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Thinking about starting a used car dealership?

By Deal Pack - June 12, 2012

You’ve got your mind made up, you’re starting your very own used car dealership. You’ve probably even done a little research and found that the industry can be very lucrative, and now you feel you’re finally on your way to realizing the American dream of entrepreneurship. Now…where to begin?


For starters, it’s critical you have at least a general understanding of the industry and the different business models that exist. Do you want to limit your business to strictly buying and selling? If so, will you at least help your customers obtain financing from outside sources… or will you only entertain cash deals? Will you offer in-house financing, commonly referred to as “Buy Here Pay Here”?


The Buy Here Pay Here model, or BHPH for short, requires a significant amount of capital. If capital isn’t readily available at this point, it’s best you stick with the outside financing option. But who knows, with a lot of saving (and a little bit of luck), you might one day be able to expand your business and enter the more lucrative BHPH model.


Both options generate income stemming directly from a sale, which is referred to as Gross Profit. In Accounting for Dummies terms, this equates to the difference between the vehicle’s initial purchase price (cash outlay) and the vehicle’s ultimate selling price (cash inlay). However, the BHPH model offers you an additional source of revenue, a reward if you will, that comes in the form of interest. After all, you are taking on the additional risk associated with financing your customer, which by the way happens to be a complete stranger that closely resembles the subject of last week’s America’s Most Wanted episode. But the outside financing model also has some perks. For one, the banks and lenders that finance your sale will pay you up front, in the form of Cash (Viva Las Vegas!). And they also help increase sales by offering your customers attractive terms and more options.


Other things to consider are the regulatory requirements, both at the state and federal level. For instance, what’s your state’s maximum allowable interest rate? What documents must be printed when financing a car? These types of questions can generally be answered by your state’s auto dealer association. A quick Google search (or Bing if you happen to be a Microsoft employee) will connect you to the appropriate association. As a side note, feel free to click (and double-click and triple-click) on any ads you deem to be completely unrelated to your search, I always do.


Now that you’ve gained a better understanding of the business… and haven’t let the regulations frighten you into FINALLY starting that landscaping business with your second-cousin from a failed marriage, you’ll need to being your search for a knowledgeable and reliable business-partner. One that will stick by your side and knows the ins-and-outs of the industry. One that has helped start-ups like you blossom into multi-million dollar operations.


If you think I’m asking you to find an investment partner, think again. I’m referring to a critical aspect of this business, software. Software designed for this industry is referred to as Dealer Management System, or DMS. The DMS solution you pick should have a winning track record, should be able to adjust to your ever-changing needs, and should help take some of the load off your shoulders, so you can focus on selling cars, and/or chuckin’ wood. All DMS systems can handle the obvious, (i.e. managing inventory, working deals, receipting payments, etc…) but not all are created equal. A key component in this industry is accounting, and it’s much more complex than that landscaping alternative, but the good thing about it is you won’t have to be a CPA to grasp it.


One just has to go to a few DMS providers’ websites to find the term “Fully-Integrated Accounting” being thrown around like yesterday’s trash. But one should not be duped, or commit adultery for that matter. Just because a DMS is integrated with a 3rd party accounting software (i.e. Quick Books, PeachTree, etc…), that doesn’t mean the relationship works both ways. What does this mean to you? In one word (or two?), double-entry. What does this mean in programming language? Transactions entered in say Quick Books don’t update your DMS. What does this mean to a marriage counselor? The two don’t communicate well and should divorce and split custody of your precious data.


A DMS with “Fully-Integrated Accounting” should have the accounting built in and should be packaged as one. The accounting would therefore be handled in “real-time” (if you’ve taken any accounting courses you’ll know the importance of this), making the accounting simpler and much more accurate because it eliminates the need for batch-processing and double-entry. DMS providers relying on 3rd party accounting packages are the complete opposite. They rely on batch-processing, which is an outdated process that adds yet another daily task to your ever-growing to-do list.


When shopping for a DMS, be sure to look for a system that offers real-time accounting and doesn’t depend on 3rd party accounting packages… you’ll thank me in the long run.

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