By on May 12, 2012

 

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.

Big Point: 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.

Big Point: 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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14 Comments on “Hammer Time Rewind: Edison Medicine...”


  • avatar
    skor

    “Every vehicle there has arrived for a reason. Do you know what it is?”

    ^So much this!^

    Years ago, when I was a teen, and I set out to buy my first used car, a friend’s mechanic father said to me, “Nobody ever sold a used car because it ran too good.”

    • 0 avatar
      Educator(of teachers)Dan

      Yes but that discounts the high number of Americans who simply get bored with a car and trade it in. My supervisor is one of those people who has a tendency to buy a new car, keep it 50,000 miles and sell it regardless of how well it has been holding up. (Thus feeding into her cycle of perpetual debt and eventual bankruptcy.)

      The art of buying a used car is doing the due dilligence that Steve has described in another series of articles. My father has bought used cars his whole life and never gotten a true lemon, but that has come from knowing what to inspect and learning which dealers and salesman to trust.

    • 0 avatar
      NulloModo

      There are plenty of off lease vehicles that are perfectly fine – the lessees just didn’t want to buy out the lease so they end up on the used market. Rental fleets also dump perfectly well maintained vehicles that are still pretty new.

      There are also a lot of cars that end up on the used market for reasons such as: ‘Gas is almost $4 a gallon, I’d be stupid not to trade my crew cab pickup for a Focus!’ or ‘My wife is pregnant, I need out of this sedan and into a SUV!’ or ‘Hey, where’d my car go? I made the first two payments and I’m only four months behind!’.

      There are the serial traders as well, those who get the itch for a new car every few years no matter how well the current vehicle is doing, and those who buy on impulse and then immediately change their minds. I’ve seen a woman buy a Mustang, then trade it in the next week for another Mustang because she decided she wanted another color. I’ve seen a woman buy a car, decide it was too small, trade it in for a larger car, then decide that is too big and trade it in for a third vehicle all in the span of several months.

      Of course, that doesn’t mean that some cars don’t get dumped when they start acting up. Any time I’ve seen a CEL light up when I’m going over someone’s trade with them the cause of said light always seems to be ‘just a sensor’ or ‘it’s the light that’s broken, the engine is perfect’, at least according to the owner of that trade. I’ve had to jump cars for the appraisal drive ‘The battery was dead? Wow, it was fine this morning!’ and had customers suddenly remember accidents as soon as we ran the carfax ‘Oh, I forgot all about that, it was really nothing, just a scratch on the bumper’…

      So, sure, it makes sense to do your due diligence, but at the same time it’s not even close to true that most used cars are only there because of problems the original owner didn’t want to deal with.

  • avatar
    ciddyguy

    All very good advice there Steven.

    It’s sad that so many people have allusions of grandeur when it comes to their dreams of whatever it may be that they are trying to do without facing the realities of whatever it is.

    And as you point out, there ARE ways to go about starting out in the business of selling new or used cars that will guarantee your success, assuming you ARE a good enough salesman to start with.

    I’m of the belief that if you are going to sell cars, you should know something about it, especially the brand you are selling if from a new car dealer or if used, educate yourself in what that car is, even if just the rudimentary info is better than knowing nothing at all. It doesn’t have to take much time, a simple search via Wikipedia should suffice in a pinch (even though it’s far from perfect, but probably better than most other sources, outside of official channels but is well known).

    That said, I got excellent service at a new car dealer where I bought my used car. My aging truck was dying and at a time I wasn’t prepared (January) to buy at that time, had just done my taxes and had a good sum coming back to sock away for a future down payment (but it had not deposited as of yet via direct deposit) but as they say, life is what happens when you are busy making other plans… Anyway, reconnaissance mission was the mission du-jur of the weekend as I was looking to see what was out there via used car arms of new car dealers (not necessarily to buy from them, but to see what I might be able to obtain for my budget, even if I went with a private party).

    I had a loan in process at my credit union, but would not know anything until that Monday (It was Saturday when I went in to set it up) but Sunday, found at a Honda dealer a nice black on black Mazda Protege5, that I was shown and looked around it, even popping the hood as it was one of 2 options he had in my price range. The salesman was great, he simply handed me the key after asking if I’d like a test drive, I said yes, out of curiosity and said, take your time and didn’t come with us, so I got in a GOOD road test and came back and decided that with the dealer having done a full safety inspection, fixed anything broken, put it out on the lot with no warranty to try and just buy it. Took a week as my CU fell through, then another source they thought might work, also fell through but by the following Thursday, we found a bank that would not only finance me, but the car as it had over 100K miles on it, Chase Bank (I know, evil incarnate) but hey, I got a good rate, 48MO note and at roughly the monthly payment (slightly more than I was looking at, but doable) and they sold the car, a win, win for all even though they ended up having to lower the price to make it work.

    So far, the car’s been fantastic and I’ve put 2200 miles on it roughly and it’s been flawless. Everything works, even the AC blows out COLD air. The only tweaks are, improving the instrument cluster lighting (too dim and of low contrast) and updating the head unit with one with Bluetooth, Aux/USB inputs (has an older Alpine unit in it now). The new unit is on order and has shipped. Today is finish fixing the back lighting for the gauge cluster.

    Turned out, the car was bought at the local Mazda Dealer in town and it came back with a clean auto check report, no accidents, no airbags deployed, which I was given and the previous (2nd) owner only traded it in for a larger vehicle to better carry his large dogs in.

    But that kind of service should exist even at a good, reputable used car dealer as well.

  • avatar
    MeaCulpa

    Two things.
    1 Your advise pretty much holds true for any business venture. I would ad “If cars are your hobby, think carefully about whether your going into the car business for the love of cars or to make money, if it’s the former think about it one mare time.”

    2 Washed title?

    • 0 avatar
      LectroByte

      I know my home state of TN used to be notorious for its loose regulations of car titles, so a car with a salvage title in another state gets retitled in TN with a clean title, and other monkey business. I imagine Carfax and things like that would help put an end to this kind of business.

      • 0 avatar
        MeaCulpa

        That’s basically what i was expecting.
        But don’t worry, the income of scumbags are safe. The cars get exported to Europe instead, admittedly a slight downgrade compared to lovely P-51 Mustangs and the Marshall aid, and helps shady “entrepreneurs”, fences, car thieves, and organised crime stay in business.

  • avatar
    mtymsi

    Steven,

    Having spent 30 years in the retail automobile industry in sales starting in 1976 in positions from sales at the #1 Lincoln dealership in the nation (13 years) 7,000 vehicles sold (#1 salesman for 7 years), to re-establishing a Ford store w/ a $25mm makeover losing money hand over fist run by second generation daughter to the 2nd largest Ford store nationwide (2000-Galpin was #1, in 8 months we were #2) to a fairly well run (mistake IMO was not spending a little money on cosmetics-95% of vehicles on lot from auction) long established independent used car lot I agree with everything you have stated.

    I never personally experienced owners with little experience trying to succeed but I have experienced more than one second generation “owner” fall flat on their face. The above referenced Ford store was “out of trust” w/ FMCC and of course seized. Takes a lot of business acumen to have that happen after your father ran a successful business for 40 years.

    Nice thread, don’t think most regular posters here have experienced the circumstances you describe. Fact of the matter is it is real life.

  • avatar
    european

    this is a copy/paste article of few months back…

    just saying…

  • avatar
    Zackman

    Buy with your eyes? Same as emotional attachment.

    That has gotten me hosed more than once – not that the cars were bad, but that I fell in love with them and overpaid. My 1961 Chevy? Yup. My 1964 Chevy? Yup – but I didn’t care, as that was the most amazing car I have ever owned. Most other cars? Yes. The best deal I got? My Impala because I didn’t have to deal, just accept the supplier discount plus the rebates and viola! Good deal. Our MX5? Pretty good deal.

  • avatar
    Mathias

    I work at a 200-people+ university lab, and we get our fair traffic of foreign visitors and post-docs. For these folks’ automotive needs, I’m the resident helper-outer, something I’ve done for 15 years or so.

    I like the article. I have to explain a lot how if you have $6k to spend, you can find a nice car if you know what to look for… but if you’re trying to get wheels for $3 or under, it’s going to be a bumpy ride. What a lot of educated Europeans don’t understand is how close to the edge most Americans live in a financial sense.

    I’ve done the math on how many cars I’d have to sell every year to duplicate my middle-class-but-not-lavish salary… it’s an exercise that really puts into perspective how hard it is to make a living in this business. No easier than other professions where knowledge and hard work counts.

    Two more points, not my inventions:

    – It’s easy to make a small fortune with a used-car operation. Just start with a big one.

    – The best way to make it in automotive sales if if you have a Ph.D. = “Papa Has a Dealership.”

    Cheers -Mathias

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