WHEN THE DOWNTURN drove car buyers into hibernation last year, General Motors and Chrysler weren’t the only U.S. auto companies scrambling to stay afloat. Faced with record sales losses, many car dealers found themselves searching for a lifeline too.

Although the government’s cash-for-clunkers program helped bolster sales at dealerships across the country this summer, car buying remains sluggish overall. (In 2008, car companies sold just 13.2 million new vehicles in the U.S., down 18% from 16.1 million the year before, according to Autodata, a firm that tracks vehicle sales.) And considering that many economists expect unemployment to remain elevated for a prolonged period, sales are unlikely to turn around any time soon.

In spite of this weak outlook -- or, perhaps because of it -- car dealers are increasingly embracing the Internet and web services that aim to convert car browsers into car buyers.

For Scott Painter, the push to attract added sales over the Internet has been a boon. As the founder and chief executive of Zag.com, a white-label affinity car buying service based in Santa Monica, Calif., Painter helps connect dealers with members of the United Services Automobile Association and the American Automobile Association, among others, who may be interested buying. Since 2005, dealers have sold more than 80,000 cars through affinity groups using Zag.com’s auto-buying service. By the end of 2010, the company, which charges dealers a flat fee per car sold, projects it will reel in $30 million in revenue for the year. Painter refused to release bottom-line numbers, but he said Zag.com had become profitable during the recession.

SmartMoney asked Painter about his run with the four-year-old firm. Here are his condensed answers.

You consider yourself a serial entrepreneur. What was the first business you started?

When I was a teenager growing up in a rural town in North Carolina, a number of my neighbors had nice, older cars that they wanted to keep in good shape. Noting the need, I started up my own business detailing cars, Scott’s Auto Detailing service. For $40, the neighborhood kids would vacuum, wax and wash a single car. We would detail four or five cars each weekend. I guess I’ve just always been entrepreneurial.

What have you been up to since then?

Although I’ve been a part of launching many non-auto-related firms, I’m a car guy at heart. Zag.com is my 34th company. I’ve had a hand in about 13 or 14 other car companies including CarsDirect, which was one of the first Internet-based auto retailers to offer upfront pricing.

What has been the most challenging aspect of running a company that relies on car sales during this downturn?

Finding the right investors who understand the business and are committed to its success.  The past year has not been the greatest time to be in the car industry. Consumers cut back on big purchases due to the economy, and, as we’ve seen with the automobile industry, they haven’t been willing to recommit to purchasing unless there’s an incentive like the cash-for-clunkers program.

Where is car buying headed?

In the future, prices will be upfront and the price for an identically equipped vehicle will be the same no matter where in the U.S. you go. The reason? Most people feel intimidated by car salespeople. Plus, haggling can deliver dissimilar results. In a Los Angeles Porsche dealership last month, for instance, there was a 40% difference between a person who paid the most for a Porsche 911 and someone who paid the least for the same car.

What will happen to car dealerships?

Car sellers will continue to look for cost savings. Currently, there are four major costs in selling a car: marketing, commissions, overhead of the dealership and the carry cost on the car or depreciation expense (the amount of value lost when a car remains unsold). On average, these expenses amount to roughly $2,000 per car sold. There is no question that many dealers will go out of business in the next couple years thanks to the rough economy. However, the big dealership groups are getting stronger as they look for ways to reduce these costs.

We’ve talked about possible changes in the industry. What can we expect down the road from Zag.com?

We want to be able to serve the overall experience, including warrantees, repairs and roadside assistance. We are now generating $300 per sale, while dealers are making $650 on average. In time, our business model will incorporate managing more than front-end sales. By managing other aspects that car buyers may need along the way, we believe we can earn about $1,000 a car. There’s no additional cost of scaling our business; we just need to keep working on our relationships.

What's the best business advice you can offer newbie auto entrepreneurs?

When you aim to make big changes -- especially in industries as stodgy as the automobile industry -- you’re going to face pushback. Although some will laugh and poke holes in your plan, you can’t let up. Build an airtight business model, and don’t give up.