumer purchases. Laws vary by state but generally, dealers are not required by law to give used car buyers a three-day right to cancel. The right to return the car in a few days for a refund exists only if the dealer grants this privilege to buyers.
- Warranties - State laws hold dealers responsible if cars they sell fail to meet reasonable quality standards. According to the FTC:
- A warranty of merchantability promises that the product offered for sale will do what it's supposed to, for example - the vehicle will perform basic functions.
- A warranty of fitness for a particular purpose applies when you buy a vehicle based on the dealer's advice that it is suitable for a particular use, for example - a dealer who suggests you buy a specific vehicle for hauling a trailer in effect is promising that the vehicle will be suitable for that purpose.
For more information, read Business.gov's guide to warranties and product liability.
Additional Resources for Starting a Business
As your business planning begins to take shape, use the free resource guides on Business.gov to decide how you will finance and market your business. Additionally, if you decide to hire employees, the Employment and Labor Law Guide highlights labor laws that apply to your business, including new hire reporting, benefits, and worker's compensation. For a quick list on all basics, see Business.gov's Ultimate Guide to Starting a Business.
Do you have more questions about starting up a used car dealership? Post them on the Business.gov discussion forum to get feedback and advice from other business owners. Industry associations often provide codes and standards that can help you navigate the norms of your trade.
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