Have you been taking a beating at the auctions lately? News flash: you can make more money on your de-fleeted rental vehicles. How? One avenue is retail sales. Okay, hanging your shingle and selling to the general public is easier said than done. Opening any independent business is a risky proposition—remember the trials and tribulations you faced to get your car rental business off the ground?
Another potentially less risky venture would be to open a used car sales franchise. You’ve probably heard that about half of all small businesses fail within five years, according to the National Federation of Independent Business’ Education Foundation. An oft-quoted figure from a study by the Journal of Small Business Management puts failure rates for franchises at less than 5 percent.
Yet running a franchise operation—especially a capital-intensive one such as car sales—isn’t for everyone. It takes a lot of money to get in, you pay royalties to the franchisor on every car sold and you have to play by the franchise rules. And are you ready to open a completely separate business?
Here’s an introduction to used car sales franchising. Call it the beginning of your due diligence to see if franchising is right for you.
Payless and Thrifty
Payless Car Sales and Thrifty Car Sales are the two major used car sales franchise opportunities with a foundation in car rental. Another car sales franchisor, Indianapolis-based J.D. Byrider, specializes in older cars sold to customers with a blemished or limited credit history. We’re talking about Thrifty and Payless here.
Tulsa, Okla.-based Thrifty Car Sales has 39 U.S. locations and has been operating since 1999. In its sixth year, Payless Car Sales (St. Petersburg, Fla.) has about 50 dealerships in 16 states.
That leaves room to grow, says Mike Harley, president of Payless Car Sales. “There are not too many markets today where we’d run into a problem in that the territory is already taken or protected,” says Harley. “Right now the market is pretty wide open.”
A Built-In Customer Base
As car rental and car sale businesses ultimately entail buying and disposing of vehicles, you might think there is crossover of owners who do both. This is not the case. At present, Thrifty has seven car sales franchisees that also run a car rental operation. Payless has two. Most franchisees for Payless and Thrifty come from a dealer background. [PAGEBREAK] Nonetheless, there are some natural synergies between the two businesses. The car rental operator already has a customer base, says Jeff Cerefice, vice president and general manager of Thrifty Car Sales. “If the car rental customer isn’t a candidate for a car someone in his family or circle of influence might be.”
Also, many car rental operations have the physical space requirements to accommodate used car sales, as well as recognized and well-trafficked locations to draw in customers. Gary Lewis, a Salt Lake City-based Thrifty Car Rental and Car Sales franchisee, leased a sales lot in between new car dealerships to siphon customers. He also runs an airport parking lot, another source of referrals.
Cars for sale can be rented to prospective buyers as an extended test drive, and cars for rent can be bought. “We put a flyer in every rental that this car is for sale,” says Tom Celona, a Rhode Island Thrifty car-rental and car-sales franchisee.
Celona’s layout is such that his car rental customers have to walk through the sales showroom to get to the rental counter.
He runs a newspaper ad for car sales with a cut-out coupon for rental: “Rent the car of your dreams first before you pay for it.”
Used car sales can be an added revenue source during slow car rental seasons. “Rates plunge in Florida after Easter,” says Harley. “Why not take advantage of those slow markets and move some cars and make some money on them?”
How much can you make selling used cars? News flash number two: profit margins in used car sales are “much better” than in car rental.
Harley says Payless dealers make from $2,500 to $4,000 per car sold. Payless dealers average 30 to 32 car sales a month. Thrifty declined to give specific profit figures. The national average is 37 cars per month.
“My goal was to retail 25 to 35 cars a month,” says Lewis, whose sales business has been open less than six months. “We’re blown away by those numbers.”[PAGEBREAK]
Playing by the Rules
While the basic requirements can be substantial, meeting them doesn’t guarantee you a franchise. Payless and Thrifty have formal evaluation processes that entail background checks, a visit to corporate headquarters and executives investigating your location in person. It is essentially required that you’ve already had experience in the car sales business or are willing to hire experienced management willing to help run the business. It may not be enough that you’re already running a successful car rental business.
“Banks want to see that you’ve been in business three to five years,” says Harley. “It would be tough to bring on somebody that’s showing a business model in which they’re not making any money.”
Like most franchise opportunities such as Subway or Travelodge, Payless and Thrifty have regulations for image and space compliance.
Both Payless and Thrifty allow co-branding for established businesses with a strong local presence, but they don’t encourage it. Thrifty requires its sign to be dominant, though the image department will work with the dealer to best accommodate signage issues. For Payless, the local business sign can be no more than 20 percent of the size of the Payless sign.
Thrifty will, on a case-by-case basis, consider other car rental branded licensees as candidates for Thrifty Car Sales franchises, though the sales lot must be stand-alone from rental.
Both franchisors have guidelines as to size and look of the sales facility and lot, as well as a minimum number of cars being retailed at any given point.
So what do you get for forking over the dough and agreeing to play by the rules?
Benefits of franchising — what’s in a name?
The primary benefit to owning a franchise is the brand recognition and trust that comes with the name, say both Cerefice and Harley. Payless (started in 1971) and Thrifty (in 1958) are well-known brands, and customers have a mindset of what to expect when they shop there.
“It’s emotional, it’s action-driven and it’s a perception that you’re going to get a good deal,” says Harley. “If you’re driving down the road and you pass a Payless Car Sales dealership, in your mind you’re thinking ‘honey, maybe we can afford that car.’”
“We advertise [our car sales] as fleet liquidation,” says Lewis. “When you come onto the lot there’s a perception that it’s a rental car and very well maintained. And they’re buying a car that’s still under a manufacturer’s warranty.”
Banks look favorably on franchises for lending. They are aware of the brand’s standards and costs of entry, and that built-in credibility could lead to better and more choices for funding. This is one factor for the higher success rate for franchises than independent, non-franchise companies.
“It gives the lenders a little comfort zone that somebody is holding you accountable for your quality,” says Jim Perry, a Payless Car Sales and Rental franchisee in Port St. Lucie, Fla. “I’ve got 25 lenders knocking on my door now.”[PAGEBREAK]
Aside from the brand recognition, franchises offer tools to facilitate the business. Payless and Thrifty provide free consulting services. Dealers can pick up the phone and get answers for anything from market structure support and advertising to floorplan options and how to buy at auctions.
These franchise consultants make site visits and offer on-site training as well. Thrifty offers a business development center, loosely equated to a reservation center in car rental, which can handle phone calls and schedule sales appointments for the dealer via a toll-free number. The dealership can track phone calls live through a software program. Using information that dealers collect from their “unsold showroom traffic,” the center can also make outbound follow-up calls.
The Web’s Wide Net
The Web is a fact of life in car sales, and is now the primary research tool in the buying process. “It’s an opportunity to capture a customer when he’s just starting to think about buying a car,” says Cerefice.
Both Payless and Thrifty have robust Internet programs to facilitate sales. “We’re pretty aggressive on the Internet,” says Cerefice. “It’s becoming more and more of a factor in car sales for the used car dealer to extend his reach.”
“The Payless name is perfect for the Internet,” says Harley. “Who do you know goes on the Internet looking to spend more money? Everybody is looking for a bargain.”
The franchisee uses a template to post vehicle sales information on a branded Web site. Keywords are optimized to rank high on search engines.
Payless’ inventory is optomized by vehicle make and model and can be found, in most cases, on the first page of Google, Yahoo and MSN.
Payless provides space for up to 60 photos per car and video is coming soon. In addition to the Payless site, the cars are automatically uploaded to appear on eBay, AutoTrader, cars.com, Autobytel and other car sales interfaces. Payless is partnered with Las Vegas-based eBizAutos who charges franchisees $279 a month to post cars.
The Thrifty Web site serves as an umbrella for individual dealers who have their own Web address. Thrifty charges $275 a month.
It is not uncommon now for customers to choose their vehicle online, start the credit application process through the Web site, visit the dealer and plunk down the money for their car. A Web presence opens the dealer to a wider sales area than his local market. Some customers purchase and ship a car cross-country, sight unseen. That is a small but growing segment, though both buyer and seller need to be aware of fraud.
[PAGEBREAK]But Wait, There’s More
So you’ve met the financial requirements, you can live by the rules and you’ve passed their test. Ready to make money? Hold on.
• a floorplan, which in car sales parlance is a loan to pay for the cars while they sit on your lot.
• to build inventory, which will initially stretch your budget thin if you don’t have enough vehicles coming off fleet.
• to secure indirect lending, a way for your customers to finance their new ride.
• computers and software programs to track sales and finance and insurance.
• advertising. Multiple sales channels on the Internet site are essential. Perry says 40 percent of his referrals are from the Web, 50 percent from newspapers and 10 percent verbal.
• to spiff up your operation, above and beyond the minimum franchise requirements. “People only want to buy cars from successful businesses,” says Celona, “You have to look good.”
Celona recently built a brand-new showroom and spent “a fortune.”
Get Someone Who Knows the Business
The franchise will help with lenders, vendors and hardware. However, “You need somebody who knows how to talk to the banks, get the loans approved and do the paperwork and title work,” says Jim Formanek, vice president of Payless Car Sales.
This person is a manager to run your car sales. He or she is not only essential to have, but also a franchise requirement.
Thrifty requires at least five years of dealership experience as general manager, sales manager or finance and insurance manager. Payless requires five years of experience in selling cars on a wholesale, if not retail, basis.
After all, you’re now a car dealership. You’ll need staff. Used car salespeople will typically get a $300-$400 weekly draw against commissions and $400 on a sale.
But the additional payroll can be adjusted to sales flow. Dealers who sell about 35 cars or less a month can combine a general manager and F&I manager into one job, says Formanek. [PAGEBREAK] Now Think Like a Dealer
In order to fully realize the synergies between car rental and car sales, you’ll need to change your buying strategies to maximize car sales.
“We make sure that we buy cars from day one that we can retail,” says Celona. “If we don’t think we can retail that type of car we don’t buy it.”
Before joining Payless corporate, Formanek was the general manager on the dealership side for a major franchise operation that did both sales and rental.
“When my partner was ordering risk cars for his fleet, I would tell him what was selling and what wasn’t in retail,” he says. “We would work together in buying his inventory for rental. It was like our own buyback program because I had committed to a dollar value and would take those cars into my sales inventory after six months.”
But as a used car dealer, the real opportunity is selling more than just rentals. “The guys that take that bigger step are diversifying their inventory quite a bit by model, year and manufacturer,” says Cerefice.
“Your need for used cars will be greater than what’s coming out of that fleet,” says Formanek.
He estimates that most Payless dealers retail 25 percent of their own fleet and find 75 percent of their cars elsewhere.
That means being proactive in finding inventory. Celona buys cars from auctions, other auto rental companies, local fleets and a local leasing company.
Many of those cars will be flipped straight away, while some can be rented and then sold.
Find Your Sweet Spot
Finding the right mix of model and segment for your market is part of the science of used car sales.
Harley says half of his Payless dealers are selling highlines: BMW, Mercedes, Jaguar and Land Rover models in markets that support highline marques, while the other half does well with Ford and GM products.
But it is essential to stay tuned to changing local market forces.
“A year and a half ago, when the real estate market was red hot, we were selling Mercedes, BMWs and Jaguars and we couldn’t get enough of those cars,” says Florida-based Perry. “We’d have them there for two or three days and then they were gone.”
That market has cooled, and so have Perry’s highline sales. “Now we’re selling cars that are more practical, more of a necessity vehicle. You have to change your market at the drop of a hat,” he says. In Utah, Lewis sells mostly late-model GM and Ford models, “minivans and Malibus,” he says.
In Rhode Island, Celona’s sweet spot is late-model, mid-size sedans that retail for about $15,000.
Success or Failure?
There is no fail-safe recipe for success in used car sales. Yet there are a couple of guiding principles to avoid failure. Franchisors agree that principals must have an active hand in the car sales side of the business. Absentee owners need not apply.
Another must: Understand your market, understand it will change and have the flexibility to change with it.
“If you treat it as an adjunct business to car rental you’ll never be successful,” says Celona. “It’s not found money, you have to invest in it and go after it.”