How to Become an Auto Dealer

Published: Jan 11, 2019
How to become an auto dealer

 

For decades the auto dealer industry has been one of the leading consumer goods sectors in the United States. Like most markets after the 2008 recession, this market also slowed down significantly. Yet, over the last few years, auto dealerships have emerged with renewed strength and have secured record sales year after year. It seems that becoming an auto dealer is an enticing prospect to many.

Opening a dealership requires a good understanding of the market and an entrepreneurial spirit. It also requires that future dealers comply with a number of business registration and licensing requirements, such as obtaining an auto dealer bond and insurance policies. To launch their dealership, individuals need to secure funding for operations as well as to understand and strictly follow all the rules and laws that apply to them.

Are you thinking about opening a dealership? Here’s what you need to know about how to become a car dealer!

Download our FREE e-book guide for an even more detailed breakdown of all the requirements and steps to becoming an auto dealer!

How to become an auto dealer ebook

Why Become a Car Dealer?

There are many benefits to becoming an auto dealer. For example, dealership compensation is among the highest compared to other industries and the highest of all retail sectors. Weekly earnings of various types of employees within the dealership sector have also been increasing steadily on a yearly basis for the last couple of years.

Becoming a dealer can also come with a flexible work schedule and the ability to scale one’s work according to one’s needs. For those with an entrepreneurial spirit, it is a great way to put their business sense to use. It also offers many opportunities to engage with other people, for those who like to communicate as part of their job.

How to Become an Auto Dealer

The process of becoming an auto dealer has many different aspects and requires careful planning. The following sections detail the main things you will need to take into consideration when setting out to open your own dealership.

Dealer license types

The exact ways that dealer licenses are called and defined differs from state to state. For example, new car dealers in one state may also be authorized to sell used vehicles, whereas they may not be allowed the same in another. Yet, regardless of these minor differences, there are several major dealer license types that are found in all states:

  • New Vehicle Dealer – also known as franchise dealers in some states, these dealers sell new vehicles retail. They typically have an agreement with manufacturers who provide them with the vehicles.
  • Used Vehicle Dealer – also known as independent dealers in some states, these dealers typically only sell used vehicles retail or wholesale.
  • Wholesale Dealer – wholesale dealers only trade with other licensed dealers. They do not sell vehicles retail.
  • Broker – brokers do not sell vehicles themselves but assist people to find a particular vehicle and/or arrange the purchase of the vehicle.
  • Distributor – like vehicle manufacturers and wholesale dealers, distributors do not sell vehicles to the public. Such dealers usually franchise licensed dealers who then sell the vehicles retail.
  • Auto Recycler – while recyclers are not vehicle dealers, they are in the business of buying vehicles which they then dismantle, and sell off their parts and accessories.

Cost of opening your dealership

The approximate cost of opening your dealership will vary widely depending on a number of factors. Your registration and licensing costs are determined on a state level and may differ significantly, though they are not the factors that will influence your cost the most.

The type of dealership you wish to open is by far the most influential factor. Dealing with new cars, for example, has drastically higher upfront costs. Similarly, whether you decide to open a service department will also influence your starting costs. On the other hand, industry trends show that increasingly more dealerships make significant profits through their service departments.

Other important costs that will be part of your initial budget include:

  • Paying a lease or buying a location
  • Obtaining office equipment
  • Payroll expenses for the first few months
  • Marketing and advertising costs, and more

With all of the above in mind, estimates provided by industry experts about opening a dealership range between as little as $10,000 and as much as $100,000 or more.

Business requirements to open a dealership

To get started with your dealership, you need to comply with various state business registration requirements. While these are different from state to state, some of them are quite common. They may include:

  • Picking a business structure and registering your business with the Secretary of State or another state business registration agency
  • Obtaining a registration with the IRS, and a tax ID from your state Department of Revenue
  • Registering with other state agencies, as necessary

Once you’ve covered these requirements, you can move on to covering the dealer licensing requirements.

Dealer licensing requirements

A central requirement to opening a dealership is to obtain a dealer license from your state licensing authority or, commonly, the state Department of Motor Vehicles. Like business registration requirements, licensing requirements vary across states. Yet, many of the following are included in most states’ dealer licensing process:

  • Find a location for your dealership and receive a zoning permit or other location approval from the licensing authority
  • Achieve compliance with state dealer location, office, and display space requirements
  • Pass a pre-licensing dealer training and examination
  • Provide fingerprints and pass a criminal background check
  • Obtain an insurance policy
  • Obtain an auto dealer surety bond
  • Pass an inspection of your dealership by an approved inspector
  • Complete and submit your dealer license application form
  • Pay application, licensing, and other fees

Want to know whether you need to get licensed in your state? See our FREE e-book guide that includes basic licensing information for all states

Surety bond requirement

All states require applicants for a dealer license to post a surety bond, though some states require bonds only for particular license types. Surety bonds serve as a guarantee that the bonded dealer will comply with state laws.

They also serve as a form of protection to the state and consumers. If a dealer violates the conditions of the bond agreement and causes harms and losses to a consumer, a claim may be filed against their bond. When a claim is filed by the state or a consumer, the surety that backs the bond will investigate the issue.

If the claim is found to be legitimate and reasonable, compensation is extended by the surety to cover the claim. Such compensation may be as high as the full amount of the bond. Yet, ultimately the dealer is liable to cover the costs of a claim and must reimburse the surety in full if it covers a claim.

Surety bond cost

The cost of your surety bond is equal to a fraction of the full bond amount. The bond amount, or penal sum, is the maximum amount of compensation covered by the bond in the case of a claim. Bond amounts for dealers are determined by each state separately.

The surety that issues your bond determines the cost or rate, you need to pay by examining your personal credit score. Applicants with a credit score of 700 FICO or more are usually offered the lowest rates on their bond.

To get an estimate on your bond rate, try our bond cost calculator below.

Surety bond cost calculator

This is where we'll email your estimate. We don't share your data with third parties. CALCULATE PREMIUM
+ -
+ =

Thank you!

Based on your credit score, your expected yearly premium is: $500 - $1000

A copy of this estimate has also been sent to [email protected]

For a FREE exact quote, take 5 minutes to submit our online application and we'll be in touch with you shortly.

Download Our Free E-book to Learn More!

Want to know even more about how to become a car dealer?

Download our 45+ pages e-book today for an even fuller overview of the whole process of starting up a dealership. Our e-book also includes:

  • Trends for the next several years in the auto dealer sector
  • More information on the cost of launching your dealership
  • Greater detail on the registration and licensing requirements
  • Ideas about how to finance your dealership
  • Information on how dealers acquire cars for their lot
  • A table that covers the basic licensing requirements for dealers in all states
  • And more…

How to become an auto dealer ebook

Additional Resources

To learn more about becoming an auto dealer, see our guides:

The following two tabs change content below.
Victor Lance is the founder and president of Lance Surety Bond Associates, Inc. He began his career as an officer in the U.S. Marine Corps, serving two combat tours. As president of Lance Surety, he now focuses on educating and assisting small businesses throughout the country with various license and bond requirements. Victor graduated from Villanova University with a degree in Business Administration and holds a Masters in Business Administration (MBA) from the University of Michigan's Ross School of Business.