Auto Dealership Due Diligence Checklist for Buyers

Auto Dealership Due Diligence Checklist for Buyers

Buying a dealership means buying several businesses under one roof: new vehicle sales, used vehicle sales, finance and insurance, service, parts and sometimes collision repair. Each department has its own economics, systems and risks. On top of that sit the franchise relationship (for franchised dealers), the real estate, the floorplan arrangements and the people who make it all run. Dealership due diligence is how a buyer tests whether the business will perform under new ownership the way the seller’s numbers suggest.

This checklist is organized around the areas buyers and lenders typically examine in a dealership acquisition. Use it alongside our guides to car dealership valuation and how to buy a car dealership.

1. Financial Performance

• Several years of dealership financial statements and tax returns, reconciled to each other.
• Monthly results for the most recent periods.
• Department-level results: new, used, finance and insurance, service, parts and collision.
• Gross profit trends by department.
• Expense trends, including personnel, advertising, facility and floorplan interest.
• Owner compensation, related-party rent and other items that need normalizing.
• Income sources that may not continue under new ownership.

Look for how each department contributes and how dependent profits are on vehicle sales versus service and parts.

2. Franchise and Manufacturer Relationship (Franchised Dealers)

• Current franchise or dealer sales and service agreements.
• Terms that affect a change in ownership, including approval requirements.
• Any facility requirements or pending commitments.
• Performance standings or correspondence regarding sales or customer satisfaction performance.
• Any disputes or notices.
• The buyer’s own eligibility for approval.

Manufacturer approval often determines the deal’s timeline and feasibility. See manufacturer approval in franchised dealership acquisitions.

3. Inventory and Floorplan

• New and used vehicle inventory listings, with age and cost.
• Aged units and how they will be valued or excluded.
• Demonstrators and loaners.
• Parts inventory, including obsolete and slow-moving parts.
• Current floorplan arrangements, balances and any curtailments due.
• How the seller’s floorplan will be paid off at closing and how you will finance acquired inventory.
• Any inventory that is sold but not yet paid for (“sold out of trust” risk), which should be ruled out.

Physical inventory counts close to closing are standard. See our guide to auto dealership cash flow for how floorplan and inventory interact with cash.

4. Receivables and Contracts-in-Transit

• Contracts-in-transit: vehicle sales financed by third parties where funding has not yet been received.
• Aging of contracts-in-transit and any that have been rejected or delayed.
• Service and parts receivables, including warranty and wholesale parts accounts.
• Manufacturer receivables such as incentives or warranty claims, where applicable.
• How these will be handled at closing.

5. Service, Parts and Collision Operations

• Service department revenue by customer pay, warranty and internal work.
• Technician headcount, experience, pay plans and turnover.
• Service bay count and utilization.
• Equipment condition and needs.
• Parts department sales mix and inventory management.
• Collision center performance and relationships, if applicable. See dealership collision centers.

6. People and Management

• Organizational chart and key managers by department.
• Pay plans, commission structures and any retention commitments.
• Turnover history, especially among salespeople and technicians.
• Which managers are likely to stay after closing.
• The seller’s role and planned transition support.

7. Real Estate and Facilities

• Whether the real estate is owned by the dealership, the dealer personally or a third party.
• Lease terms, remaining term, renewal options and assignment provisions if leased.
• Appraisal and environmental review, particularly for service and body shop areas.
• Facility condition, including roof, HVAC, lifts, paint booths and paving.
• Zoning and signage.
• Any required facility upgrades.

See dealership real estate: own, lease or hold separately.

8. Legal, Regulatory and Compliance

• Corporate records and ownership structure.
• Pending litigation, customer complaints and regulatory matters.
• Compliance practices in sales and finance and insurance operations, reviewed with counsel.
• Required dealer licenses and whether they transfer.
• Environmental matters related to service and body shop operations.

9. Systems and Contracts

• Dealer management and other technology systems and whether contracts transfer.
• Vendor agreements and their terms.
• Advertising commitments.
• Any service contract or product provider arrangements.

10. Deal Structure

Whether you buy the dealership’s assets or its ownership interests affects which liabilities you assume, how franchise and license transfers work and how the deal is financed. See asset purchase vs. stock purchase in a dealership acquisition.

11. Financing Diligence

Your lender will review:

• Normalized cash flow and debt service coverage.
• The purchase agreement, including allocation among goodwill, fixed assets, inventory and real estate.
• Your dealership experience and management plan.
• Your equity and liquidity.
• Manufacturer approval status, where applicable.
• Your floorplan arrangement for acquired inventory, which is provided separately by floorplan lenders.
• Working capital after closing.

See our guide to preparing a dealership loan package.

12. Finance and Insurance Operations

• Which third-party finance sources the dealership uses and whether those relationships will continue under new ownership.
• How the finance office documents deals and stores deal files.
• Chargeback history on cancelled service contracts and other products.
• Rejected or returned deals and the reasons behind them.
• Training and oversight practices, reviewed with counsel.

Finance and insurance income can be a meaningful part of dealership profit, and it is also an area where compliance issues can surface after closing. Buyers should understand how the income is generated, not just how much there is.

13. Used Vehicle Operations

• How used vehicles are sourced: trade-ins, auctions, direct purchases from consumers or other channels.
• Who makes appraisal and buying decisions, and whether that person will stay.
• Reconditioning process, cost tracking and time from acquisition to frontline-ready.
• Pricing practices and how aged units are managed.
• Wholesale results and how often units are wholesaled at a loss.

Used vehicle operations often depend heavily on a small number of people. If appraisal and buying skill leaves with the seller or a departing manager, results can change quickly.

14. Sequencing Diligence With Approval and Financing

In a franchised acquisition, diligence, manufacturer approval and financing all run on overlapping timelines. A practical sequence often looks like this:

• Early financial review to confirm the deal makes sense before significant legal and approval costs are incurred.
• Submission of the buyer’s approval materials once the purchase agreement is signed.
• Lender underwriting in parallel, including appraisal and environmental review of any real estate.
• Detailed operational diligence on departments, staff and systems.
• Final inventory counts, contract-in-transit cut-off and floorplan payoff coordination near closing.

Lining these up avoids the common problem of approval arriving before financing is ready, or diligence findings surfacing after the buyer has spent heavily on the process.

15. Closing-Day Items

• Physical counts of new and used vehicles, demonstrators and parts.
• Agreed treatment of contracts-in-transit and receivables as of the cut-off.
• Payoff letters from the seller’s floorplan provider and other lenders.
• Your own floorplan line approved and ready to fund acquired inventory.
• Transfers or new issuance of dealer licenses and registrations.
• Employee transition, payroll setup and benefits continuity.

Additional Diligence for Multi-Location Acquisitions

Buying several stores at once, or buying a store out of a larger group, adds its own diligence questions:

• Which costs are shared across locations, such as accounting, marketing, management and technology, and what it will cost to replace them.
• Inter-store vehicle transfers and whether they shift profit between locations.
• Centralized functions such as a shared reconditioning center, call center or parts warehouse, and whether they are included.
• Group-level debt, guarantees and cross-default provisions that must be released.
• Separate franchise approvals for each franchised rooftop, which may move on different timelines.
• Real estate for each location, which may be owned by different entities or partners.

Standalone financial statements for each store, with clear allocation of shared costs, are the foundation for evaluating a multi-location deal and for sizing its financing. See our guide to dealership group financing for how larger transactions are typically structured.

Common Red Flags

• Department results that cannot be reconciled to overall financials.
• Aged inventory or parts that are carried at unrealistic values.
• Old or rejected contracts-in-transit.
• Pending facility requirements not reflected in the price.
• Key managers or technicians planning to leave.
• A short remaining real estate lease.
• Unresolved compliance or customer complaint issues.

Frequently Asked Questions

What is the most important part of dealership due diligence?
It depends on the store, but earnings quality, manufacturer approval for franchised dealers and the real estate arrangement often have the greatest impact on price and financing.

How is inventory handled in a dealership purchase?
Inventory is usually counted and valued separately at closing, and the seller’s floorplan is paid off from proceeds.

Do lenders review department-level results?
Often, yes. Understanding which departments produce profit helps lenders evaluate stability.

US Professional Funding helps buyers finance the acquisition of operating dealerships, including goodwill, owner-occupied real estate where appropriate and working capital. Learn more about our auto dealership acquisition financing.

Contact A Financing Specialist Today