By on April 9, 2010


I revisited my past recently. A friend of mine who has been in the car business for longer than I’ve been alive called me right out of the blue. It had been well over two recessions since our last talk and yes, there was an awful lot of catching up to do. So the banter lasted about three hours and all we talked about was… how things don’t work in the car business. The list is longer than a modern day health care bill and the prescription is pain (and debt) incarnate. That is unless you decide to take the easy way out. In which case it’s downright fatal. There are thousands of do’s and don’ts in this business. Today I’ll share the Top Five ways many rookies end up scorching the thin skin under their Hawaiian shirts.

1) Start Big

There was once this fellow I knew by the name of Crowe. Great guy for someone in the used car business…well…. okay he was a jerk. Crowe was just one of the thousands of people who come with big ideas about how the car business should work and little real experience. So what does he do? He gets a bank to loan him 400k for a brand new dealership (this was back in 2006). He buys 60+ cars through a floorplan company that finances all his vehicles. He advertises through every marketing source that knocks on his door. Pretty soon the high sixes in debt have hit the $1 million mark without a single sold car yet.

Grand opening comes with hot dogs, balloons, rides for the kids, and enough salesmen to serve the entire Trump family. He sells two cars. For the rest of the month he sells three. The finance company starts to want some of their money. He prays, he stresses, he panics… and he’s completely bankrupt in three months. But don’t worry though. The bank that financed him got bailed out.

Big Point: Most of the veterans in this business start in either one of two places. Either they get their experience as an employee, or they start slowly with one vehicle at a time. When they become successful, it’s because they were wise enough not to make their ‘big bets’ with little experience. Start small and build up.

2) Floorplan

Floorplan companies are more or less professional handicappers. They offer you the opportunity to buy vehicles for a given interest rate and certain terms. If you are good at churning cars they can work extremely well. But a few down times or bad loans, and your debt can quickly become bigger than a home mortgage.

The big issue with these companies is that when it comes to the rookie dealer, they are going to offer the equivalent of a sucker’s bet. A small fee up front leads to major costs once the vehicle may hit the 30, 60 or 90 day mark at the lot (and beyond). It usually takes several months to a year for any dealership to gain presence. Without the ‘presence’ there is absolutely no chance of clearing a floorplan’s costs.

Big Point: Always work with your own money starting out. Money is cheap to acquire in this business (if your credit is good), but it will usually be very expensive in due time if it isn’t yours.

3) The Internet Will Set You Free

The biggest fallacy in this business is that Internet alone will get you ahead. It can happen. But not like it used to.

Back in 2005 an auto advertisement on Craigslist would usually stay on the 1st page for seven to eight hours. You always got calls and most of the people were fairly well educated. These days it’s five to fifteen minutes and the majority are any combination of auto illiterate, desperate, or predatory.

Autotrader also used to be a great place. But with so many PT Cruisers, Malibus, and Tauruses out there it’s very hard to differentiate your own. You also have to take into account that most dealerships are savvy with their internet operations and have been building their own talents for several years. To make the internet work, you have to offer an ‘exceptional’ edge of some sort. Price alone usually doesn’t cut it because the real cheapskates are the rebuilders who use illegal labor and wash their titles.

Big Point: Most of the successful independent dealers offer something of value beyond price to their customers. Most of the time it’s financing. Sometimes it’s a warranty. Sometimes it’s the opportunity to buy from a place that specializes in those vehicles. Selling cars is 90% perception with about 10% nuance for the buyer’s unique wants.

Everyone in this business who ultimately succeeds finds a customer niche or a marketing strategy that they will use through multiple mediums. TV, Radio (remember them), drive-by’s, event sponsorships, mass mailings (these are in decline), and perhaps even a dancing turkey in front of their store du jour. All joking aside, you need to refine your message and you better have strong word of mouth. Take care of your people.

4) Buy With Your Eyes

If you don’t know much about purchasing cars you have three options. Buy cars from a wholesaler. Hire an employee to buy them. Or buy them yourself. Number one is a little expensive. Number two is real expensive. Number three is the most expensive… but only if you chose to ignore the way things work at the various wholesale channels. I’ll just cover auto auctions for now since that’s the one most folks are familiar with.

At the dealer auctions nearly everything is nice and shiny. The car that’s been there 18 months? It just got a spray down and a quick wipe before going through the block. Every vehicle there has arrived for a reason. Do you know what it is? People who buy with their eyes are a lot like consumers. Most rarely look past the proverbial cover and they end up paying for it down the road.

If you haven’t opened the hood, and the doors, and the trunk, and took a look at everything in between then don’t bid on it. ‘Beauty’ in this business is like an old Kia. It’s a neurotic demon bitch with flood damage, rust, and $3000+ worth of mechanical issues. Start slowly and learn from others… but don’t copy them. That nice friendly guy who doesn’t look at what he’s buying either has an army of mechanics at his disposal or is laundering money. Sometimes both.

5) Finance

You buy a car for $2000 and you finance for $4000. Wonderful! You get the first $500 payment. Even better! The first payment is late, then the second is partial. By the third payment, the phone number’s been disconnected. Then you realize that your $2000 profit is a negative $1500 with a repo fee… if you’re lucky.

I avoided financing during my first three years for ‘philosophical reasons’. I absolutely hated the idea of financing depreciating assets and ‘enslaving’ folks. So I didn’t. I was a cash dealer. In those days, I generally found cash customers to be far easier to work with. But since then this country got whored out and I had to adjust my cottage sized enterprise to the Titanic sized debts of my fellow citizens.

Financing can work. But you have to work very hard at it and make extra sure that you’re financing the right people.Do everything you can to help the good folks. But be a nag. Be persistent, and know when to cut your losses.

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26 Comments on “Hammer Time: Edison Medicine...”


  • avatar

    Great article Steven. I really enjoyed learning more about something I’m interested, but not involved, in.

    Financing stinks on the dealer’s end and the customer’s end. No more for me, thanks.

  • avatar
    jmo

    I absolutely hated the idea of financing depreciating assets and ‘enslaving’ folks.

    But if you have some 22yo who just lost the transmission on her 18yo civic, how is she going to get to her first job if someone won’t finance her?

    • 0 avatar
      rnc

      Most porn flicks involve that very situation.

    • 0 avatar
      porschespeed

      “…you must be the credit repairman…”

      Bwahh-chicka-bwah-bwahhhh

    • 0 avatar
      gsw0

      I had this conversation with the wife recently. Back in college, I tore out my clutch with a friend’s help and replaced it at a DIY repair shop. Neither of us knew what we were doing. Since my clutch was gone, my car was gone and so was my ride to work.

      How did I keep my job 30 miles roundtrip which I could not afford to lose? I bummed rides off of each of my friends to get to work and used a rotational system so I did not use the same friend twice.
      When I was at work, I had 8 hours to find a ride home and asked everyone and I mean everyone for a ride home. Usually it was well out of the way, but I had a lot of help. People seem to think no car = not able to get to work. Bicycle,walk, take a city bus or bum rides with a friend. I did have to take 2 taxi rides at some point because my pool of friends/co-workers dried up that were available. Eventually the car was fixed by us non-car repair guys and nearly killed our friendship.

  • avatar
    nmcheese

    @jmo

    Walk or bike. Works for millions of people every day.

    • 0 avatar
      jmo

      11.6 miles each way(the average commute)? That’s quite a walk or bike ride…

    • 0 avatar
      Geotpf

      There’s always the bus.

      Or a $500 beater.

    • 0 avatar
      dhathewa

      @jmo,

      If it’s bike for 50 minutes or assume a crushing debt, biking is a pretty good option. And a bike/bus combo can be very effective.

      @geotpf,

      Of course, we’re presuming that there’s a safe biking route (not always true) and halfway decent bus service (not true very often, IMHO).

    • 0 avatar

      11.6 miles each way(the average commute)? That’s quite a walk or bike ride…

      A long walk, yes. An easy bike commute for most people.

      I commuted to work for years on my bike. Depending on the route, it was 8-9 miles each way. I did a loop on my way home to get it to an even 20 a day. Anyone in decent health can do a 12 mile ride in an hour or less. At 12 mph, they might not even need a shower when they get there. Any faster speeds and you’ll need to wash off. When I’m fit, I can avg 17 maybe 18 over distances. My best time ever to work was right around 20 minutes, with an avg speed of ~21mph. To do that, though, I was doing intervals running at my max heartrate all the way there.

      It is dangerous. Bicycling injures more people than any other sporting activity and some of those injuries are closed head injuries or worse, fatal. I’ve been hit by cars three times. Fortunately the worst that’s happened has been a broken knee, but drivers will kill you.

      If you want to commute, get a bike shop bike that fits and is lightweight, flashing lights, a good helmet that fits, some lycra bike clothes to keep from getting chafed, and a knapsack or pannier bags to carry your stuff.

      Most people freak out when I tell them that I routinely ride 20 miles on my bike. It’s really not that hard. I’ve been riding seriously for 15 years or so, originally to lose weight after realizing that walking or running hurt too much. I’m still not skinny, 5’6″ and about 185-190, which is relatively light for me, though a couple years back I got down to 165. Even when I’m chubbed out after a winter, it only takes about a month of riding to be able to do a 50 mile ride.

      Seriously, a 10 mile ride is no big deal.

    • 0 avatar
      rpn453

      Anyone driving an 11.6 mile commute probably has a decent-paying job anyway. You don’t need to drive that far to find a minimum wage job.

      I would have no problem biking an 11.6 mile commute if I can find a decent route to get there. I usually bike about 15 miles per day just for exercise and fresh air anyway.

      As always, an excellent article, Mr. Lang.

  • avatar
    rpol35

    Very interesting article, thanks!

    I don’t know why anyone would want to be in the car business these days, either manufacturing or selling. It seems cars are built according to invasive, ruinous Federal regulations more than to any other consideration. And selling, fugetaboutit! I can agree with you on being a cash dealer but I imagine it limits your reach and market potential but I can’t imagine financing and chasing after debtors that are upside down, what a disaster!

    One other thought; most individuals that I know or have worked with over the years, in many lines of business, have always told me, “Use someone else’s money, never your own!” Also, consider the state in which you are operating; they differ greatly in terms of what can be attached if your business goes T.U.

    • 0 avatar
      Geotpf

      Those ruinous Federal regulations that have saved millions of people’s lives (either due to less pollution or stronger safety features)? Boo-hoo-hoo.

    • 0 avatar
      FleetofWheel

      Some of the regulations did cost lives. Such as the rapid down-sizing necessary to meet mileage restrictions before the car makers could engineer in advanced crumple zones, make ABS cost effective on low priced cars, etc.

  • avatar
    CyCarConsulting

    Many good points on today’s car business. What I’ve found over the years, is most of the sales come from repeat business. This important fact is why dealers need to sell themselves, because everyone at the bake sale has the same cookies.

  • avatar

    Very interesting. Thanks!

  • avatar

    Steve, thanks for the great article. Even though I’m not involved in this business (well, except for financing my car – no other choice), it’s good to be aware of what’s going on. nmcheese’s comment is quite silly; sounds superior on paper, unrealistic for many people in reality.

  • avatar
    dhathewa

    Steve,

    Thanks, I always enjoy reading your articles. I do have a question.

    “Number three is the most expensive… but only if you chose to ignore the way things work at the various wholesale channels. I’ll just cover auto auctions for now since that’s the one most folks are familiar with.”

    What are the other channels?

  • avatar
    FleetofWheel

    Can’t wait until those state level dealer franchise laws go away.

    It’d be great to order a car off the web site straight from the mfg.
    Just click through the wizard to pick color, engine, options.

    Test drives would be done for a small fee from demonstration lots or rental car companies. Say $15 for a 15 minute test drive. That would keep joy riders away.
    For those who still want hand-holding, they could choose pay a consultation fee or hire an independent buyer’s agent which already exist.

    Service would be at any of the thousands of auto care shops just like now.

    Get financing from your own bank, credit union or the car mfg when you are completing the on-line application.

    Such a system would allow well informed car people like those here TTAC to not pay for services we don’t need or like.

  • avatar
    Littlecarrot

    Steven,

    I’d like to become a part-time car dealer. Just buy one car at a time, fix it up a little, and then try to sell it. Not necessarily for the money…I just love cars that much.

    The problem is in the State of Oregon you need a dealer’s license to even sell a few cars. In order to get a license, the County Planning office has to “approve” your dealership location. This is normally not a problem, as most commerical locations are zoned for for this type of activity. If you want to sell out of your home, however, you need to apply for zoning variance. Unfortunately, this can cost several thousand dollars. When I look on Craigslist, I see plenty of folks selling multiple cars from their residences–especially the Russian salvage title Mafia. I’m wondering what would I should do?

    • 0 avatar
      educatordan

      Move to Ohio. No seriously. ;)

      $500 bucks gets you a dealers license and then you can go to auctions and buy what you like. I knew a few guys growing up that bought one just so they could go to the auction when they needed a car. The funny thing was then they would spend the next couple years driving around with permanent “DEALER” plates on the car. Occasionally they would act as agents for friends.

  • avatar
    Moparagain

    Great article.

    Such a system would allow well informed car people like those here TTAC to not pay for services we don’t need or like.

    What services wouldn’t I need or like? There has been talk of internet car buying since Bill Gates was a boy. Won’t work.

  • avatar
    Steven Lang

    “What are the other channels?”

    Direct purchases from the dealerships.

    Sealed-bid sales

    Purchasing from auto finance, title pawn and repo firms.

    Offering to beat X companies trade-in price.

    Buying directly from private parties.

    Direct purchases from banks and credit unions

    Impound sales

    Mechanic shops

    Literally anyone who has a vehicle to sell…

  • avatar
    Facebook User

    I know bicycling was mentioned but I haven’t yet figured out how bicycling in an urban area is faster than a motor vehicle unless you disobey traffic signals.

    Back when I lived in Chicago, there was almost NO way to average above 18mph on my commute in a car. That means if you followed traffic signals you would be significantly less. On top of that the “bike lanes” are NEXT to parked cars. I’m sure that was because bike paths were an afterthought instead of planned out from the ground up.

    Now that I live out in the far suburbs, roads are 45-50 with people normally going 10 over. This creates an absolutely unacceptable risk of bicycling outside of the subdivision. (Well, maybe I’ll one day try it when I leave for work at 2-3am and cover myself in bright lights…commute is 40 miles each way, a good chunk on 40-50+ mph roads until I get near chicago).

    I can’t see bicycling as a real viable commuting method in most cases unless you are a huge risk taker or the city you live in planned it out from the beginning.

    It is a big shame, as I used to love bicycling as a kid.

    With all that being said, the fault of bicycling not being viable is certainly not that of the bicyclist, but of city planners (not planning for bicyclists) & the motorists who simply just don’t care about others safety.

  • avatar
    Robstar

    I know bicycling was mentioned but I haven’t yet figured out how bicycling in an urban area is faster than a motor vehicle unless you disobey traffic signals.

    Back when I lived in Chicago, there was almost NO way to average above 18mph on my commute in a car. That means if you followed traffic signals you would be significantly less. On top of that the “bike lanes” are NEXT to parked cars. I’m sure that was because bike paths were an afterthought instead of planned out from the ground up.

    Now that I live out in the far suburbs, roads are 45-50 with people normally going 10 over. This creates an absolutely unacceptable risk of bicycling outside of the subdivision. (Well, maybe I’ll one day try it when I leave for work at 2-3am and cover myself in bright lights…commute is 40 miles each way, a good chunk on 40-50+ mph roads until I get near chicago).

    I can’t see bicycling as a real viable commuting method in most cases unless you are a huge risk taker or the city you live in planned it out from the beginning.

    It is a big shame, as I used to love bicycling as a kid.

    With all that being said, the fault of bicycling not being viable is certainly not that of the bicyclist, but of city planners (not planning for bicyclists) & the motorists who simply just don’t care about others safety.

    • 0 avatar
      mcs

      There are a couple of ways that biking is faster even when you obey the traffic rules. One problem is that if you’re in a car it may take more than one light cycle to get through intersections. On the bike, it’s just one cycle. In my experience, that’s where I can really leave cars in the dust.

      Another factor that I’ve discovered is that if you are in a car, you may have to park at a garage that’s several blocks away and have to walk from the garage to your office. Sometimes the garage is full and you have to go hunt for another one. I’ve also waited in line getting into garages and worse lines getting out at rush hour.

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