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How To Start A Custom Car Shop

How To Start A Custom Car Shop

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How To Start A Custom Car Shop

How To Start A Custom Car Shop

Starting a custom car shop is an exciting opportunity for car enthusiasts and skilled technicians alike. But you’ll need more than just a love for hot rods and a knack for tinkering under the hood. Launching a successful business involves several layers, from understanding your local market to navigating the legal requirements. Our guide will walk you through the process, offering insights into the automotive industry, essential steps to get started, and answers to questions you might have along the way.

Business Overview

A custom car shop is an automotive business focused on vehicle modifications and specialty work. Services may include installing aftermarket parts, fabricating custom components, engine building, paint/body work, audio/video systems, performance tuning, and complete custom car builds. Shops range from small operations in home garages to large specialty shops with multiple bays and staff.

Custom car shops exist for your everyday vehicle owner as well as for owners of certain types of vehicles, like work trucks, sports cars, classic cars, and even race cars. These shops become sought out and trusted because they do work that other shops don’t, and they often have access to products that you can’t find at a more general mechanic. 

Industry Summary

The custom car shop industry has been around for decades and has evolved over time to meet the changing needs and interests of car enthusiasts. Initially, custom car shops catered to hot rod enthusiasts who wanted to modify their cars for speed and performance. These early shops offered services such as engine swaps, suspension upgrades, and custom paint jobs.

Today, custom car shops have expanded to include a wide range of services, from cosmetic upgrades such as custom wheels and leather interiors, to advanced technical modifications such as turbocharging and supercharging. In addition to individual customers, custom car shops also cater to commercial clients, such as car dealerships, rental companies, and corporate clients who want to create a unique brand identity with their vehicles.

Steps To Start A Custom Car Shop

Step 1: Research the Market

If you’re thinking of starting a custom car shop, it’s important to know whether this business is a viable option in your area. A well-planned market research effort will help you answer the pressing question: Is starting a custom car shop a good idea?

At this stage, you want to know who you’re serving, and the age and interests of your local population can greatly influence the types of services in demand. Younger audiences might lean towards modern, high-tech modifications, while an older crowd could be interested in classic restorations. By defining your target market, you’ll be better equipped to align your business with the specific needs and preferences of potential customers.

Once you know who your customers are, it’s time to find out what they want. Go where they go: car shows, car meets, online forums, and local events. Engage in conversations to uncover what types of custom work people want and what services they feel are lacking in existing shops. You’ll not only get a feel for the demand but also discover potential gaps in the market that your business can fill.

Understanding the competitive landscape is the next item to research. Take a tour of your local area, note how many custom car shops are already in operation, and assess the level of service they provide. It’s also a good idea to extend your research to neighboring towns. Existing shops may already meet the demand, or conversely, there might be room for a business that offers something different or better.

Step 2: Write a Business Plan

Starting a custom car shop is a significant investment, and taking the time to write a business plan is essential. A business plan not only serves as a reality check, allowing you to project income and expenses to evaluate the business’s feasibility, but it also plays a pivotal role in securing funding. It’s far better to understand the viability of your idea in the planning stage rather than after launching the business.

When you’re looking for funding, certain sections of your business plan will hold more weight. These sections can be the deciding factors for lenders who are considering extending credit or loans to your business. Here are some to focus on:

Market analysis: In this section, you’ll want to demonstrate why your custom car shop will succeed. Include information about your target market, industry trends, and competitive landscape. Highlight your shop’s unique selling proposition and how it meets an unmet need or offers a better solution than existing competitors. Lenders will look at this section to assess the demand for your services and your business’s potential for success.

Management team: The management team section is key as lenders often associate the success of a business with the people behind it. Detail the qualifications, experience, and skills of your team, which includes the owner(s), and highlight any relevant expertise in the automotive or business sectors.

Financial projections: Banks pay close attention to financial projections as they demonstrate the business’s potential profitability. Provide reasonable income and expense projections, cash flow statements, and balance sheets for at least three years. Explain how you arrived at these numbers, and be prepared to explain them.

Related: How to write a business plan

Step 3: Source Funding

After confirming there’s a market for your custom car shop and crafting a business plan, the next big hurdle is securing funding. Raising the needed capital can be a challenging step when starting a business, but understanding the options available can simplify the process. Here are some common funding sources to consider for a custom car shop.

Personal savings: Personal savings often serve as the foundational source of funding for many entrepreneurs. However, personal savings may not cover all the startup costs, necessitating exploring outside funding sources.

Bank loans: Banks are a common source of funding for businesses. They typically require borrowers to invest between 15% and 25% of their personal funds towards the total cost of the project. Additionally, a good credit score and sufficient collateral are usually necessary.

Sometimes, banks may consider a loan too risky due to the nature of the startup or the borrower’s financial history. In such cases, they could use a Small Business Administration (SBA) loan guarantee, which can make it easier for entrepreneurs to secure loans.

Friends and family: Another potential source of funding is friends and family. They can provide loans or even equity investment. However, mixing business with personal relationships can be tricky. To protect both parties, it’s important to put all agreements in writing, clearly outlining the terms of the loan or investment. This transparency can help prevent future misunderstandings or conflicts.

Microloans: Microloans are small, short-term loans for businesses, typically ranging from $500 to $50,000. If the funding needs are low or credit isn’t available through a lender, microloans can be an excellent option. Organizations like Accion, Kiva, and local economic development organizations offer microloan programs, some of which also offer business training.

Related: Finding the money to start a business

Step 4: Register the Business

Starting your custom car shop is an exciting journey, but it’s important to make sure your business is fully registered and legal before you open your doors. The legal requirements can vary from state to state, so you’ll need to check local regulations for specifics.

Choosing a business structure: First up is deciding on the structure of your business. The four main types are:

  • Sole proprietorship: The simplest and least expensive structure. You have full control but are personally responsible for all liabilities.
  • General partnership: You share ownership and responsibilities with one or more partners, but each partner is personally responsible for debts and liabilities.
  • Corporation: A more complex structure that offers liability protection but is more expensive and has additional administrative requirements.
  • Limited Liability Company (LLC): Combines elements of a corporation and a sole proprietorship/partnership as it offers liability protection without as many corporate procedures.

For custom car shops, the choice of business structure often depends on factors like the size of the business, funding needs, and the level of liability you’re comfortable with. Many small shops start as sole proprietorships due to the ease of startup and lower costs. However, as they grow and the risks increase, they may opt for an LLC or Corporation for better liability protection.

Related: Comparison of business structures

Forming an LLC sounds complicated and expensive, but using an entity formation service guides you through the process so you know it was done right.

Some popular LLC formation services include:

IncFile - $0 plus state fees & free registered agent for 1 year!

ZenBusiness - Best for beginners. $0 plus state fees & free registered agent for 1 year!

Northwest - Best privacy protection. $39 plus state fees & free registered agent for 1 year!

Business name registration: After registering the business structure, you may need to register your business name. This process will vary depending on what business structure you pick. Sole proprietors and partnerships will often be required to register a “Doing Business As” (DBA), while corporations and LLCs register with the state during the formation process.

Related: Tips and ideas for naming a custom car shop

During this time, it’s also a good idea to check if the name you want is available as a web domain, even if you’re not ready to set up a website yet.

Related: Finding a domain name for your business

Obtain business licenses and permits: Depending on the extent of services offered at your shop, there will likely be several regulations to be aware of.

For example, in order to have a paint shop, there are federal and state regulations to follow. Also, there are rules for the proper storage and safety of common supplies like carb cleaner, solvents, oil, and tires to be aware of, too.

In addition, you will need to check for general business requirements from local, state, and federal agencies. Common ones include a local business license, sales tax permit, Employer Identification Number, and Occupancy Permit, among others.

Related: Common business licenses, permits, and registrations by state

Step 5: Set Up Operations

After doing market research, writing a business plan, and securing funding, it’s now time to turn your focus towards setting up the actual operations of your custom car shop. From acquiring a space to lining up vendor accounts, there’s a lot to consider.

The first step towards setting up your custom car shop is to find an appropriate space that offers adequate room for all the necessary components. Consider factors like zoning laws, infrastructure needs, and the growth potential of the location. Also, take time to think through how you want the shop layout to be. For example, the lifts and work bays should be placed in a way that allows for smooth movement of both people and cars. Good workflow design will directly impact what equipment you’ll need and where it should be placed.

Getting the right equipment is next on the list. At the bare minimum, you’ll need lifts for raising cars, air compressors for power tools, and diagnostic tools for troubleshooting. Don’t forget the essentials like welding equipment, engine hoists, jacks, and specialized tools required for custom work.

Finally, you’ll need a reliable supply chain to keep your custom car shop running. Establishing strong relationships with vendors is key. You’ll need accounts with a variety of suppliers, from performance parts companies and OEM parts dealers to speed shops and parts recyclers. Don’t overlook online retailers and auto salvage yards as they can often offer parts at lower prices or hard-to-find items.

Step 6: Hire Staff

If you’re about to become a custom car shop owner, hiring employees will likely be one of your initial tasks. As a new employer, there are several legal requirements you must meet before hiring employees.

First, you’ll need to obtain an Employer Identification Number (EIN) from the IRS, which is used for tax reporting purposes.

Next, you will verify the employment eligibility of your potential employees. This involves ensuring they have the right to work in the United States, typically verified through Form I-9.

Also, as a new employer, you are required to report your new hires to your state’s new hire reporting agency. Every state has different reporting requirements, so it’s important to familiarize yourself with your specific state’s rules.

Worker’s compensation insurance, which provides benefits to employees who suffer work-related injuries or illnesses, is also needed. Most states require businesses with employees to carry this type of insurance.

Finally, you should be aware of labor laws that apply to your business. These can include wage and hour laws, anti-discrimination laws, and workplace safety regulations. The U.S. Department of Labor provides resources to help employers understand their obligations.

Related: State guides for hiring your first employee

Step 7: Prepare to Open!

In the journey of establishing your custom car shop, there are likely going to be several other important steps to consider. Every business will have different needs, but here are a few to consider to ensure a smooth start and ongoing success of your business.

Business insurance: Securing business insurance is at the top of the list and is important as it protects you from potential risks that could result in significant financial losses. This can include property damage, liability claims, and worker’s compensation.

Setting up bookkeeping: Proper financial management is vital. Consider setting up a robust system to monitor your income, expenses, and profitability either through a professional accountant or accounting software such as Wave Accounting (FREE) or Quickbooks.

Contracts: You’ll likely need specific contracts such as service agreements, customer waivers, and vendor contracts. These documents outline the terms and conditions of your services and define your relationships with suppliers. RocketLawyer and Law Depot have free and inexpensive templates that may be helpful.

Opening a business bank account: It’s essential to open a business bank account to separate your personal finances from your business finances.

Accepting credit cards: Providing the convenience of credit card transactions can broaden your customer base. Set up a merchant account like 

Greg's Business Tip

Common Questions When Starting A Custom Car Shop

How much does it cost to start a custom car shop?

Starting a custom car shop is no small task, financially speaking. Based on various factors like location, size, and specialization, the total initial cost can range from $50,000 to $150,000 or more. Here’s a breakdown of some common costs involved:

Business registration: Expect to pay around $100 to $500 for filing the necessary paperwork to formally establish your business. This fee can vary by state.

Initial deposits for the shop: Securing a location often requires a down payment, usually the equivalent of one or two months’ rent. For a decent-sized shop in a moderate location, this can easily range from $4,000 to $10,000.

Equipment: The initial setup for lifts, air compressors, diagnostic tools, and other necessary equipment can cost up to $40,000, depending on the quality and quantity of tools you need.

Initial stock of parts: Especially if selling parts at retail, you’ll want to have a variety of parts on hand to serve your customers. This stock could run from $5,000 to $20,000 initially, depending on your focus and the size of your shop.

Business insurance: Initial premiums for liability, property, and other types of insurance could cost around $2,000 to $4,000 in total.

Marketing: Before opening, you’ll want to have a marketing plan in place. The initial costs for website development, social media ads, and maybe even some promotional events can be around $2,000 to $5,000.

Employee salaries: If you plan to have staff from the get-go, you’ll need to pay them even as you’re ramping up business. Budget at least $3,000 to $5,000 per employee for the first month.

Miscellaneous costs: You’ll also have unexpected expenses, so budget around $5,000 for miscellaneous items like office supplies, additional small tools, or unanticipated repairs.

It’s also a good idea to have three to six months’ worth of operating expenses saved as a financial cushion. You’ll want this buffer to cover rent, utilities, employee wages, and other recurring costs, especially as you’re building up a client base.

How profitable is a custom car shop?

In the custom car shop business, profits can vary widely depending on various factors like location, services offered, and customer base. Generally, custom car shops operate on a gross margin of about 40-50% for parts and up to 60-65% for labor. So, let’s break it down with a simple example.

Say your shop averages three full custom car projects per month at $20,000 each and performs miscellaneous repairs and upgrades, generating another $10,000. Your total monthly revenue would be $70,000 ($60,000 from custom projects + $10,000 from repairs).

Out of this, you have expenses. If your monthly fixed costs for rent, utilities, and salaries total $25,000, and your variable costs (parts, additional labor) amount to 50% of your sales, you’re spending $35,000 on variable costs ($70,000 x 50%). Add your fixed and variable costs, and your total monthly expenses are $60,000 ($25,000 fixed + $35,000 variable).

Subtracting these expenses from your revenue, you would have a monthly profit of $10,000 ($70,000 revenue – $60,000 expenses). That’s a yearly profit of $120,000, not accounting for any seasonal fluctuations or unexpected expenses.

However, remember, these numbers are purely illustrative and actual profits can vary. It’s essential to continuously monitor both your expenses and revenue to adjust your business plan accordingly.,

What skills are helpful in running a custom car shop?

Running a custom car shop doesn’t require a business degree, but certain skills and experiences will be helpful in running this type of business.

Auto industry knowledge and experience: Knowledge and experience in the automotive industry are essential for any custom car shop owner. A genuine enthusiasm for the industry will also help the business owner to deliver quality work.

Awareness of customization trends: A custom car shop owner will need to stay aware of current and emerging customization trends. This can help to keep the shop current and appealing to its customers.

Attention to detail: Laser-focused attention to detail is essential in this industry, and this trait can help make a car shop a success.

Mechanical and technical skills and training: Mechanical and technical skills and training are a must and previous experience as a bodyworker or mechanic is ideal. Some types of customization, like custom fabrication, paint jobs, or installing custom bodywork, require specialized training and skills. Experience with these types of customization will increase a business’ versatility and leave the business owner well-prepared to train other staff.

Customer service skills: Strong customer service skills will help a business owner to build rapport with customers. Knowing how to interact with customers and address concerns can improve a business’s reputation and lead to referrals and repeat business.

Management experience: It may be possible for a business owner to manage their smaller shop, but as that shop grows, they’ll need to hire staff. Experience in hiring, training, and managing staff will be a valuable skill.

What is the NAICS code for a custom car shop?

The NAICS code for a custom car shop is 811121, which is categorized under Automotive Body, Paint, and Interior Repair and Maintenance.

The NAICS code (North American Industry Classification System) is a federal system to classify different types of businesses for the collection and reporting of statistical data.

Related: What is a NAICS code?

How To Start A Custom Car Shop

How To Start A Custom Car Shop

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