How to Start a Wholesale Distribution Business

For entrepreneurs looking to start their own wholesale distributorship, there are basically three avenues to choose from: buy an existing business, start from scratch or buy into a business opportunity. Buying an existing business can be costly and may even be risky, depending on the level of success and reputation of the distributorship you want to buy. The positive side of buying a business is that you can probably tap into the seller's knowledge bank, and you may even inherit his or her existing client base, which could prove extremely valuable.

The second option, starting from scratch, can also be costly, but it allows for a true "make or break it yourself" scenario that is guaranteed not to be preceded by an existing owner's reputation. On the downside, you will be building a reputation from scratch, which means lots of sales and marketing for at least the first two years or until your client base is large enough to reach critical mass.

The last option is perhaps the most risky, as all business opportunities must be thoroughly explored before any money or precious time is invested. However, the right opportunity can mean support, training and quick success if the originating company has already proven itself to be profitable, reputable and durable.

During the startup process, you'll also need to assess your own financial situation and decide if you're going to start your business on a full- or part-time basis. A full-time commitment probably means quicker success, mainly because you will be devoting all your time to the new company's success.

Because the amount of startup capital necessary will be highly dependent on what you choose to sell, the numbers vary. For instance, an Ohio-based wholesale distributor of men's ties and belts started his company with $700 worth of closeout ties bought from the manufacturer and a few basic pieces of office equipment. At the higher end of the spectrum, a Virginia-based distributor of fine wines started with $1.5 million used mainly for inventory, a large warehouse, internal necessities (pallet racking, pallets, forklift), and a few Chevrolet Astro vans for delivery.

Like most startups, the average wholesale distributor will need to be in business two to five years to be profitable. There are exceptions, of course. Take, for example, the ambitious entrepreneur who sets up his garage as a warehouse to stock full of small hand tools. Using his own vehicle and relying on the low overhead that his home provides, he could conceivably start making money within six to 12 months.

"Wholesale distribution is a very large segment of the economy and constitutes about 7 percent of the nation's GDP," says Pembroke Consulting Inc.'s Fein. "That said, there are many different subsegments and industries within the realm of wholesale distribution, and some offer much greater opportunities than others."

Among those subsegments are wholesale distributors that specialize in a unique niche (e.g., the distributor that sells specialty foods to grocery stores), larger distributors that sell everything from soup to nuts (e.g., the distributor with warehouses nationwide and a large stock of various, unrelated closeout items), and midsized distributors who choose an industry (hand tools, for example) and offer a variety of products to myriad customers.

Operations
A wholesale distributor's initial steps when venturing into the entrepreneurial landscape include defining a customer base and locating reliable sources of product. The latter will soon become commonly known as your "vendors" or "suppliers."

The cornerstone of every distribution cycle, however, is the basic flow of product from manufacturer to distributor to customer. As a wholesale distributor, your position on that supply chain (a supply chain is a set of resources and processes that begins with the sourcing of raw material and extends through the delivery of items to the final consumer) will involve matching up the manufacturer and customer by obtaining quality products at a reasonable price and then selling them to the companies that need them.

In its simplest form, distribution means purchasing a product from a source-usually a manufacturer, but sometimes another distributor-and selling it to your customer. As a wholesale distributor, you will specialize in selling to customers-and even other distributors-who are in the business of selling to end users (usually the general public). It's one of the purest examples of the business-to-business function, as opposed to a business-to-consumer function, in which companies sell to the general public.

Weighing It Out: Operating Costs
No two distribution companies are alike, and each has its own unique needs. The entrepreneur who is selling closeout T-shirts from his basement, for example, has very different startup financial needs than the one selling power tools from a warehouse in the middle of an industrial park.

Regardless of where a distributor sets up shop, some basic operating costs apply across the board. For starters, necessities like office space, a telephone, fax machine and personal computer will make up the core of your business. This means an office rental fee if you're working from anywhere but home, a telephone bill and ISP fees for getting on the internet.

No matter what type of products you plan to carry, you'll need some type of warehouse or storage space in which to store them; this means a leasing fee. Remember that if you lease a warehouse that has room for office space, you can combine both on one bill. If you're delivering locally, you'll also need an adequate vehicle to get around in. If your customer base is located further than 40 miles from your home base, then you'll also need to set up a working relationship with one or more shipping companies like UPS, FedEx or the U.S. Postal Service. Most distributors serve a mixed client base; some of the merchandise you move can be delivered via truck, while some will require shipping services

While they may sound a bit overwhelming, the above necessities don't always have to be expensive-especially not during the startup phase. For example, Keith Schwartz, owner of On Target Promotions, started his wholesale tie and belt distributorship from the corner of his living room. With no equipment other than a phone, fax machine and computer, he grew his company from the living room to the basement to the garage and then into a shared warehouse space (the entire process took five years). Today, the firm operates from a 50,000-square-foot distribution center in Warrensville Heights, Ohio. According to Schwartz, the firm has grown into a designer and importer of men's ties, belts, socks, wallets, photo frames and more.

To avoid liability early on in his entrepreneurial venture, Schwartz rented pallet space in someone else's warehouse, where he stored his closeout ties and belts. This meant lower overhead for the entrepreneur, along with no utility bills, leases or costly insurance policies in his name. In fact, it wasn't until he penned a deal with a Michigan distributor for a large project that he had to store product and relabel the closeout ties with his firm's own insignia. As a result, he finally rented a 1,000-square-foot warehouse space. But even that was shared, this time with another Ohio distributor. "I don't believe in having any liability if I don't have to have it," he says. "A warehouse is a liability."

The Day-to-Day Routine
Like many other businesses, wholesale distributors perform sales and marketing, accounting, shipping and receiving, and customer service functions on a daily basis. They also handle tasks like contacting existing and prospective customers, processing orders, supporting customers who need help with problems that may crop up, and doing market research (for example, who better than the "in the trenches" distributor to find out if a manufacturer's new product will be viable in a particular market?).

"One reason that wholesale distributors have increased their share of total wholesale sales is that they can perform these functions more effectively and efficiently than manufacturers or customers," comments Fein.

To handle all these tasks and whatever else may come their way during the course of the day, most distributors rely on specialized software packages that tackle such functions as inventory control, shipping and receiving, accounting, client management, and bar-coding (the application of computerized UPC codes to track inventory).

And while not every distributor has adopted the high-tech way of doing business, those who have are reaping the rewards of their investments. Redondo Beach, California-based yoga and fitness distributor YogaFit Inc., for example, has been slowly tweaking its automation strategy over the past few years, according to Beth Shaw, founder and president. Shaw says the 25-employee company sells through a website that tracks orders and manages inventory, and the company also makes use of networking among its various computers and a database management program to maintain and update client information. In business since 1994, Shaw says technology has helped increase productivity while cutting down on the amount of time spent on repetitive activities, such as entering addresses used to create mailing labels for catalogs and individual orders. Adds Shaw, "It's imperative that any new distributor realize from day one that technology will make their lives much, much easier."

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