If you are debating whether or not to start a wholesale business, you have come to the right place. Even if you have no experience in the industry, with our guide, you should be selling like a pro in short order.
As a wholesaler, you are going to be providing products to other companies at a discounted price. Wholesalers are basically the “middle man” between suppliers or manufacturers and retail stores, so your business model will essentially involve buying large quantities of merchandise from the manufacturers, storing them in warehouses, and then reselling them to retailers. Since you will be buying in such large quantities, you will be getting a significant discount, which allows you to then make a profit from selling to retailers with a small mark-up on each item.
Understanding Profit Margins
Now that you know what wholesalers do, you also need to understand profit margins in order to make money. The profit margin on products is calculated as a gross profit margin and does not factor in the operating expenses, so margins must be healthy enough to generate a net profit after all expenses, according to Chron. To calculate the product profit margin, the wholesaler takes the received price (revenue), subtracts the acquisition price (cost), and then divides that figure by the received price and, finally, multiplies by 100 to express the margin as a percentage.
For example, a coffee mug costs the wholesaler $1, which is the acquisition cost. The wholesaler sells it to a retailer for $5. The profit margin for each mug is 80 percent.
Gross profit = ($5 - $1) ÷ $5 × 100 = 80 percent.
How Much Money Can You Make?
Total U.S. wholesale distributor sales are approximately $3.2 trillion. Since 1987, wholesale distributors’ share of U.S. private industry gross domestic product (GDP) has remained steady at seven percent, with segments ranging from grocery and food-service distributors (which make up 13 percent of the total, or $424.7 billion in revenues) to furniture and home furnishings wholesalers (comprising 2 percent of the total, or $48.7 billion in revenues).
8 Wholesale Business Tips for Beginners
With the general idea of how a wholesale business runs and the profits you can make on the table, here are all of the basics you need to know in order to start a wholesale company:
- Decide What You Want to Sell
- Choose a Business Name
- Obtain the Necessary Legal Documents
- Find a Place to Set Up Shop
- Choose Reliable Manufacturers
- Create a Website
- Find Retailers to Sell Your Products
- Bring Excellent Customer Service to the Table
1. Decide What You Want to Sell
Rather than going all in and trying to manage wholesaling different types of goods, it is better to start off by selling a certain category of products. There are so many options out there, including selling home goods, electronics, and health and wellness, just to name a few. Pick something you are passionate about or are just really interested in, and you can slowly build your distribution from there.
Pro Tip: Do your research on the type of products you choose to sell and find a particular item that is in-demand. If there is already a desire out there for this product, you are likely to start making sales fast.
2. Choose a Business Name
Once you figure out the types of products you are going to sell, now you need to decide upon a business name. Before you start ordering signs and business cards, you should make sure your name is not already being used by another company. If you choose a name that is already in use, you will have trouble forming a business entity and you also may be infringing another company’s trademarks, according to LegalZoom. To check and see the names that have already been taken, most states have an online entity name check tool right on their website which you can use.
Pro Tip: Be sure to also choose a business entity, since certain business structures have different benefits that they offer. Some wholesalers operate as an LLC, which shields them from personal liability while providing the option to be taxed either as a sole proprietor or corporation. Some might also find it beneficial to register as an S-corp for tax purposes.
3. Obtain the Necessary Legal Documents
Before starting a business, you need to obtain your wholesale license, as well as other legal documents to run things efficiently. According to Enterprise League, this includes:
- A sales tax permit.
This permit allows you to charge sales tax on the products and services you sell. Most goods must have sales tax paid on them, but this is only required once by the final buyer in the chain. - A business interruption insurance policy.
While a standard business interruption insurance policy will not cover the economic impact of a pandemic like the coronavirus, there are two extensions which, depending on the specific wording of the policy, might cover coronavirus-related business disruption – the Infectious Disease Extension and Denial of Access Extension (non-damage). - Contracts of employment.
All employers are legally bound to provide the following: they must provide a contract of employment on day one. They must have policies that cover all statutory rights including Discipline, Grievance, Flexible Working, Maternity, Adoption, Paternity, Parental Leave, and Shared Parental Leave. - Put contracts in place with your customers and suppliers.
Your client contract is the most important contract in your business, as this is the one that generates revenue. Whether that is a license, terms and conditions, or user terms, the contract needs to be reasonable but also needs to protect your business.
Pro Tip: Check with your state’s tax office, which you can find here, about how to obtain a wholesale license. You can also check with your Secretary of State’s office for any other types of business licenses or permits you may need.
4. Find a Place to Set Up Shop
Depending on the types of products you choose to sell, you now need to find a place to store your merchandise. According to Entrepreneur, wholesale distribution companies are frequently started in areas where land is not too expensive and where buying or renting warehouse space is affordable. It is best to not rent a space right in the middle of downtown, but you also want to make sure you are not so out of the way where your clients find it hard to reach you.
Pro Tip: Start out in a small space, and as your company grows, take note of how much space you need. This way when your lease is up, you can start looking for a better location to suit your needs and may already have some revenue to help cover the costs. Also be sure to have enough space for things like inventory, machinery, and employee necessities, like a break room and bathrooms.
5. Choose Reliable Manufacturers
Suppliers should not be selected based solely on the price of the product. You need to make sure they are easy to get ahold of, and then check their customer service by asking around in the industry and finding other companies that have worked with them. You also need to factor in speed, quality, and location to pick the best suppliers. Aside from large-scale manufacturers, you can also source products from independent artisans.
Pro Tip: According to Enterprise League, find a direct supplier of the goods or products you want to sell because if it will come directly from them, the products will be priced lower compared to if you will be buying it from other resellers too.
6. Create a Website
Even if you just have a Facebook business page and sell your products through there, every business needs an online presence. Make sure whatever you are using is easy to navigate and accessible, with the prices clearly visible. When you are not creating professional business relationships in person, your website does that for you, so if it does not look good, retailers may very well think your business skills are just as bad as your ecommerce presence.
Pro Tip: Whether you create an official website or begin selling from your Facebook business page, always be sure to include high quality images of your products. No one will buy your merchandise if they do not know what they are getting.
7. Find Retailers to Sell Your Products
Since resellers are the ones who will be showcasing your merchandise to consumers, this is a crucial step for steady growth. It is wise to set aside some marketing dollars so that you can get your company out there, even if you have a website or Facebook page. If a retailer does not know who you are or what you sell, they will not know how to look for you. NerdWallet offers some great tips for marketing when you are just starting your wholesale business:
- Send direct mail.
Running direct mail campaigns is an affordable, yet effective way to market your business. Be sure to make your campaigns eye-catching and mention any deals or promotions you are offering. - Advertise in relevant publications.
With an increased attention put on digital marketing these days, you might not have tried purchasing ad space in local or industry-related publications, like wholesale trade magazines, but they can be a great way to reach your desired customers. - Post sponsored media content.
On social media platforms like Facebook or Twitter, you can publish sponsored social media posts. These posts can be targeted to your ideal customer’s demographics, which is what makes them an asset to your marketing strategy.
Pro Tip: Trade shows offer the perfect atmosphere to meet with retailers one-on-one to get a better idea of who they are, how they do business, the types of customers who shop from them, and how fast they move products. Even though they can be expensive and time consuming, it is an easy way to get in front of thousands of resellers and make your grand introduction.
8. Bring Excellent Customer Service to the Table
Besides selling quality products, the only true way to be a profitable business is through excellent customer service. This is a core function which will create the most customer loyalty for your business – whether that means answering customer questions, pushing out upgrades on your products, or repair and maintenance.
Pro Tip: In order to be available for every one of your clients, sometimes that means hiring new employees to take on the extra work. No one wants to wait days or even weeks to have their questions answered. Not only can hiring more employees help keep your customers happy, but they can also bring in more revenue.
Starting any business, no matter how large or small, can be a daunting task. Whether you are just learning how to start a wholesale company, or you are looking to expand your current operation, let these tips be your guide to help establish a solid base and give you ideas about how you can continue to increase profits.