How to start up a motor dealing business

Car salesman selling a Vauxhall Astra to a coupleSelling cars is big business and operating as a franchised motor dealer can be complex. Read our in-depth practical guide to starting up and running your own dealership.

Buy an existing business

You might decide to buy an existing motor dealership rather than start your own venture from scratch. Buying a going concern can mean that:

  • the premises, equipment and fittings are already in place
  • some stock may already be in place
  • there are established customers
  • the business can generate income immediately
  • suppliers have been identified and relationships established with them
  • the business has a name and track record, which can help if you are looking for finance
  • staff are already in place
  • a business website has already been set up

However, note that acquiring a business which holds a franchise with a vehicle manufacturer will not necessarily mean that the franchise automatically passes to you. Most manufacturers retain the right to cancel a franchise agreement immediately should a change of ownership occur. You will have to demonstrate to the manufacturer that you and your business are suitable candidates for operating the franchise before it is passed to you. Discuss these matters with the relevant parties before making a firm offer to purchase an existing dealership.

Look critically at any business that you are interested in to make sure that the price you negotiate with the seller is a fair one. Try to establish why the business is for sale - for example, is the owner keen to retire or is there another personal reason for selling up. Try to find out about the future plans of the vehicle manufacturer with whom you will hold a franchise. Find out too about the manufacturer's 'marque' and dealer network. Is it popular, well regarded and in demand? Are its models modern and up to date? If possible, try to find out what the manufacturer is like to deal with as a franchise holder. The National Franchised Dealers Association (NFDA), part of the Retail Motor Industry Federation (RMIF), publishes regular Dealer Attitude Surveys which give a picture of what dealers think about their supplying manufacturer. You can download the surveys from the NFDA section of the RMIF website.

Your market research into the sector as a whole and the locality in particular will help you to establish whether or not the owner is selling because he or she can no longer generate enough income from the business. This may not necessarily deter you - many business people are confident that they can turn a failing business around. The important thing is to have established the current position so that the price you pay for the business is not too high. Do bear in mind though that the number of franchised dealerships in the UK is declining, with some closing because they are no longer financially viable and others struggling to continue.

Remember that reputation is a very important factor in determining the value of a business. If you are paying for goodwill, make sure that there is no reason why previous customers of the business would be put off buying another car from it. Also consider the extent to which goodwill depends on the skills and personality of the seller. You could try searching the web for reviews and opinions from previous customers.

Other matters to consider include:

  • the state of the premises, fittings, equipment and so on. Will you have to spend money refurbishing or replacing assets
  • the condition and value of any stock you are buying. Check this over carefully before agreeing a price. Remember that used car values can fall quite rapidly - so make sure that the stock valuation is up to date
  • the nature of the dealer agreement. Does it appear unreasonably prescriptive or restrictive? Is the bonus scheme reasonable and realistic?
  • existing staff rights
  • how to retain key personnel once you've taken over
  • does the business owe money that you will be responsible for

Ask your accountant to look critically at the business accounts for the past three years and discuss with him or her the selling price in the light of what the accounts reveal. Make sure you budget for other professional fees such as legal fees and valuation and survey costs.

The franchise agreement

Although commonly described as such, the agreement between a vehicle manufacturer and a motor dealer is not really like a typical franchise. For example, you will not be expected to pay any franchise fees to your main supplier, nor will you usually be expected to stick rigidly to a standard business model. However, in common with many 'true' franchise schemes, your contract with your vehicle supplier will set out certain rights and obligations which apply to each party. This contract is commonly referred to in the motor industry as the 'dealer agreement' and every franchised outlet must have one.

Dealer agreements

As the representative of a major brand or 'marque' of vehicle, you will be expected to meet certain standards of quality, integrity and efficiency. In return for this, and for the substantial financial investment that your business will be required to make in order to meet these standards, you will expect your vehicle supplier to provide an agreed level of support for your business. All of this will be set out in detail within the terms of your dealer agreement.

Although most vehicle manufacturers use broadly similar dealer agreements, no two contracts will be identical and the individual circumstances which relate to your own business will be taken into account. All dealer agreements are exhaustive in their detail and usually cover most or all of the following main points:

  • your terms of supply (list prices, your profit margins, bonuses, finance and credit terms and so on)
  • your sales targets and stocking levels
  • the territory within which you will be granted exclusivity (within which the vehicle manufacturer will not appoint any new franchises)
  • minimum standards for your dealership, including quality standards and the level of facilities, practices to which you must adhere and activities from which you must refrain
  • other obligations which apply both to you and to your supplier. For example, you will be expected to carry out warranty work, while you can expect your supplier to provide technical information and support

Your dealer agreement will also include details of the ownership and management of your outlet and will cover such issues as business and administrative practices, length of contract and contract termination. Some contracts are rolling open-ended (meaning they have no fixed duration), others run for a fixed term, generally of at least five years. Both you and your supplier are free to terminate the contract by giving an agreed period of notice. In some cases, for example in the event of a gross breach of contract, an agreement may be terminated with immediate effect.

The National Franchised Dealers Association, part of the Retail Motor Industry Federation (RMIF), offers its members advice and assistance in negotiating with vehicle manufacturers on dealer agreements.

Obtaining a franchise

Early motor manufacturers had little interest in selling their own products and so looked to develop networks of specialist suppliers. Selling new cars is not like selling most other goods - special training and facilities are needed, as is quite a large amount of space. Also, as the agent of a major manufacturer, a new car dealer is responsible for the public image of that particular marque. So vehicle manufacturers took steps to control how many dealers sold their cars and the way in which they sold them.

When legislation was introduced in the UK and Europe to increase competition among suppliers and retailers of consumer goods, the motor industry argued that it was a special case and was exempted from the normal competition laws under a 'Block Exemption' rule. As a result, only approved franchised dealers are permitted by vehicle manufacturers to operate as 'main dealers' for their products. However, a change in the rules in 2003 did make it easier for other types of business to sell new cars on a 'sub-dealer' basis. The legislation was reviewed in 2010, and the competition rules for motor traders in the EU changed again in 2013 when new car distribution switched to being covered by general competition rules that apply to most other industries.

To become a franchised main dealer, you will have to find a vehicle manufacturer that is looking to appoint a new franchise in the area where you want to open your business. It may be worth considering manufacturers that are new to the UK market, such as certain Chinese vehicle makers. You will then have to convince the manufacturer that yours is the best business to hold that franchise. Depending on the way in which the manufacturer appoints new franchises, you will probably have to do one or more of the following:

  • find an area that is not currently served by an existing franchise (often referred to as an 'open point')
  • convince the manufacturer that a particular area would support a second franchise - perhaps because the population has increased significantly
  • persuade the manufacturer to terminate an existing dealer's franchise and appoint you as the replacement
  • acquire an existing business that already holds a franchise
  • find a manufacturer which is looking to break into the UK market and establish a dealer network (for example a newly established manufacturer, or a small independent producer of specialist vehicles)
  • find a manufacturer which is about to completely reorganise its dealer network
  • demonstrate to the manufacturer that you and your business are suitable candidates to hold a franchise

Note that buying an existing franchised dealership will not automatically mean that you obtain the franchise. Most manufacturers state explicitly in their dealer contracts that a change of ownership may result in the immediate termination of the franchise agreement. However, if you can show that you and your business are appropriate for the position of franchise-holder then the manufacturer may be happy for the agreement to continue in your name. Always speak to the manufacturer in question before acquiring a business in this way.

Approach the manufacturer or manufacturers whose vehicles you would like to sell to find out about the possibility of obtaining a franchise. In practice, you may find that obtaining a franchise with a major manufacturer is difficult. Franchise numbers are currently falling as territories get larger, while some manufacturers are moving into ownership of their own retail outlets. Most vehicle manufacturers have reduced their number of franchised outlets in recent years and some are continuing to do so. When a profitable franchise does become available, it may get snapped up by a major dealer group which already has an established track record with the manufacturer.

When bidding for a franchise, it is often advantageous to have an established motor trade business of your own. Being already active within the industry will also be helpful when it comes to establishing useful contacts and finding out when a franchise opportunity is likely to become available.

Alternatives to becoming a franchise

Although the majority of new cars in the UK are sold through franchised main dealers, it is possible to sell new cars without becoming a franchise holder. Doing so may be an attractive alternative if it proves difficult or impossible to obtain a suitable franchise in your area. There are several possible options:

  • making 'parallel' imports from other EU countries
  • making 'grey' imports from countries outside the EU
  • purchasing new cars on a wholesale basis from a franchised dealership and selling them on as a 'sub-dealer' or 'car supermarket'

Parallel imports

Parallel imports are generally right-hand drive cars ordered through non-UK dealers within the EU and brought into the UK. They are nearly always new. Car manufacturers are obliged by law to supply right-hand drive versions of cars available in the UK to dealers in mainland EU countries. Belgium and Holland are popular sources of parallel imports, because they are both easy to reach from the UK and have lower list prices for many models.

Dealers who sell parallel imports generally focus on offering popular models at very competitive prices, often undercutting their franchised rivals. Some dealers sell cut-price parallel imports over the internet.

Vehicle manufacturers aren't keen on parallel imports, but EU competition laws prevent them from stopping this sort of thing from happening.

Grey imports

Grey imports can be used or new and are brought into the UK from non-EU countries, usually where vehicles are equipped as standard with right-hand drive equipment. America and Japan are particularly popular locations for sourcing grey imports. Grey imports must conform to EU standards for safety and specification - this usually means passing the single vehicle approval (SVA) test. Specialist importers exist who bring in grey imports to the UK and sell them on a wholesale basis to independent car dealers.

Dealers who sell grey imports often focus on specialist models such as sports cars and other vehicles that are difficult to get hold of in the UK. Many operate online and source cars to order.

Other alternatives

One alternative to selling new cars, either as a franchise or as an independent dealer, is to sell nearly new used cars. There is always demand for cars that are just a few months old and have covered only a few thousand miles but are considerably cheaper than their brand new equivalents.

Another alternative to becoming a franchised new car dealer would be to become an authorised repairer. It is possible for independent repair garages to set up as authorised specialists in a particular marque. In this role you would operate in much the same way as the service department of a franchised dealership.

Estimating sales income

You will need to make an estimate of your income from new car sales and from other sources.

Income from new car sales

To complete your business plan, you will need to estimate how many new cars your business will sell annually, and at what price. Franchised dealers in the UK typically sell in the region of 400 - 500 or so new cars per outlet in a normal year. Some large ones sell considerably more. However, many sell fewer than this and your own annual total will depend on the size of your dealership, the state of the car market and your business skills. Prices will depend on the make and model of the cars that you sell, and to some extent on your own pricing strategy. Think about what your policy on discounting will be.

Most vehicle manufacturers will offer your business bonuses for meeting agreed sales targets and for undertaking to do certain other things. Find out about any available bonus schemes and try to estimate how much bonus income your business is likely to earn. Bonuses can make up a significant chunk of a franchised dealer's total income but remember that if you have to pre-register many vehicles to meet your sales targets your margins will suffer.

Your vehicle supplier may be able to assist you in making your estimates of how many cars you can expect to sell each year. It will also be able to provide you with details of current list prices. Remember though that your supplier's own sales projections may be based on 'best case scenario' estimates - use your own research and knowledge of the local market when preparing your estimates.

Income from used car sales

Around three quarters of all your new car customers will want to trade in an older vehicle. Decide whether your used car sales will be limited to disposing of part-exchanged vehicles, or whether you will actively buy in suitable used stock. You may decide to stock a large number of used cars.

Make an estimate of the average value of each used vehicle you will sell, then multiply this by the number of vehicles that you expect to sell. Make sure that you don't count money from sales of part-exchanged vehicles twice.

Income from other departments

Your outlet is likely to include a service department and a parts sales counter and may also include a body repair shop, petrol station, forecourt shop, car hire operation and so on. You will need to make an estimate of the amount of income that each one of these departments will generate. 'After sales' income from these departments is normally very important to a franchised dealership.

Breakdown of sales

As a very rough guide, you might expect sales of new cars to account for at least 35% of your total business income - probably quite a bit more. Used car sales might account for a further 25% plus, while your workshop and bodyshop (if you have one) will probably contribute around 20% of your total turnover. The remainder of your turnover (up to 20%, but quite probably much less) will mainly be retail and trade sales (parts and possibly petrol/forecourt retailing). Bear in mind though that your sources of profit might break down somewhat differently - repair and servicing work, for example, is generally much more profitable than new car sales.

Once you have estimated how much income your business will generate, decide how much of this is likely to be 'Cash sales' (paid to you at once) and how much will be 'Cash from debtors' (invoiced on account and paid to you at a later time). Much of your parts sales income, for example, is likely to be sales made on account to local independent repair garages.

Bonuses

Your income from new car sales will probably come in two main parts:

  • gross profit margin achieved on the sale of each new car (the difference between what your business paid for it and what it sold it for)
  • sales bonuses paid to your business from time to time by your main vehicle supplier/s

Most vehicle manufacturers will agree to pay your business financial bonuses if you do some or all of the following:

  • meet or exceed agreed sales targets
  • pre-register a certain number of vehicles
  • keep to high standards of quality and service

There may be other requirements and bonus triggers too.

Bonuses may be paid to your business in the form of a lump sum every month, every quarter or every year. Alternatively, instead of paying you a lump sum, your vehicle supplier might give you extra 'dealer discount' (profit margin) on certain models.

Bonuses are likely to form an important part of your business income. From time to time, you may decide that it is worth selling certain vehicles for very little profit to achieve your sales targets and qualify for a bonus payment.

Full details of your vehicle supplier's bonus scheme will be set out in your dealer agreement.

Research your target market

It's very important to research your market properly. Try to find out as much as you can about the level of demand and about how much competition there is to meet that demand.

Choice of marque

Although you are unlikely to be able to pick and choose exactly which marque/s you sell, you should try to make sure that your franchise is appropriate to the local area. For example, there would be little point in opening an executive or sports car franchise in an area where few people will be able to afford this type of vehicle. Look around for a suitable area where a manufacturer that you would like to do business with has an 'open point' - a sales territory not currently covered by a franchise.

Think about whether or not it is an affluent area. Local housing is often a good indicator of this. Look at the types of cars that are in people's driveways and on the roads. Remember that your used car stock should also reflect what people want and can afford, particularly if you intend to buy in additional used stock.

Before signing the franchise agreement, find out as much as you can about that particular manufacturer. How well does the marque perform in consumer tests and customer satisfaction surveys? What about fuel economy across the range? High vehicle excise duty is payable on cars with high levels of emissions, particularly diesel models, and there is an extra tax on vehicles that cost more than £40,000. These factors may put off some buyers. What is the brand's profile - what do people think of this make of car? Also try to find out as much as possible about what it is like to deal with that particular manufacturer as a franchise holder. How does it treat its dealer network in the UK? What are the profit margins like? What kind of support can you expect? If possible, talk to other dealers of that marque. Most major manufacturers have Dealer Councils which represent their network of dealers. It's also a good idea to check out the Dealer Attitude Surveys which are published regularly by the National Franchised Dealers Association (NFDA - part of the Retail Motor Industry Federation) and give a picture of what dealers think about their supplying manufacturer. You can download the surveys from the NFDA section of the RMIF website.

Finding out about your competitors

How well are your potential customers already served by existing businesses? Find out which other marques are represented within your area. A browse on Yell.com should give an indication of this. Try searching the web too and checking out existing dealers' websites. Try to find out whether dealers of marques that are not locally represented actively seek to make 'extra-territorial' sales in your area.

Make a note of the types of franchise found in your area. What types of car do they represent - budget, everyday, luxury? Find out as much as you can about these businesses. For example, what sort of discounts do they offer? What sort of reputation do they have? Are any outlets owned by large multi-franchise businesses, or by major national dealer groups such as Pendragon (which operates Stratstone and Evans Halshaw dealerships among others)? Visit the outlets and make notes about their size, prices and appearance. How do the sales staff seem - are they friendly, pushy, relaxed?

Try to find out about other local businesses that you will compete with. In particular, look out for independent 'car supermarkets' and web-based discounters which sell imported new cars at very low prices. Don't forget used car dealers, particularly those who sell cars that are similar in age and specification to your own used stock. Consider other sources of competition, including other dealers of the same marque, specialist importers and so on. A car is a major purchase for most people and many are prepared to travel a considerable distance if doing so will save them a significant amount of money. What about independent repair garages - do any specialise in the marque that you will be selling?

Bear in mind that some local dealers might actually be your customers rather than just your competitors. For example, you might regularly receive low value vehicles in part exchange and sell them on to another dealer. You may find that it is beneficial to co-operate with several local dealers in this way.

You might decide that it is actually beneficial to be located near to several franchised main dealers of other marques. This will attract potential buyers who wish to browse a wide range of different models before making a decision.

Research current trends, plus legal and tax issues

Selling cars on finance

A vehicle is a large, expensive purchase. Some customers may be unwilling or unable to pay for it all in one go and would prefer to pay a deposit (sometimes a part-exchange vehicle) and spread the balancing payment over several months or years. In many cases you will agree to take their old vehicle in part-exchange as part or all of the deposit.

As a very large proportion of new vehicles are now purchased on finance, it's likely that you're planning to offer credit to these customers, arranged through a specialist finance company. Several such companies exist and, between them, they offer a range of different finance packages. Some of the finance packages available which you might use to attract customers include:

  • standard interest bearing credit
  • subsidised interest rate credit
  • interest free credit
  • deferred payment (buy now, pay later) credit
  • high risk credit (for customers who might normally be turned down by a finance company)

Many vehicle manufacturers operate their own in-house finance operations, which can often offer very attractive rates and deals. Depending on the terms of your dealer agreement, you may be obliged to put most or all of your finance business with your main supplier. However, most manufacturers give you the choice. Most in-house finance companies will offer some or all of the above finance packages. From time to time your manufacturer may subsidise interest free or low cost finance as a special promotion.

When you sell a vehicle on finance you will have to fill in a credit application with the customer. Your finance company will then give a decision on whether to accept the application. All being well, the transaction will be completed quite quickly and you will receive payment for the vehicle from the finance company within a few days. You will usually also be paid commission. This is normally based on a percentage of the value of the sale and paid to you separately at the end of the month.

Most finance companies will expect you to meet certain requirements and standards before agreeing to do business with you. Some will only deal with businesses that have been trading for a certain minimum length of time, often two years.

If possible, shop around when it comes to choosing which finance company you will deal with. Their terms and working practices vary. When choosing which one is best suited to your business, bear in mind the following:

  • what type of finance packages are most likely to appeal to your customers
  • how promptly will you receive payment from the finance company
  • how much commission are you offered
  • how quickly will your customers' credit applications be turned around
  • what level of back-up and support is available to you

You will need consumer credit authorisation if you want to offer finance to your customers. This is obtained from the Financial Conduct Authority (FCA). You may only need to apply for limited permission if vehicle sales are your main business activity and offering credit is just to help your customers finance their car purchase.

Services you can offer

There are some services that you are certain - or at least very likely - to offer as a franchised main dealer. These include:

  • new and used car sales
  • servicing and repair, including MOT inspections
  • parts sales

In many cases the supplying manufacturer's dealer agreement will require you to offer certain core aftersales services.

Some manufacturers operate 'approved used car' schemes in which you may decide to participate. It may also be possible to open a manufacturer-branded 'fast-fit' outlet for tyres, exhausts, batteries and basic mechanical repairs to all makes of vehicle.

Much of your parts business is likely to be wholesale, to other garages. Consider whether you will run a fleet of delivery vans for distributing parts.

You might well also decide to offer a range of other services, for example:

  • body repairs
  • vehicle recovery and storage services
  • valeting and car wash facilities
  • car hire and leasing
  • car audio sales
  • petrol and forecourt sales

There are certain main dealer facilities that you will be expected to offer. In some cases you may be obliged to offer them under the terms of your dealer agreement. Examples include:

  • acceptance of part-exchanges
  • financial services and extended warranties
  • warranty repair work and manufacturer recalls (to rectify known faults)
  • technical information about the models that you stock
  • test drives, demonstrations, launch events and open days
  • pre-delivery vehicle inspections (new cars)
  • pre-purchase inspections (used cars)
  • arrangement of large fleet deliveries
  • courtesy cars

Think about what facilities you will provide for your customers. These might include a drinks machine, comfortable seating area, children's play facilities and so on. Your main supplier will expect you to meet certain minimum standards of cleanliness, comfort and presentation in your outlet.

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