What Is a Franchised Dealership?

While most people think of car dealerships as either used car dealerships or new car dealerships, there's also one other big distinction as well: those that are franchised and those that are independent. In fact, all new car dealerships are franchised because manufacturers will only sell vehicles to a franchised dealer. When it comes to used cars, though, independent dealers can get vehicles in a number of ways that allow them to avoid buying a franchise.

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A franchised dealership can buy and sell vehicles direct from the manufacturer.

Just like when someone buys a McDonald's franchise so they can sell McDonald's products, an Audi dealership is owned by someone who has bought a franchise to sell Audis. This means he can only buy and sell Audi vehicles. While you may occasionally see a franchise that works with different brands, this is actually because those brands are owned by one large parent company. For example, General Motors owns Buick, Chevrolet, GMC and Cadillac, while Infiniti, Mitsubishi and Nissan are all owned by Renault-Nissan-Mitsubishi Alliance.

When it comes to used cars, franchised dealers can accept trade-ins from any car maker, but they can't resell vehicles from other manufacturers. Those that are from the right manufacturer can be resold at the dealership, or if they are in particularly good condition, the dealer may sell them back to the manufacturer to be part of the manufacturer's certified preowned program, or CPO. Trade-ins from other companies may be sold or traded to franchised dealers working with other manufacturers or independent dealerships. The dealer may then sell trade-ins, CPO vehicles and used cars from other sources as long as they are from the same manufacturer.

The benefit to the franchisee is that it has the option to sell new and CPO cars from a certain manufacturer, which they would not get to do otherwise. Manufacturers benefit because they do not need to distribute their products, and dealers order vehicles before the production is complete, so the risk of unsold inventory is transferred to the dealerships. It's worth noting that many states actually prohibit manufacturers from opening their own dealerships to sell vehicles directly to the public in what are known as "dealer franchise laws". Some new car companies, like Tesla, are trying to have these laws repealed so they can sell vehicles to the public without third-party dealerships.

Independent used car dealers are those who have no affiliation with a specific manufacturer and sell vehicles of any make or model. These are often local dealerships with names like John's Used Cars or Globetown Used Car Emporium, unlike franchised dealerships that will always have the brand in its name, such as Bigtown Ford or Bob Stranger's BMW. There are some larger chains of independent dealerships as well, such as CarMax and AutoNation.

Independent dealerships get their vehicles through trade-ins, auctions, private sales and other sources but never from the manufacturers themselves. While they can offer CPOs that are certified by other agencies, these will not be manufacturer certified preowned cars and will lack the manufacturer-backed warranty for which many buyers are looking when they seek out CPOs.

In between fully franchised dealers and independent dealers are independent franchised dealers. They can sell new cars from a particular manufacturer but not manufacturer certified preowned cars.

In exchange for giving up access to manufacturer CPO vehicles, these dealers instead have the flexibility to sell used cars from any manufacturer. This makes it easier to deal with trade-ins since the dealership can resell the vehicle itself, but it does prevent the dealership from being able to sell potential manufacturer CPOs back to the manufacturer and does not allow them the income from this premium used car market.