Like laundromats, car dealerships are another eye-catching business that attracts many entrepreneurs. On average, car dealers make around $1,250 per vehicle sold, though some studies conducted by NADA report profits as high as $2,000 based on their data.
If you’re planning to start a car dealership and are wondering whether it’s a viable career path, how much you can earn, or how to maximize profits if you already own one, this guide covers everything in detail.
Before diving into the specifics, there’s an exciting study that reveals the hidden potential of the car dealership industry.
In the United States, the National Automobile Dealers Association estimates franchise new-car dealerships produced a value of over $1.2 trillion in sales.
That’s not just impressive—it’s staggering.
These numbers suggest that owning a dealership is potentially very profitable.
However, potential does not suggest promise.
To analyze the actual profitability of car dealerships, we need to dig into each of their moving parts.
From the sales of high-dollar vehicles to the concerns of service bays to finance offices, dealers have a number of ways to generate revenue, but with each comes its own cost, risk, and very tight profit margin.
A new car might market for $50,000, but the dealerships, after they pay the manufacturer, employees, taxes, and overhead, might earn $1,250-$2000.
So it is a juggling act between volume and profit margin.
So, before you finalize this business, you should understand costs, revenue streams, profit margins, common risks, and what it takes to be successful. Let’s get to it.
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Is owning a car dealership profitable?
Yes, owning a car dealership can be very profitable, but it largely depends on the type of dealership, its geographical location, and how well it is managed.
Franchise dealerships that sell new vehicles are reliant on volume but have a lower profit margin per car sold, 1% to 6%, on average.
Used vehicle dealerships, especially independent used car dealers, can have more flexibility in operations and have a higher profit margin from the sale of vehicles, as used vehicle margins can be 10% to 25%.
Depending on the purchase and sale, used car dealers can also make up to 400% profits, but that takes a lot of blood and sweat.
The real profits are in the add-ons—repairs and preventative maintenance costs at profit margins of between 50% and 70%, and vehicle financing or warranties at profit margins of 40% to 60%.
Motor dealer profitability also depends on the inventory in stock, the demand for the business in the local area, and the additional services provided to keep the customers returning.
As you can see, a car dealership might be more profitable than just selling vehicles. When run well, the business can build an income stream without generating additional sales revenue.
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Startup costs and investment required:
Opening a car dealership is not a small investment. However, the cost you’ll need to invest can change a lot, depending on the type of car dealership you plan to run.
If you want to run a franchise dealership—like a Toyota or BMW dealership—it can run anywhere from $1 million to $10 million.
You’re not just buying cars. You’re paying for a brand, a building that meets strict specs, and often a hefty franchise fee.
On the other hand, an independent used car dealership or an independent new car dealership is most likely a much more attainable goal, starting out at about $100,000 to $500,000.
You won’t be bound by any manufacturer guidelines, and you won’t get their assistance either.
That’s a trade-off.
We can even trim it more.
An online-only car dealership can be launched for between $50,000 and $200,000 based on significantly lower overhead costs and no physical lot.
Regardless of the type of dealership you are starting, there are always costs that will be unavoidable.
The most significant expense is typically inventory.
For new car dealers, vehicles are usually financed with a floorplan loan. This means you’re sitting on your cash and collecting interest until a unit sells.
When purchasing used cars, you’ll likely have to pay upfront money or buy from an auction.
Either way, having a diverse and attractive inventory is key to generating consistent sales. Without that, you’re stuck with a parking lot full of depreciating metal.
There are other expenses associated with licensing and legal fees that also vary based on your state or city.
A dealer’s license, business insurance, and zoning approvals—and in some cases, surety bonds, which are especially true for used car dealers. It is a lot of paperwork that you cannot simply skip.
Next is where you are going to do business, your location.
In the dealership game, location really matters, especially with a traditional lot or showroom.
A visible, easily accessible property can make or break your foot traffic.
But it’s expensive. Buying, leasing, renovating, all of it adds up fast, and you can’t afford to be unprofessional.
Staffing is another significant decision in the process.
Staffing reliable sales consultants means a significant additional cost, as do skilled mechanics if you have a service department, and finance and insurance specialists, as well as someone to answer the phone and manage the accounting.
Finally, if you are a franchise, then you will be required by the brand to complete their training, which means more time, more money, and more to manage.
And then there’s marketing and advertising because if no one knows you exist, no one will come.
You will absolutely need solid digital marketing: Google Ads, social media marketing, SEO, and car listings on third-party platforms like Autotrader, Craigslist, or Carvana.
So, yes, starting a car dealership is expensive. There’s no way around that. But if you have a great plan, a great brand, and a great team, the venture will more than pay off.
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Revenue potential and profit breakdown:
I always believed the sole way a dealership made money was through selling cars.
Seems simple enough, right?
You buy low, sell high, and there you make a profit. That’s it.
But that is only part of the story. A small part, for that matter.
Because if all you’re counting on to survive as a dealership is selling vehicles, you’re leaving a lot of money on the table. Sometimes, you won’t make any significant profits due to ongoing expenses.
In fact, dealerships do not just survive on selling vehicles; they thrive on everything that comes with selling vehicles.
Revenue sources:
To begin with, there is the obvious: sales of vehicles, both new and used, are your highest-ticket items, the big numbers that make the headlines.
New vehicles typically come with thinner margins. You are competing against other dealerships, online resources, and, many times, pricing set by the manufacturer.
You might be wondering about used cars: That’s a more interesting scenario: you have more pricing control, more flexibility with trade-ins, and, frankly, higher margins.
Next is the service and repair department.
This area is the main focus of a good number of successful dealerships. This is where the customers develop trust in the dealership for service ranging from oil changes to tire rotations to engine repairs, even warranty repairs.
This generates dependable income.
And the margins on service are incredible.
The repair parts, technician labor, and diagnostic services all add up.
Some dealerships actually will generate more service revenues than sales.
Moving on to financing plans and extended coverage options.
Many new owners are surprised by this.
Every time a customer finances a vehicle through your dealership, you get a commission from the lender or bank. This is called dealer reserve.
You can also add extended warranties, GAP insurance, tire protection plans – you name it.
These may not seem like much, but all these crazy add-ons could potentially double the profit per sale.
Then we’ve got trade-ins and reselling used cars.
Suppose a customer drives in with a 2016 Honda Accord.
You offer $8,000 for it. You clean it up, detail it, fix a few things, and put it back on the lot for $13,500.
That’s 59.26% – a sweet margin.
Profit margins per revenue stream:
So, what does this all mean in terms of numbers?
The following are the average profit margins from the main dealership revenue sources:
Revenue Source |
Average Profit Margin |
|---|---|
| New Car Sales | 1%–6% |
| Used Car Sales | 10%–15% |
| Service & Repairs | 50%–65% |
| Financing & Warranties | 25%–50% |
Many of the new dealers think that selling a luxury vehicle will bring in enormous sums of money. But in some cases, it’s not true.
In reality, once you factor in incentives from the manufacturer and dealer fees, a brand-new $45,000 sedan might generate a few hundred bucks.
At the end of the day, it’s used cars, repairs, and finance deals that bring in the cash.
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Break-even period:
If you have made up your mind to start a car dealership, the first question that comes to mind is When do dealerships typically become profitable?
Most of the time, they are able to break even between 1 and 3 years.
That means that within the first one to three years of running a car dealership, the business typically generates enough profit to cover the initial startup costs, including inventory, rent, licenses, and other overhead expenses. After this breakeven point, the dealership can start operating at a consistent profit.
However, this relies on your initial investment, your ability to build revenue streams quickly, and your ability to manage overhead.
Franchise dealers with a greater initial investment might take longer to break even.
Independent lots or online dealers running a leaner model may break even in less than a year.
Types of car dealerships and their profitability:
No two car dealerships operate at the same level of excellence.
Every type has its own assortment of benefits, drawbacks, and profitability opportunities.
If you are considering a franchise lot, a small used car lot, or all online, the way you structure your dealership will determine everything: your costs, customer base, and profit margin.
Let’s go through the three major types.
Franchise dealerships:
These are significant players. Think of your local Toyota center, BMW showroom, or Ford dealership.
Franchise dealers are bound to a contract with an OEM (think “Ford”) to sell that OEM’s vehicles; therefore, they will always have the first access to new inventory, factory promotions, and often, an exclusive territory.
Customers have experience and trust in the brand, so it helps the dealer because they walk in halfway sold. This trust comes with a major downside: cost.
It costs anywhere from $1 million to more than $10 million to start a franchise, depending on the OEM, location, facility requirements, and operational considerations.
Franchise dealers are also expected to comply with strict compliance (everything from how your showroom looks to what uniforms your staff wear); they are awarded a dealership based on their agreement.
New car sales create volume and sales, but the margins on new car sales are usually less than many service items, etc.
For example, a Mercedes-Benz dealership located in a large metropolitan area may sell hundreds of vehicles each month but make a high percentage of its profit from repair services and premium financing packages.
Independent used car dealerships:
This is frequently the approach for entrepreneurs who want to get up and running without a huge financial commitment.
No partnership with a manufacturer is required.
You procure your inventory from auctions, trade-ins, or private sellers, and you determine the price.
Also, the start-up costs are much more approachable on average, anywhere from $100,000 to $500,000.
The really nice part is that the profit margins are larger. The downside is you don’t get the instant credibility of a known brand
You’ll need to build your reputation, earn customer trust, and stand out with pricing, transparency, and service to differentiate yourself from the competition.
It is a lot of a grind. But for many, it is worth it.
Online-only car dealerships:
This model prioritizes efficiency. There’s no physical lot. No showroom. Just a web presence, a store/warehouse, and a delivery mechanism.
It is streamlined and has scalability built into the model.
Startup is between $50,000 and $200,000, plus you will have to pay significantly less in real estate and labor costs.
However, you will need to invest additional cash into your website, advertising, and logistics.
The key to success is how fast you can get vehicles from point A to point B and how seamless that experience is for the customer—volume really is everything.
If you were wondering, can you target such people who want to buy a car online, then look at this search volume of the search query: buy a car online. Thousands of people search for this term every month. Thus, you can also choose this, or at least you should target these customers by optimizing your site for search engines.
But you will require an experienced SEO expert to help you acquire these customers.
Profit margins can be very healthy, especially with used cars and financing, but there is a lot of competition. Customers expect an Amazon-type experience on the front end.
Carvana, a major name in online auto sales, developed a business model based on speedy delivery, upfront prices, and touchless purchases.
Today, it is a billion-dollar company, but its early growth focused on sales volume and data, not physical lots.
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How to maximize profit in a car dealership business:
Profit is not something that simply happens in the car business. It is built carefully and thoughtfully, and often behind the scenes.
Some dealerships sell more cars and earn less. Others sell fewer cars, earn better margins, and retain better customers.
What’s the difference? It’s a strategy.
Here is how the best dealerships turn steady traffic into long-term profit.
Choosing the right location:
Location is not just about real estate—it’s about visibility, accessibility, and foot traffic.
A dealership situated in an industrial park may save on rent, but a dealership located on a busy highway or busy retail intersection sees a lot more exposure.
People notice. They will stop by—even if they weren’t planning to.
This is especially true for franchise or independent lots; the opportunity for walk-ins and drive-by traffic increases by being around major roadways or busy commercial areas.
Expanding revenue streams:
The most successful dealerships are likely not just selling cars but also selling everything that surrounds the car: Oil changes, brakes, extended warranties, and finance packages.
Every additional service is another opportunity to increase average revenue per customer.
By offering on-site repairs or maintenance, you bring people back through your doors long after the sale has been completed.
It builds loyalty. And loyalty pays off.
A dealership that sells a 24-month maintenance plan at the point of sale not only generates revenue on the front end but also has a customer interacting and returning to the dealership, often resulting in referrals and repeat purchases.
Building a strong online presence:
Nowadays, an overwhelming majority of buyers start their journey online, scrolling through listings, comparing prices, reading reviews, etc.
If your digital presence is lacking, it means you are nonexistent. That entails investing in a nice, mobile-friendly site with high-quality photos, clear pricing, and detailed descriptions.
Additionally, it also means that you must have an active presence on sites like Facebook Marketplace, Autotrader, and Instagram.
The more places your cars are visible, the more chances you have to attract the buyer’s attention.
Lastly, customer reviews should not be overlooked; they act as your new word-of-mouth.
Optimizing inventory management:
Have you ever tried to sell what nobody wants?
It is an absolute nightmare.
This is exactly why you need to pay serious attention to what is trending.
What are the popular trends in your area? Hybrids? Trucks? Budget sedans? Try and make sure your lot is stocked with cars and trucks that are going to move.
Get rid of stale inventory as fast as possible through auctions or promotions.
Don’t let cars just sit there; you are losing money every day, and the car depreciates.
Make use of inventory management software to track your top performers and weed out your worst-performing vehicles.
Negotiating better deals with suppliers and banks:
Profit is frequently concealed in transactions other than sales.
Strike a better deal on secondhand inventory at wholesale prices.
Develop a solid rapport with banks and lenders in order to obtain larger dealer reserves for financing.
In terms of interest, floor plan rates, and insurance relationships, every half-percent counts.
Apart from that, sharpen your negotiating abilities and review contracts frequently.
At the end, you will have more money because of better deals made behind the scenes.
Offering trade-in programs:
Trade-ins are valuable.
They reduce pricing for customers and provide you with valuable inventory at wholesale prices.
Many customers prefer the convenience of trading in something on the spot rather than selling privately.
Make it easier for them. Provide on-the-spot appraisals, simple incentives, and a guaranteed minimum if possible. Then, refurbish the cars for resale at a solid markup.
Challenges and risks of running a car dealership
Running a car dealership can be profitable, no doubt. But it’s not a guaranteed win.
There are real risks. Real pressure.
And a lot of moving parts that can go wrong fast.
Even successful dealers will tell you—this business can be a grind.
High competition from other dealers and online platforms:
In most cities, dealerships are everywhere.
New ones open all the time.
You’re not just competing with the guy across town anymore; you’re up against digital giants like Carvana, Vroom, and even manufacturers selling direct to consumers.
Online listings have made pricing totally transparent. Customers can compare your vehicles with dozens of others in seconds. So you’ve got to stay competitive, not just in price, but in experience.
People want fast replies, honest answers, and easy financing.
Fall behind on any of those fronts, and someone else gets the sale.
Market fluctuations and economic downturns:
The purchase of automobiles declines when the economy declines.
A severe decline.
Higher interest rates make financing cars more costly. Layoffs cause customers to be reluctant to purchase a car that costs a lot of money to finance.
Gas prices change the demand for trucks or SUVs. And if we are going through uncertain times, i.e., a recession or a global event (i.e., COVID), then people pause on major purchases.
Dealers, then, are stuck with cars that no one wants.
This is about timing.
When times are good, you count your profits. When times are bad, then your holding costs crush you.
High initial investment and inventory costs:
Starting a car dealership business is not cheap.
From purchasing your first inventory of cars to building a lot, hiring employees, and acquiring a license, it all costs money.
Inventory alone can be hundreds of thousands of dollars parked on your balance sheet.
If these vehicles aren’t sold quickly, you are incurring interest payments, storage, and insurance on a car portfolio, losing money each day.
Cash flow can be tight. One slow quarter can mean major financial strain.
Rising popularity of car subscription and rental services:
Owning a car is no longer quite the dream it used to be.
Increasingly, people—especially younger people—value flexibility instead of commitment.
So, they use ride-sharing, they rent cars, or they have short-term leases or monthly subscription services that let them interchange cars as needed.
And that challenges the usual dealership model directly.
If more people adopt this trend, it will be increasingly rare for people to walk into a dealership for a five-year car financing or outright purchase.
You will need to adapt. Either by offering different services or by changing how you market.
Companies like Zipcar, Turo, and even automaker subscription programs (like Volvo’s Care by Volvo) are already pulling potential buyers out of the sales funnel.
Regulatory and licensing requirements:
Depending on where you do business, the legal side will be a headache.
Each state, province, or country will have very different licensing requirements. You will also need to ensure proper zoning and obtain surety bonds, consumer protection, compliance, and constant paperwork.
If you miss something, you could face fines, have your license suspended, or get shut down altogether.
And then, of course, there are taxes.
Every possible tax will need to be tracked: sales tax, payroll tax, and dealership-specific taxes.
In all these cases, you may as well pay for legal counsel and a trusted accountant, just to keep ahead.
For instance, in California, dealerships have to follow stringent consumer disclosure laws as well as emissions laws, and they can be fined thousands of dollars for each violation.
In summary, there is a lot of money to be made in this business, but nothing comes easy. To make money, you will have to outperform your competitors, adapt quickly, and keep costs and risks down.
Every dealership has its case of challenges, but smart dealers can turn their challenges into opportunities.