Ask any startup founder and you’ll get the same answer: There is hardly anything more exciting in the business field than starting your own company.
And this holds true for auto dealers, too.
But how to start a non-franchised, used-car car dealership and succeed can be tough for many.
While the enthusiasm and energy are abundant in the first months of setting up a new business, the challenges are plentiful too. From financial difficulties to lack of business focus, there are many potential pitfalls on the path of the dealership startup.
What better way to avoid mistakes but to get to know the most common ones that fresh auto dealers make?
Let’s go through the usual pitfalls together, so that your startup dealership is bulletproof.
No Business Plan
Any successful entrepreneur will tell you a solid business plan is a recipe for a well-functioning business. It’s the bible of your company and will evolve with every step you take. Not having a business plan is a recipe for disaster.
The plan gives you the stimulus and opportunity to define your business goals and create a trajectory to follow. It has to contain your mission and vision, which give the overarching structure of your business. Without such an overview, you’ll find yourself at a dead end.
As a critical part of your business plan, don’t forget to research your competitors. That allows you to know “your enemies” and claim your rightful spot in the market. This means you can differentiate your products and services and find the target audience that will best match your company.
Finally, think about your business location. For auto dealers, this is crucial, as convenient and visible locations simply work better for your clients. This step also is a part of setting the stage for the development of your business.
No Sound Financial Plan
Needless to say, adequate financial planning goes hand in hand with the business plan. Having a good overview of your budget, savings and financing options is essential, as it gives you the basis for your operation. The usual tip here is not to overextend yourself financially, as you can easily make a wrong turn in the beginning.
Getting down to specific numbers, the estimated investment for a dealership startup is about $100,000. This, indeed, is a big figure, so it’s essential to know how you’re going to distribute the sum among your different priorities such as facilities, land, inventory and working capital. It’s a good idea to get advice from an accountant, as well as continuing help with your monthly financials.
Having a well-tracked budget also means being careful with hiring staff. Not too early and not too late may sound like a paradox, but that’s the rule of thumb. Furthermore, keep in mind that having excellent mechanics will bring you a lot of business, so make sure to invest in hiring good ones.
No Clear Business Focus
When you start small, it’s important to have a clear focus on a service or product. In this way, you can specialize and capitalize on your expertise, while also saving on big investments that a wide portfolio requires. If you scatter your efforts in buying, say, all kinds of cars, you can easily lose your way in overspending.
For example, one option would be to start with selling European cars. You can get them either by directly approaching people selling their cars or at auctions. You can start with a modest inventory of about 10 cars and whenever they’re out, use the turnover to make the next purchases. It’s a wise step to keep the working capital at the level of two months’ inventory. While scaling in this manner can take a while, it keeps you on the safe side financially.
Such a focused approach also gives you the opportunity to make a name in a certain domain of car sales. You can learn the ins and outs of this trade, thus developing a clear specialty. Once you have this stable ground, it’s much easier to widen your focus and add new types of vehicles and extra services with full-blown power.
Forgetting About Branding and Marketing
Once you delve into the startup universe, you will quickly learn the mantra of any new business in this age: Market your brand. While many car dealers still think this is not relevant for their business, reality shows the opposite. If you’re just taking your first steps as a car dealer, don’t get caught in this common opinion trap.
If you really want to make a difference on the market, you should create a brand for your dealership and put real effort into creating a consistent image of it. The brand transcends the idea of a company that only makes profit. It turns your dealership into a renowned name that has an attractive force beyond its good prices or great customer service. And this is precisely what you should be aiming for.
That’s why not having a marketing budget is a big mistake. Even if your financing is tight, invest in at least a basic marketing service. You won’t believe how many business leads will come from there, especially if you focus on exploring the power of online marketing.
Moreover, returning happy customers often are a bigger and more stable source of revenue than finding new ones constantly. Having a strong brand, along with great service, will help you build those lasting relationships.
Losing Track of Your Credit History
This last point is connected with the first one – namely, having a good business and financial plan for your startup. Many new (and even experienced) dealers make a grave mistake in this respect, as they don’t track their finances and allow their businesses to get into serious debt.
Staying in shape financially is important, because once you owe large sums, it’s difficult to think about solid profit. This means your business should be really flexible and you should adapt to new circumstances as they come.
Maintaining a good credit score is essential for keeping your dealership license too. If your business is located in, say, Texas, every time you need to renew the license, you will have to renew your Texas auto dealer bond. The catch here is that if your credit score falls, the price of your dealer bond will increase.
Instead of paying between 1%-4% of the bond as a premium, you can end up paying 15%. This means that if you need a $25,000 bond, with good credit you will have to pay between $250 and $1,000, while the price for high-risk cases can be up to $3,750. A bad credit record even can get your dealer bond application declined, which is a death sentence for your startup.
Getting to know these common startup mistakes will help you avoid them in your own dealership business. Don’t forget that while there are many potential pitfalls, it’s all about having the right information in advance and being prepared.
What is your experience with starting a car dealership? Please share your insight in the comments below.
Todd Bryant is the president and founder of Bryant Surety Bonds.