Starting a Liquidation Business

"Closing Down" sign hung in a store window, hanging over mannequins and boxes

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In the business world, liquidation is the process to close a business and use its assets to satisfy the firm's debts. Often the failing company's goods are sold to liquidation resell businesses. Buying this product at a discount, the liquidation company then sells it to the public for deeply discounted prices.

Big Lots (BIG) is a great example of a liquidation reseller. The company is based in Ohio, but has over 1400 outlet stores and lists shares on the New York Stock Exchange (NYSE).

Running a business is hard enough, and keeping costs low is key to turning profits and staying afloat. A potentially profitable way to launch a new business is to buy liquidation goods at bargain-basement prices that you can resell for a profit. Luckily, there are lots of opportunities to find other businesses that are looking to cash out and unload inventory at pennies on the dollar.

Find and Check-Out Liquidation Wholesalers

First, look online for websites that will lead you to reputable liquidation brokers. A simple Internet search will yield dozens of websites that promise daily auctions of liquidation merchandise at deep discounts. However, the most important thing in choosing your supplier is to make sure it’s reputable.

Get the contact information and place a call or send an email. If you don’t get a response, or it just doesn’t “feel” right, move on. Check other websites for reviews about the online merchants you’re considering. They should be correctly representing the merchandise they’re selling. Search for any complaints against the vendor and see if they have a history of doing bad business. Check for references and see what others who do business with the firm think of the relationship.

In short, check them all out to make sure you don’t get a bum deal. Don’t limit your search to one website or one vendor. Look for similar products being sold by other vendors, either online or in your area.

Know Who You’re Buying From

It's typical to work with a reputable liquidation broker that deals with large quantities of liquidated goods. It’s important to understand whose goods they are selling and why, so you know what you’re dealing with. Liquidation brokers work with retailers, government agencies, and manufacturers.

You will also find liquidation auction sites. These sites may offer outdated, refurbished, or overstocked items directly from the manufacturers. Some auctions are run by brokers. You may also see liquidators listed as closeout or surplus brokers.

How A Liquidation Sale Functions

Liquidation sales will offer more than just the product or merchandise of the closing company. You may see everything from forklifts to desk lamps for sale during these "Going-Out-Of-Business" sells.

The sale usually lasts for several days or even weeks. When a large corporation is going bankrupt, they may ship merchandise to a few centralized locations and conduct the liquidation from those points. In the beginning, prices will be slightly discounted. As time passes, discounts will become larger and may be as large as 90% by the end. Of course, by the end, there may not be a lot of merchandise left to choose from and the focus may be more on selling the store's fixtures.

You should know all sales will be final and, in most cases, you will have to pay immediately for your purchases. Some brokers or auctions may have you pre-qualify by submitting financial information.

Product Buying Considerations

As you begin to investigate you will find many different products available for you to sell. Decide what types of goods you plan to buy. Just as important, know how much you plan to buy.

Depending on the supplier you choose, you may be able to buy as little as one case or a single lot of a product. Or, you may be required to buy dozens of entire pallets of the merchandise.

Total cost is important, too. Consider not only the cost of the merchandise itself but also includes the “hidden” costs like shipping or other fees. These extra expenses can impact your profit margin. Another important consideration is where you will store the merchandise once you have purchased. Perhaps you have an empty garage or shed, if not then you may need to rent a storage room or warehouse. These costs will increase your total expenses and will, again affect the profit.

Know What You’re Selling

Of course, before everything else, you should have created a well researched and thought out business plan. If you did, then you know who your customers will be and the types of product they will be buying. Your business plan research also informed your decision on how you would go about selling to your customers—online or storefront.

As you researched brokers and auctions you have discovered some general prices that the product you want to purchase will cost you. Also, you have included the other expenses it will cost to buy, transport, and store the merchandise. Now, you need to look at selling the liquidation merchandise.

Calculate the total cost to determine the amount of profit you expect to make. Make sure that the goods you're buying have a ready market that you deliver your goods to quickly. Also, inspect what you plan to buy so you know the quality of the merchandise; ensure the quality is decent and corresponds to the price you plan to charge. This is especially important with electronics and flat-packed furniture, which have high return rates.

Many times, the broker in charge of the liquidation won't check the quality of the merchandise being liquidated and will simply mark it as “unchecked” or give it some other generic term, so it’s up to you to do the quality control. If the goods have been checked and graded, you’ll pay more. One good rule of thumb is to buy as far up the liquidation chain as possible. The more times your merchandise has changed hands, the more likely it's poor quality or won’t sell.

Don’t Get Taken

Check out the price of similar items at other sites to ensure the price you’re paying is competitive. Market research is critical to ensure you don’t get overcharged and that you’ll have a place to sell your merchandise once it’s in your hands.

Buying low and selling high is at the core of any successful business. But if you're going to be successful, you need to know as much as possible about what you’re buying and how you plan to sell it.