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The Pros and Cons of Buying a Franchise Car Dealership

To franchise or not to franchise, that is the question.

Deciding to enter the retail automobile industry is only the beginning, next you have to determine how best to operate within the sector.

Franchises are considered to have a higher rate of success compared to independently-owned businesses, and come with the comfort of ongoing support from a big-name brand. But, is it right for you?

Being a franchisee for one of these industry giants can be a profitable opportunity. Let’s take a look under the proverbial hood and see the advantages, as well as the disadvantages, of buying a franchise car dealership.  

Are you suited for the job?

Running a franchise requires a certain type of entrepreneur. You have to be able to lead, yet know when to follow. One of the main concerns with owning a dealership franchise is the lack of autonomy.

You will be operating under specific constraints concerning prices, terms, inventory, promotions, etc., with little wiggle room for you to exercise your creative ability or business judgment. 

On the other hand, running a franchise is a safer bet, which would appeal to a risk-averse individual seeking job security. Franchises offer a kind of owner’s manual with a fully-developed way of doing business. Entrepreneurs looking to support and contribute to the overall success of a well-established manufacturer will find this avenue very attractive.  

Getting started

The franchisee will have little bargaining power during the initial paperwork and throughout the partnership. Franchisors are trying to preserve the uniformity and integrity of their brand, so there is not much room for negotiation, which can be a turnoff for some entrepreneurs.  

On the plus side, the startup can be executed quickly and easily since franchisors commonly have pre-established protocols in place. It is estimated that it takes a non-franchised startup about four years to kick off, and around seven to ten years before it is truly successful. With a franchise, you are ultimately set up for success right off the bat.

A franchisor will equip you with the resources to run and manage a thriving car dealership business. They will supply you with a steady inventory of vehicles to fill your showroom and lot, predetermined prices and financing plans, as well as proven marketing campaigns and promotions such as Toyotathon or the Chevy Employee Discount Event that customers are already familiar with.

Some franchisors will even assist you with the initial operational tasks such as choosing a prime location, the grand opening event, hiring and training your employees, management, and long-term planning.

Cost, earnings, and financing

Everything comes at a cost. A disadvantage of a franchise is that you are, obviously, paying for that winning formula.

Car dealership franchisees not only have to pay upfront for the location but are also required to pay a franchise fee, as well as royalties equivalent to a percentage of overall sales. This can be discouraging when having to share your profits with an invisible partner.

However, the potential revenue of selling a trusted brand name can outweigh those costs. The automotive franchise industry has the highest average pre-taxed income compared to other franchise sectors, earning approximately $106,500 (based on 2016 figures).

Even more, franchises typically come with the added benefit of a servicing department which can drive profits substantially. The average car dealership markup per car is only two to five percent, so most car dealerships rely mainly on their servicing department to drive cash flow.

The automotive aftermarket industry is a growing trade that is responsible for almost 50 percent of a dealership’s gross profits.

Customer perception  

A potential downfall of running an established car dealership franchise is that your customers are aware of your constraints. They may wish to shop around and compare different brands simultaneously, and have the freedom to bargain on price and terms.

As a franchise, you are limited to one car brand sold at a set price, with predetermined conditions and an already-defined warranty — and your potential clients know there’s only so much you can do to negotiate. Some consumers will opt to work with an independent auto shop to alleviate some of that pressure and restriction.    

Yet, the primary benefit of choosing a franchise is the trust. The franchisor, whether it be Ford, General Motors, or Honda, have been cultivating and building a recognizable brand that your customers are loyal to. All the groundwork has already been completed, and you merely have to foster the relationship.

Some customers feel more at ease purchasing a large ticket item from a well-established corporation versus an independently-owned, single-location shop.  

Are you ready to take the next step in your business venture? On businessesforsale.com you easily browse through a list of both independent auto shops and franchise car dealerships currently for sale and decide which avenue will lead you on the road to success.



Bruce Hakutizwi

About the author

USA and International BusinessesForSale.com Manager for BusinessesForSale.com, a global online marketplace for buying and selling small medium size businesses. The website has over 60,000 business listings and attracts over 1.5 million buyers to the site every month.

@BizForSaleUS

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