Car dealers make their money from sourcing cars across dealerships, auctions and private sellers, and selling them for a higher price. The average self-employed car dealer makes around £36,000 per year according to both Indeed and Payscale, which is motivation enough for many – but the highest-end traders earn well into the six figures.
But how do you become a car trader? In this article, Real Business will outline how to start buying and selling cars from home or other premises, including what you need legally, the best practices, and more.
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How Do You Become A Car Dealer?
To become a car dealer, all you need is the capital to purchase a vehicle, and when you sell vehicles, you need to adhere to several regulations mandated by both the government and the local council. You do not need to be an employee of a car dealership, meaning you can operate as a sole trader.
What Are The Legal Requirements That Bind Car Dealers?
The UK mandates that those buying and selling cars must do the following, to comply with various legal requirements and regulations:
- V5C Registration Certificate – Sellers must provide buyers with the V5C registration certificate, as well as notify the Driver and Vehicle Licensing Agency (DVLA), as per the Road Vehicles Regulations 2002.
- MOT Certificate – The status of the MOT certificate must be disclosed to the buyer, as all vehicles over three years old must prove roadworthiness according to the Road Traffic Act 1988.
- Roadworthiness disclosure – It is legal to sell cars that are both roadworthy and not. Still, the vehicle’s status must be disclosed under the Consumer Protection from Unfair Trading Regulations 2008.
- Vehicle tax – Sellers must cancel their tax upon selling the vehicle, and the buyer must tax their new car due to the Vehicle Excise and Registration Act 1994.
How Do You Become A Successful Car Dealer?
The following is a quick rundown on the best practices that successful car dealers should follow, with each element to be expanded on in the following sections:
- Market research – Pick a market niche, such as used cars, electric vehicles, luxury cars etc. From there, you have to study local competitors in your area to identify gaps and opportunities.
- Solid business plan – Outline your goals and split them between short-term and long-term objectives, including setting startup costs, listing profit margins and accounting for unexpected expenses. A proper car trader business plan is essential to ensure consistent profits.
- Build relationships with suppliers – Create long-lasting relationships between yourself and suppliers of your inventory, whether this be an auction house, via private sellers etc.
- Marketing strategy – You need a strategy to market your cars. Avenues include creating websites, leveraging social media, highlighting customer reviews and advertising in local newspapers and radio.
Where Do Car Dealers Buy Cars From?
The most common avenues that car dealers source their vehicles from are:
- Auction house – Auction houses are platforms used to sell most assets. One of the most popular car auctions in the UK is BCA, which reports selling over 600,000 vehicles annually. Car dealers can gain quick access to a wide stock that is competitively priced, making them ideal for sole traders or a new business to begin their trade.
- Trade-ins – Trade-ins, also known as part exchanges, is a buying method where a buyer exchanges their car for credit towards the purchase of another. Trade-ins make up 30-35% of the used inventory at the franchised dealer and are considered an economic method for dealers to acquire inventory and foster customer loyalty.
- Direct from manufacturer – Manufacturers sell new cars with factory warranties, offering incentives and dealer holdbacks which can improve profit margins. That being said, the overhead costs are high, and this method is only done by franchised dealers who are affiliated.
- Direct purchases from private sellers – Most opportunistic dealers opt to buy from private sellers and negotiate on the spot. This is a tactic usually used by independent dealers and can see significant profits depending on individual situations. That being said, it’s a lot more difficult to source these opportunities.
- Fleet or rental liquidation – Mid-to-large-sized businesses and networkers typically use this method, buying in bulk to reduce the amount of capital required per unit. These cars usually have a service history to consider, but the volume of sales often far outweighs the costs.
What To Look For When Purchasing A Car For Your Car Dealership Business?
There is an equation to make when determining whether or not it’s worthwhile to buy a used car for resale, and knowing what it is will mean the difference in your profit margins.
- Identity – Review the V5C Logbook to confirm the legitimacy of the vehicle’s ownership and specifications, as well as run an HPI check to ensure the vehicle is not reported lost, stolen or has a history of finance.
- Service history – Having a service history can help improve resale value, as it indicates high-value maintenance.
- Demand – Check the demand. High demand usually means quick turnover.
- Mileage vs age – The lower the mileage and age, the higher the resale value. This can be offset with a proper service history.
- Seller quality – A seller that has all the information you need, such as documentation and records of service, or an otherwise reputable seller, is less likely to have unforeseen consequences.
Take in all the costs of the vehicle, including the expected prices of any additional required work, and compare it against what you expect you can sell it for. If it’s safely within your profit margins, then you should consider it a confident purchase.
What Are The Best Practices For Selling Cars As A Sole Trader?
The following are some best practices you should follow from your first car purchases onwards.
Gather Documentation
Once you get the car, there are several checks to make and documents to gather to ensure smooth sailing with your car business:
- V5C Logbook – This document proves you are the official owner of the vehicle, and it is distributed by the DVLA.
- MOT Certificate – If the car is over three years old, you should pursue MOT certification given out by the relevant service station.
- MID – Add the vehicle’s insurance condition to the motor insurance database (MID) to maintain proper insurance records.
Vehicle Inspections And Work
Unless the car comes in already great condition, which is a rarity, you should conduct a thorough professional inspection by trusted mechanics. This will give you an in-depth rundown of vehicle conditions, allowing you to make repairs to the most severe factors. In particular, ensure that brakes and suspensions are in top condition, and repair any faults with emissions or engines. These in particular highly affect resale value or ability.
After this, consider making aesthetic changes to the vehicle. A fresh coat of paint and the repair of any minor imperfections can bring great returns in resale value.
Advertising & Marketing Of Car Business
Like every other business, you need to promote your car trading business on platforms from social media to auction sites like eBay.
Buying rapport with potential buyers is a key part of selling cars so make sure you interact well with them during car viewing, test drives, and negotiations. Test drives in particular are a huge plus for buyers, as they get to experience the car first-hand themselves.
Compliance
As we’ve mentioned before, everything from gathering the right documentation to advertising with truth will keep you in compliance with regulations. Make sure you are advertising and managing vehicle sales, warranties, and consumer rights professionally and legally.
In the event that you get ahold of temporary vehicles, obtain trade plates immediately so you do not need to individually register and tax them.
Do You Need Insurance For A Car Dealership Business?
No, but having motor trade insurance is highly recommended to ensure your assets are protected. Without it, you will be entirely liable for any damages that you were not at fault for. Car dealers in the motor trade industry very rarely operate without motor trade insurance for the following reasons:
- Road Risks – This will cover cars that are test-driven by potential buyers and employees.
- Public Liability – Insurance will ensure that all the damages against a third-party property, like cars on the forecourt, are covered.
- Employers Liability – Insurance will protect any staff or apprentice that might face any issues.
- Tools & Stocks – Insurance will cover all the equipment, spare parts, and overall vehicle inventory.
- Premises – The motor trade insurance also covers the places that house or work on the cars.
Brokers will identify suitable policies depending on the turnover of business, stock levels, and types of premises. This will help you get quotes from multiple providers.
Conclusion
Before you go into the business of becoming a car trader, you need to have some industry knowledge, finance available and the right skill set to succeed.
You will need to build up a trusted supplier network, and provide excellent customer service, and with hard work and passion you can enjoy the exciting opportunities that a successful car trading business can bring.
FAQ: What are the benefits of franchise models?
If you join any established vehicle franchise chains, you can accelerate market entry and growth:
- Proven Strategies – You can follow formulas that are successful for inventory, promotions, and accounting.
- Training & Support – You can train and mentor your staff during the launch and expansion phases, accessing corporate schemes.
- Brand Power – Making your business a brand will help in advertising your business and making conversions.
- Economies of Sales – Increase your sales by using shared marketing, bulk buying discounts, and integrated IT systems. This will also help you save costs.
Partnering with recognised car manufacturers not only attracts those who recognise their brand but can also get you access to effective marketing materials.
