How Much Profits can you Make with a Car Dealership?

With over 16,750 light vehicle dealers in the US that sold 6.8 million light-duty vehicles in the first half of 2022 alone, car dealerships can be very profitable businesses. Yet, if you’re looking to start your own car dealership, you may want to know how much profits you can make with this business.

How profitable is a car dealership in the US? What is the average break even for a car dealership? In this article we’ll look into how much profits you can expect to make with a car dealership using public benchmarks as well as our own analysis below. Let’s dive in!

What is the average turnover of a car dealership?

As per the data provided by National Automotive Dealers Association (NADA), the total sales of light vehicles topped 618 billion at half year 2022. With over 16,750 dealers across the country, the average turnover of a car dealership is about $74 million per year…!

Of course, this is an average. Some dealerships earn significantly more, and others much less.

When it comes to pay, according to Zip Recruiter, the average annual take-home salary of a car dealership owner in the US is $61,493 per year.

Car Dealership Financial Model

Download an expert-built 5-year Excel financial model for your business plan

Car Dealership Financial Model

Download an expert-built 5-year Excel financial model for your business plan

What is the average profit margin of a car dealership?

As per The Freeman Online, the net profit margin of a car dealership is usually between 1% and 2%. This is also something we could find in our own analysis below.

These low margins are due to the fact that car dealership are very costly to run. Indeed, the cost to buy the cars alone represents 90 to 92% of total sales (8-10% gross profit margin)…! For luxury cars though, the gross profit margin is higher (10% to 15%).

Yet, despite low margin percentages (1-2%), the actual dollar profits can easily reach a few hundred thousands a year given turnover is very high. Indeed, using the average turnover of $74 million per year, even a net profit margin of 1-2% gives us a profit of $740,000 to $1,480,000 per year..!

How much does it cost to run a car dealership?

Running a car dealership attracts various recurring costs that include:

  • COGS (~85-90% sales): the cost to acquire the vehicles you sell. This is by far the biggest expense. It represents on average 90% of sales, this means you make a 10% margin on each vehicle sale
  • Salaries (2-3% sales): You will have multiple employees such as a mechanic, a bookkeeper, a salesperson, an accountant, a sales associate, etc.
  • Sales bonuses (2-3% sales): in addition to base pay, you will need to pay bonuses, especially to the sales representatives. Indeed, a significant part of your sales team salaries will be variable to keep their interest aligned with those of your business
  • Operations (4-6%): includes the rent, utility bills, maintenance costs, showroom expenses, logistics, etc.
  • Other (2-3%): marketing, bookkeeping, legal fees, etc.

Car Dealership Financial Model

Download an expert-built 5-year Excel financial model for your business plan

Car Dealership Financial Model

Download an expert-built 5-year Excel financial model for your business plan

How to forecast profits for a car dealership?

In order to calculate profits for your car dealership, you must first forecast sales and expenses.

Profits = Sales – Expenses

Forecasting sales for a car dealership

In order to forecast the revenue for your car dealership, you can simply multiply the number of vehicles sold by the average selling price:

Revenue = # vehicles sold x average selling price

For example, if you have sold 50 vehicles in a month at an average selling price of $15,000, then revenue for the month is $750,000:

Revenue = 50 x $15,000 = $750,000

Forecasting expenses for a car dealership

There are 2 types of expenses for a car dealership:

  • Variable expenses: these are the COGS as explained earlier. To this you can also add the sales team bonuses. They grow in line with your revenue: if your turnover increases by 10%, variable expenses grow by 10% as well
  • Fixed expenses: salaries, operations and all the other costs listed above

Calculating profits for a car dealership

When we refer to profits, we usually refer to EBITDA (Earnings before interests, taxes, depreciation and amortization) as it represents the core profitability of the business, excluding things such as debt interests, non cash expenses and other non-core expenses.

In order to get to EBITDA, we use the following formula:

EBITDA = Revenue – COGS – Operating Expenses

We’ve included below the profit-and-loss of a car dealership (from our financial model template for car dealership businesses).

As explained earlier, profit margins for car dealerships are very low. For example, whilst gross margin is around 15% on average, EBITDA usually is around 3% instead.

In the end, net profit margin is around 1-3% of revenue. This the profit margin after all expenses have been paid for, including taxes. This in line with the benchmarks discussed earlier.

What’s the break even point for a car dealership?

Break-even is the point at which total costs and total revenue are equal. In other words, the breakeven point is the amount of revenue you must generate to turn a profit.

The break even point shouldn’t be confused with days to break even which is a very different KPI.

Because you must at least cover all fixed costs (that aren’t a function of revenue) to turn a profit, the break-even point is at least superior to the sum of your fixed costs. Yet, you also need to spend a certain amount for every $1 of sales to pay for the variable costs.

The break-even point can easily be obtained by using the following formula:

Break-even point = Fixed costs / Gross margin

As we explained just now, the vast majority of costs for car dealerships are variable costs (approximately 90%). Let’s assume we are operating a car dealership with the following structure:

Operating costFixed vs. variableAmount
COGSVariable cost$640,000
SalariesFixed cost$20,000
BonusesVariable cost$20,000
OtherFixed cost$40,000

The break-even point would then be:

Break-even point = Fixed costs / gross margin

= $60,000 / 8.3% = $720,000

You must sell vehicles for a total revenue of $720,000 in a month to break even. Only beyond that point you will make profits. Now assuming the average selling price of a vehicle is $15,000, the break even point is about 48 vehicles sold per month.

Car Dealership Financial Model

Download an expert-built 5-year Excel financial model for your business plan

Car Dealership Financial Model

Download an expert-built 5-year Excel financial model for your business plan

How to increase profits for a car dealership?

There are several strategies that you can use to increase the profitability of your car dealership business, and they include:

  • For New Cars: Maximize bonuses and cater to customers’ needs instead of pushing for something they don’t need. Sell financing, accessories, insurance, etc.
  • Aftersales: Upsell accessories, parts, and repairs
  • Used Cars: Tap into the trade-in profitability, which is basically the price difference between a traditional used car and a newer, less-used car
  • Sell Additional Products & Services: Try to sell extras such as electricity packages, extended warranties, etc.
  • Stock Management: Don’t buy cars that are not in demand. Bring in only those vehicles that are in demand and are likely to sell faster
  • Single Point-of-Contact Sales Process: Eliminate friction from the customer experience by introducing a single point-of-contact sales in which only one person will be involved all the way from test driving to the transaction’s delivery stage
  • One-Price Selling Model: Introduce a one-price selling model in which you will charge the lowest possible price where you can keep some profit and customers will not negotiate further. This helps to speed up the buying process and offers a better customer experience, hence, increasing sales