Start a Distribution Business

Getting into product distribution means entering a big industry. For example, there are roughly 300,000 distributors in the United States that produce a combined $3.2 trillion in annual revenue. Despite this large number of participants, the fragmented and competitive nature of the industry allows for plenty of profitable new entrants.[1] With some planning and entrepreneurial spirit, you too can be on your way to owning a successful distribution business.

Steps

Creating a Business Strategy

  1. Decide what type of distribution business you will run. Distributors can be split into two categories based upon who they serve. First, retail distributors buy from wholesalers or manufacturers and sell products directly to consumers (end-users). In contrast, wholesale merchant distributors buy from manufacturers and resell the products to retailers or other distributors.[2] Which one is right for your business will depend on your goals and experience.
  2. Decide what you would like to distribute. You could focus on a specific product or offer a variety of items. Your decision could be based on a passion or on a product that is hard to find in your own personal experience.
    • While many large companies are served by equally large distributors, these distributors are unwilling or unable to serve smaller, more specialized business. A good idea, especially in a crowded market like beverage distribution, might be to provide niche products to these specialized retailers.[1]
  3. Put together a business plan that lays out the full vision of your new distribution business. A business plan allows you to follow a direction for making your business a success. This plan will included the type of distributor you will be, the products you plan to offer (at least initially), the name of your company, your target customer base, shipping method, and a general strategy. This strategy can be as simple as focusing on fast and effective service, or more complicated, such as specifying a way to offer specialized products that are unavailable from other distributors.
  4. Estimate your startup costs. In addition to a business plan, you will also need some idea of how much money it will take to get your business up and running. As a distributor, your single biggest expense will be inventory. This means that your startup costs will vary widely depending on what you are planning on selling. You will also need a place of business, office equipment, and some warehouse equipment (like forklifts if you have heavy products or shelves if you have lighter products).
    • For an example of how much costs can vary, two successful business in different markets started with $700 and $1.5 million, respectively. The first, a tie company, started with such a small amount because the business was run from home, started with low inventory costs, and didn't require any equipment to manage. The second, a fine wine retailer, had expensive product to buy, had to rent a large warehouse, and had high operating expenses like temperature-controlling the warehouse and investing in equipment to transport the product around the warehouse and to customers.[1]
    • The advent of online distribution has also created new options for distribution businesses. One of these, drop-shipping, allows for distributors to avoid all inventory control and shipping issues by never taking physical possession of the product. Never taking control of inventory means that your initial investment can be much lower. However, this a crowded market that can be difficult to make money in.[3] See Start a Drop Shipping Business for more information.
  5. Figure out how to sell your products. This will depend largely on who your customers are and what type of products you're selling. In any case, your goal should be to let potential customers know about your business and what you can offer. This can mean anything from advertising to personal meetings with store owners to search-engine optimization (SEO).
    • As part of selling, put together a marketing plan so that you can promote your services. This may include the costs of printing brochures, creating catalogues detailing your offerings, and placing ads in trade journals or magazines. As a small business, you can expect to do a lot of marketing for the first few years until you have a good-sized customer base and have established a reputation.[2] See how to create a marketing plan for more information.
  6. Determine how you will be funding your business. With low startup costs, you may be able to purchase your inventory and get your business started with money you already have. However, more expensive startup costs may require you to take out a loan. See how to get a small business loan for more information.

Getting Your Business Started

  1. Form your company legally. If you're planning to operate as a corporation, LLC, or any other type of company, you'll have to legally create the company before you can do business. Check with your state regulations and see if you need to create an operating agreement or another type of founding document. Gather any business partners you have for this venture and have them sign any legal documents you fill out.
    • The primary advantage of forming a company is that your finances will be legally separated from those of your company. This minimizes risk to you in the event that your business is sued or goes into bankruptcy.
  2. Make your business official by getting it licensed and registered. You will have to register your "doing business as" (company) name with your city or county business office. Other legal steps may be required to get your business started. Contact your local Small Business Administration office for more information.
  3. Find a location for your business. The size of the space you need to hold your inventory will be determined by the size of your product and your delivery method (you don't need inventory space for drop-shipping). You should consider starting off small as your business builds a reputation. As your business grows, you can move into larger facilities that can accommodate your inventory needs, such as a distribution warehouse.
    • It is conceivable that a successful distribution business could be built and run from your home. This depends on the physical size of your inventory, however.[2]
  4. Contact manufacturers or wholesalers of your products. You will need to find sources from which you will buy your product. To locate manufacturers and wholesalers, contact the National Association of Wholesaler-Distributors or use an online resource like http://thomasnet.com.
  5. Purchase inventory. Once you've found a source for product, it's time to place your first order. Unless you're using the drop-shipping model, you'll need to purchase however much inventory you think you can sell. Keep in mind not only your budget and space constraints but also how many items you will likely sell at first. This is especially true of products with a short shelf-life. When ordering inventory, keep the following tips in mind:
    • Don't buy too much inventory, especially at first.
    • Try to estimate your customer's needs before you invest in inventory.
    • If you can get away with low overhead (storing items at home or at a cheap location) at first, go for it.
    • Purchase inventory to a point where you can sell that inventory before you have to pay the manufacturer or distributor for it.[1]
  6. Create a website for your business. In addition to simple contact information, this website should describe prices and product offerings. This is especially important if you sell directly to consumers.
    • You can also invest in search engine optimization (SEO) that directs potential customers directly to your website by placing it higher in search engine results. See how to improve search engine optimization for more information.
  7. Design a catalog that lays out your products. You can send these out to potential clients so that they can see what you have to offer. Another option is to highlight a few items, and then lead your potential clients to a website that shows off your full inventory.
  8. Market your product to potential customers. Send out your catalog to potential customers in your area. You can also make cold calls or place ads in trade publication relevant to your products. With some luck and salesmanship, your first orders will be coming in soon!

Video

Tips

  • Distribution is all about covering the spread, or making sure that you charge enough for your products to cover your cost in buying them and your operating expenses with a bit left over for you to keep as profit. A good model in determining your prices is to copy the markup used by the manufacturer. For example, if they produce as a product for $5 and sell it to you for $10 (a 100% markup), you should sell the product for $20 (a 100% markup from $10). This, of course, is only a general guideline.[1] What you end up charging for your product will also depend on your market and your competitor's prices.

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Sources and Citations

  1. ↑ 1.0 1.1 1.2 1.3 1.4 http://www.entrepreneur.com/article/190460
  2. ↑ 2.0 2.1 2.2 http://www.entrepreneurmag.co.za/ask-entrepreneur/start-up-industry-specific-ask-entrepreneur/how-does-one-go-about-starting-a-distribution-business-or-how-do-you-become-a-seller-for-an-international-company-locally-sa/
  3. ↑ https://www.doba.com/how-dropshipping-works/drop-shipping-basics/

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