The $0.99 Trillion US automotive market is expected to register tremendous growth over the coming years presenting a perfect market opportunity for business entrepreneurs.
However, entering into this market with a car dealership requires a significant investment and planning.
Having a thorough understanding of how much does it cost to start a car dealership is essential so that you can finance your business efficiently.
Well, this blog post offers all the answers related to your car dealership start-up costs and an understanding of the factors influencing those costs.
Ready to dive in? Let’s get started.
What is the cost of starting up a car dealership business?
The cost of starting a car dealership in the US varies between $130,000-$913,500 and much more. These costs vary greatly depending on the size, location, and scope of your business and can sometimes cost you up to $5 million to make a solid start.
In terms of profitability, car dealerships generally operate on a 1-2% net profit margin. Although it may seem like a small percentage of gain, the value is actually quite high making it a profitable venture.
Average costs for starting a car dealership business
Before we dive into details, check out this car dealership startup cost checklist. It will help you plan your startup budget and know how much financing you need to get started.
| Item | Average Cost |
|---|---|
| One-time Expenses | |
| Business Registration Fees | $150 to $500 |
| Security deposits | $6,000 to $150,000 |
| Remodeling | $5,000 to $20,000 |
| Initial Vehicle Inventory | $50,000 to $500,000 |
| Furnishings and Office Equipment | $5,000 to $50,000 |
| Recruitment and Training | $10,000-$25,000 |
| Vehicle Maintenance Equipment | $2,000-$20,000 |
| Computer Systems and Software | $4,000 to $10,000 |
| Initial Marketing and Advertising | $10,000 to $20,000 |
| Signage | $5,000 to $10,000 |
| Licenses and Permits | $5,000 to $10,000 |
| Insurance Deposits | $5,000 to $10,000 |
| Total One-Time Expenses | $112,000 to $835,000 |
| Recurring Expenses (Per Month) | |
| Employee Salaries | $4,000 to $12,500 |
| Marketing and Advertising | $2,000 to $10,000 |
| Mortgage or Land Lease | $5,000 to $25,000 |
| Utility Bills | $2,000 to $5,000 |
| Inventory Financing Costs | $5,000 to $25,000 |
| Software Subscriptions | $200 – $500 |
| Total Recurring Expenses | $18,000 to $78,500 |
| Total | $130,000 to $913,500 |
Using this car dealership startup cost checklist, you can plan your startup budget and get an idea of how much financing you will need.
How to calculate the cost of starting a car dealership business
You now have a list of potential expenses and a rough estimate of your startup costs. Let’s estimate your actual startup costs using these two proven methods.
The first, traditional method involves using a startup costs calculator to estimate the startup costs. However, the second, the Upmetrics method, is an innovative method that uses the Upmetrics financial forecasting tool.
Let’s understand both methods so that you can choose one that suits your requirements the best.
The traditional method—startup costs calculator
The calculator includes categories such as pre-trading, website setup, marketing, operations, and people. You can enter the estimated costs in each field and let the calculator estimate the costs for you.
Remember that many startup costs fall under recurring expenses, so cover those costs monthly, quarterly, or annually.
Calculate your startup costs using this calculator.
The Upmetrics method—financial forecasting tool
It is an intuitive and efficient method of calculating startup costs. Using Upmetrics will not just help you estimate startup costs but also help with financial forecasting.
All you need to do is enter your sales, costs, and other financial assumptions and let the tool calculate monthly/quarterly/ and yearly projections for you.
Check out the financial forecasting tool for accurate financial forecasting. Once you accurately estimate startup costs, you can easily identify funding requirements for your car dealership.
Pro-tip
Check out the financial forecasting tool for accurate financial forecasting. Once you have an accurate estimate of startup costs, you can easily identify funding requirements for your lawn care and other landscaping businesses.
Raising funds for a new startup is nerve-wracking and time-consuming, but having a solid car dealership business plan can make things a lot easier.
Let’s move ahead and discuss the factors that affect your car dealership business startup costs.
Factors that affect car dealership startup costs
Let’s understand the factors that influence your cost of starting a car dealership in the US.
1. Location
Location is crucial in determining the cost of starting and operating a car dealership business.
From lease rental expenses to payroll and other operating expenses— everything is heavily influenced by the state and location of your dealership.
It’s a no-brainer that prominent locations bearing high traffic will be associated with higher start-up costs. On the contrary, starting a business in sub-urban locations or places with less prominence will cost you considerably less.
Evidently enough, your start-up costs will be influenced by the location of your business. However, don’t let cost be the only factor you consider while finalizing your dealership location.
2. Lease and Mortgage
Amongst the prominent start-up expenses, lease and mortgage payments stand at the top for car dealership owners.
Now, car dealers can either purchase or lease an office space. And while each has its benefits, leasing is indeed more cost-effective.
The lease costs will vary significantly depending on how large or small a space you require. However, consider paying anywhere between $10-$40 per sq. ft. for a nice thriving location.
That being said, for an average of 3,500- 7,000 sq. ft. location, you would be paying an annual lease of $35,000-$280,000.
Now, it is truly difficult to generalize the lease expenses for the entire US through a rough approximation.
For instance, the median per sq. ft. rent in the upper boroughs of Manhattan is $980 and it can be as high as $2,750 annually. In such cases, your annual rent alone can sum up to millions of dollars.
Hence, the location truly dictates the lease expenses you would be bearing.
Another prominent expense to consider is that of security deposits. Generally, the lease agreements would ask you to pay 2-6 months of rent as an upfront deposit, i.e. $6,000-$150,000. Ensure that you have a sufficient sum to close the deal.
3. Remodeling and Furnishing
Expenses on leasehold improvements would be another prominent expense for a car dealer. Now the costs for these vary significantly for different car dealerships depending mainly on the condition of the leased space.
Getting a space up and ready for your dealership operations includes expenses on paints, flooring, minor constructions, and a lot of furniture. Considering, the scope of work and improvements required, be prepared to spend anywhere from $5,000-$20,000 on remodeling without furniture.
In terms of furniture and fixtures, a car dealer needs to spend on chairs, desks, couches, reception tables, rugs, and much more to create a comforting, functional, and aesthetic ambiance.
The costs for furnishing can be as low as $5,000, however, can be extended up to $50,000 depending on the taste and quality of the finishings.
4. Vehicle Inventory
Before you start your own car dealership, you need to build a considerable inventory of cars you would be selling. However, unlike other businesses, the inventory in question is considerably of a big value.
Now, the investment you make at the initial stage is dependent on multiple factors such as the size and scope of your car dealership, car brands and models you would be selling, and the amount of capital you can gather. Also, would you be selling new cars, used cars, or both?
Depending on the answers, you would be building an inventory of cars, costing you at least $50,000-$500,000. However, the costs here can be as high as $1M-$5 M for the initial first batch.
Bulk purchasing would definitely offer you better rates and up to 20-30% discounts on retail pricing. However, it might be difficult for most car dealers to invest such a large amount initially without a considerable loan.
Another cost aspect to consider is the storage of these vehicles in the warehouse. This would add a couple of thousand dollars to your monthly expenses, i.e. $2,000-$5,000.
5. Recruitment, Training, and Hiring
You need salespeople and other employees to help you run a functional and profitable car dealership. However, the phase of recruitment, training, and hiring is pretty expensive.
Hiring a white-collar employee in the US takes anywhere from $200-$250. This includes the cost of filling a position and not training. Training an employee takes an additional $250-$1,000 depending on whether it’s in-house training or by some trained specialist.
Further, if we consider the payroll for the first few months, the expenses flare up pretty high. To give you a rough overview, the average weekly earnings of a light-vehicle dealership employee in the US is $1681.
This statistic by the National Automobile Dealers Association (NADA) just shows how expensive it is going to be to have an employee on board. Consider having at least $10,000-$25,000 as a reserve for paying employee salaries for the first few months.
These expenses may seem pretty expensive, however, the investment in the right manpower will bring back profound returns for your dealership.
6. Maintenance and Office Equipment
Whether you are running a used car dealership or a new car dealership, you need to ensure that the vehicle remains in optimum condition for sale.
Not many, however, you will require a couple of maintenance equipment like car lifts, power tools, wheel balancers, and compressors in your inventory. The costs for these vary differently, however, budgeting $2,000-$20,000 would be sufficient to get you started.
Apart from these, you would even require a set of computers, a POS system, and a couple of software for efficient functioning at the back end.
To give you a rough overview, a single computer system would cost you between $300-$700. Depending on the number of units required, be prepared to spend $3,000 or more on computers.
Further, a collective cost of POS hardware, software, and setup would cost between $500-$10,000 depending on the features and scale of the system.
Lastly, a couple of sales, marketing, accounting, or combined dealership software would cost you around $500-$2,000 annually.
These expenses on hardware and software are essential to help your employees work efficiently for your organization.
7. Licensing, Permits, and Insurance
Another aspect related to start-up costs includes consideration relating to compliance.
The basic business registration and acquiring of a business license would cost you between $150-$500 depending on the state.
However, that’s not it. You will require additional licenses to run car dealerships in the US.
Firstly, a dealer license and a national salesperson License for all the salespeople in your dealership to be able to sell cars. The cost for this varies between $100-$400 for each salesperson.
Additionally, certain states require you to get a surety or an auto dealer bond before they grant you a dealership license. The costs for this can vary significantly between $5,000-$50,000.
Another important license would be by the Department of Motor Vehicles for federal automobile dealers which can cost up to $10,000 at a time. This is quintessential for you to handle vehicle registration and titling on behalf of customers.
Further, basic zoning permits, sales tax permits, and environmental permits would cost you an additional $500-$1500.
In terms of insurance, you need general liability, auto liability, workers’ compensation, and basic property insurance. Since there is a comparatively higher degree of risk, the costs for insurance would generally span up to $10,000 annually.
8. Marketing and Advertisement
Marketing and advertisement expenses are significant ongoing costs for dealers in the car dealership industry. While the expenses vary significantly for different dealerships, most car dealers spend about $100,000-$500,000 annually on marketing and advertising activities.
First things first, getting a website for your car dealership can cost you anywhere from $500-$5,000. The additional content marketing and SEO for the same would cost somewhere between $200-$3,000.
Now, if you are getting a car dealership franchise, you might need to follow certain of their marketing protocols. This would include signage boards, print advertisements, events, and all. The costs for these can vary between $5,000-$20,000 and more depending on the initial requirements.
Spending on online marketing avenues is equally essential. Exploring the options for email marketing, social media marketing, and paid advertisements would cost between $500-$2,000 every month.
Lay a strategic plan and dedicate a marketing budget to different marketing activities to gain overall benefits.
And those are pretty much all the expenses you will bear when you are starting a new car dealership franchise or a business. Let’s now learn some cost-effective methods to reduce your initial costs.
Tips for reducing car dealership startup costs
As we learned, starting a car dealership takes a substantial investment. However, here are a few ways to reduce your start-up costs to a great extent.
1. Start with a remote dealership
Instead of getting a luxurious space and all, start remotely. Establish yourself as a reputed car dealer, build your contacts, and market yourself efficiently. When you start individually, you don’t need to bother with lease, payroll, remodeling, and extensive licensing requirements. This will save you a hundred thousand dollars during the initial investment.
2. Don’t build a vehicle inventory
Building a car inventory is the largest expense costing you up to millions. Instead, adapt a method of delivering the cars directly to the customers as and when an order is placed. This would save you from making a huge upfront investment.
3. Second-hand equipment
For furniture, office equipment, and car maintenance equipment—try getting your hands on second-hand equipment. They are more cost-effective and can reduce your initial expenses by a couple of thousand dollars.
4. Buy used car dealerships
Instead of building an entire dealership from scratch, buy an existing business and make some essential ramifications. Doing so will help you not only save a couple of bucks but also in getting started easily.
Conclusion
And that’s it. Now that you understand the costs associated with starting a car dealership, let’s take a step forward and calculate the actual costs for your business.
Use Upmetrics’s startup cost calculator to estimate your start-up costs and make provisions accordingly.
Use Upmetrics for Accurate Startup Cost Projections!
Looking to estimate your startup costs? Dive into Upmetrics! Our business plan software makes financial forecasting a breeze
