Car Dealership Business Overview

Used car dealerships acquire and sell pre-owned vehicles to consumers who want alternatives to new car purchases. These businesses obtain inventory through various sources, including auctions, customer trade-ins, private sellers, and lease returns. Before putting vehicles up for sale, dealerships inspect and complete necessary repairs or improvements to ensure the vehicles meet quality and safety standards. Most dealerships combine vehicle sales with complementary services like financing assistance, vehicle warranties, maintenance, and parts sales. The industry includes businesses of different sizes, from small local lots to large multi-state operations.

The automotive retail industry includes several business models, including:

• Independent Dealership: A single physical location selling used vehicles with a local customer base
• Multi-Location Dealer: Multiple physical locations operating under one brand within a geographic region
• Online-First Dealer: Primarily web-based operations with minimal physical presence, offering home delivery and online purchasing
• Buy-Here-Pay-Here Dealer: Focuses on customers with limited credit options by providing direct financing

How Used Car Dealers Make Money

Used car dealers build their business around the price difference between vehicle acquisition costs and retail selling prices. When dealerships purchase vehicles through auctions, trade-ins, or private sellers, they evaluate market conditions and potential profit margins. After reconditioning and preparing vehicles for sale, dealers price them competitively while maintaining room for negotiation with potential buyers.

Beyond vehicle sales, dealerships create additional income through financing arrangements, where they receive commission fees from lenders for setting up auto loans. If desired, a car dealership may also have a service department that performs customer maintenance and repairs, contributing steady revenue throughout the year. Parts sales, extended warranties, and vehicle protection packages provide supplemental income. Many dealers also participate in the wholesale market, selling trade-ins that don’t meet their retail standards to other dealers or through auctions. Insurance referrals and documentation fees from vehicle transactions round out the revenue streams available to used car dealers.

Industry Statistics

Used car dealers operate in the Retail Trade sector under NAICS 44112 – Used Car Dealers. This code covers businesses that retail used passenger vehicles, including automobiles, light trucks, and utility vehicles. Below are some statistics about this industry.

Used Car Dealer Industry Size & Growth: The used car dealer industry generates $173.9 billion in annual revenue. Over the past five years, the industry has grown by 3.5% annually. This growth was driven by semiconductor shortages affecting new vehicle availability and increased consumer demand for pre-owned vehicles. Looking ahead, the industry is expected to see moderate growth of 6% through 2030 as new vehicle production normalizes and interest rates influence purchasing decisions (IBISWorld)

Number of Used Car Dealers: There are approximately 130,000 used car dealerships operating across the country. The industry includes both small independent dealers and large national chains. Two major companies dominate the market – CarMax generates $21.1 billion in revenue while Carvana brings in $10.4 billion in annual sales (IBISWorld)

Used Car Dealer Average Profit Margin: Used car dealers typically maintain profit margins of around 2.6%. This percentage reflects the balance between vehicle acquisition costs, reconditioning expenses, and market-based pricing (IRS)

Also See: Ideas for Naming a Car Dealership

Costs To Start a Used Car Dealership

Starting a used car dealership typically costs between $50,000 and $500,000. This range accounts for different business sizes and locations, from small local lots to larger operations with service departments.

Here are some of the larger expenses when starting a used car dealership:

Initial Inventory: A starting inventory of used vehicles represents one of the biggest expenses. Most dealers begin with 10-20 vehicles, which requires $100,000 to $300,000 depending on the types and quality of vehicles selected.

Location: A car lot with sufficient space for inventory display and customer parking requires significant investment. Depending on size and location, monthly lease costs range from $2,000 to $8,000. Some dealers purchase property instead, increasing initial costs but providing long-term stability.

Equipment and Supplies: Basic equipment needed includes vehicle lifts, diagnostic tools, cleaning supplies, and office equipment. Setting up a service bay with the necessary tools and equipment typically costs $15,000 to $30,000.

Insurance: Dealer insurance policies covering inventory, liability, and property damage protection range from $800 to $2,500 per month. This varies based on inventory value and coverage levels.

These estimates represent general ranges, and actual costs will vary. The final amount depends on location choice, inventory size, and whether the business includes a service department.