The car dealership industry is a huge one and continues to attract millions of entrepreneurs who want to create a successful business. According to the most recent statistics, there are nearly 17, 000 franchise auto dealerships in the U.S., and the total sale of new vehicles skyrocketed past $500 billion.
Note that these figures show that franchise auto dealerships continue to provide profitable opportunities for those who want to enter the industry. A car dealer is someone who buys automobiles for his business, keeps an inventory of them, and sells them to the customer, acting as a middle person between customer and distributor.
Authorized permission to do so is known as the dealership. A car dealership is a business which sells used or new cars depending on the contract signed by the dealer. Car dealers have the option of selling pre-owned cars or both i.e. new cars and used cars. What you choose to do will define the dealership you have to take.
Starting and running a car dealership franchise is only one of two means by which you can leverage the vast opportunities in this industry. In fact, some entrepreneurs may choose to open an independent dealership rather than a franchise. To better understand what each of these choices offer you, it is important to understand how franchise auto dealerships differ from owning an independent auto dealership.
Today, there are nearly 17,000 franchise dealerships in the United States, and even more independent car dealers. The problem is, many car shoppers don’t understand the differences between the two types of dealerships, and they don’t know the advantages and disadvantages of buying a car from each type.
What is the Difference Between Franchise Dealership and an Independent Dealership?
In the dealership vs. franchise debate, there are several differences that you must understand. As with many questions, there is not necessarily a right or wrong answer – just pros and cons and a choice to make based on your particular requirements. Nonetheless, let’s have a look at how they are different from each other.
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One crucial factor of differentiation between the two is the training bit. Franchised dealers are expected to comply with the set of training standards set by the manufacturer. These standards or guidelines could include training and updating programs, conducted online or in a classroom for technicians and salespeople.
People at the managerial level are expected to be well-versed with the manufacturer’s warranty and its application(s). This is done by the parent company to ensure that all the quality standards are respected by the dealers. Contrary to this, an independent car dealer is not mandated by anyone to take these courses for any automobile company.
Car manufacturers sometimes expect their dealers to follow a certain set of rules when it comes to dealing with their customers and potential leads. This is why it is not surprising to find a franchised official dealer with a waiting room, offering coffee and snacks.
Nonetheless, these are some of the extra services that represent cost to the dealer, so independent or private dealers pay more attention to the extra services that they provide to customers.
Operations or Business Activities
Another major area of concern is how they operate their business. Independent dealerships are run by an independent entrepreneur and franchise dealerships have the proper involvement of the franchisee. Franchise dealership comes with the set rules and regulation which you cannot abide them at any cost. Franchise dealerships are lesser preferred by people almost entrepreneurs are drawn towards the independent ones as they can run business in the way which they like.
Franchise dealers more or less have lower interest rates when it comes to financing and it is done through their manufacturer’s financial services arm – GMAC or Ford Motor Company Credit, for example. Independent dealers’ interest rates are often higher, but they are also more likely to offer to finance to people with less than excellent credit, making it easy for someone with a chequered credit history to finance a car that would be turned down at a franchise dealer.
Note that used cars at franchise dealerships are usually later models. Independent dealers may offer late models, but also typically have a selection of cars that are older than you would find at a franchise dealer.
Paying Royalty amount
The people who acquire the franchise are expected to pay royalty fees to parent companies. This is a permanent fee that they have to pay on a monthly basis. Independent dealerships do not have to deal with these kind of fees which provide them retained earnings.
Franchise setup requires a huge amount of money and the person involved has to pay different types of fees such as franchise fees, license fees, etc. and he has to also go through the process of recruitment too.
There are a number of expenses that are involved in the franchise dealership in comparison to independent dealers. The costs which are borne by the independent dealers are related to the license and buying of products.
A good number of franchise dealerships have their own service departments with technicians trained to work on the brands of new cars that they sell. That can be a good thing if you are buying a used Honda from a franchised Honda dealership but doesn’t matter so much if you are buying a used Chevy from the Honda dealership.
Most independent used car dealers don’t have service departments to fix your car after you buy it. However, there are plenty of good, independent mechanic shops around to fix your car, so it is not really a big deal.
Franchise dealers are bound by the parent company and they have set targets by the company which they have to fulfill. In any case, if they are not able to achieve the business chances are the company can terminate your business in the long run. Independent dealership is not involved with the targeted sales as they work according to their wish and run their business accordingly.
Pros and Cons of Franchise Dealership
When you decide to acquire a car dealership franchise, you are committing to selling cars made by big name-brand manufacturers such as Toyota, Mazda, Honda, and Nissan. While you can choose any name you see fit, that name will often include the name brand that shows customers that you are an official and authorized franchise dealer who has made a contract with that manufacturer to sell its cars.
Therefore, a franchise car dealer has the permission and authority to sell cars as a direct agent of a major automaker.
- Lower price: Competition among dealers lowers vehicle prices for consumers.
- Financial services: Coupled with selling cars, dealers arrange to finance and take trade-ins.
- Service: Consumers can get their vehicle serviced at the same place they bought it. This can foster a sense of community, trust.
- Advocacy: With warranty issues, dealerships often advocate on behalf of consumers with the manufacturer.
- Limited competition: Car manufacturers are required to sell only through franchised dealers, thereby limiting retail competition.
- Deterrent to innovation: State franchise laws inhibit retail innovations, such as internet sales.
- Limited choice: Some consumers would prefer to buy directly from the manufacturer and avoid dealers.
- Higher costs: Dealerships raise costs by adding another layer to the distribution system.
Pros and Cons of Independent Dealership
An independent car dealership has not made any agreements or contracted with a major auto manufacturer. The names of these independent dealerships more or less give away that fact since they will never include the name of a big automaker.
For example, you might drive by a dealership with the name “John’s Quality Used Cars,” or “Billy Johnson’s Auto Sales,” which would clue you in that the dealership is not a franchise of a big car manufacturer.
- Faster service: Independent shops provide faster services since there aren’t as many cars scheduled for service each day as there would typically be at a dealership.
- Complete autonomy. When you start from the scratch, you are painting on a blank canvas and you are essentially free to do whatever you want or need to do to make it work.
- Product varieties: Independent shops typically carry a variety of makes and models, so they can be a one-stop-shop for all of the family’s car needs, unlike most dealerships.
Because of the smaller environment, customers can have a stronger, more personalized report with service writers and salespeople. Compared to Franchise Dealership, many independent shops are much smaller, which gives them an edge in customer service.
- Funding can be a nightmare: Unless you are already independently wealthy or you are willing and able to struggle through a tough initial bootstrapping phase, a start-up is going to require significant funding.
Investors exert strong control
Although starting a business sounds like it should be all about the lone wolf entrepreneur going with her gut and succeeding through sheer instinct, the truth is the founder of a business must make decisions in line with the requirements laid out by their investors. If they don’t, they risk getting the funding rug pulled out from under them at a critical moment.
So much work
Of course, running an independent shop is a lot of work; there is no getting around that. But successful businesses are notorious for demanding 100+ hour work weeks from their founders, sometimes for years. Even the most determined and passionate entrepreneur can struggle with that kind of protracted workload.
Lack of expertise
Because independent shops work on a variety of makes and models, they mostly don’t have all the factory tools that might be necessary for certain jobs. They also don’t usually have a parts department like a dealership would, since dealers can stock up on their commonly used car parts.
Independents don’t quite have the same brand familiarity that a dealership should have, since dealerships work on the same makes and models all day long. It can make it tougher for an independent to attract clients.
If you want to own a dealership that mainly offers new vehicles and also provides service for your customers as well as name-brand recognition, then a franchise would be a perfect choice.
If you prefer to buy used vehicles from different types of auto manufacturers without having to worry about exclusivity, then an independent dealership may be the better choice. However, each has pros and cons. You should check out each kind and see what is right for you.