The Surplus / Liquidation Business

Please read the following paragraghs.

This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that I am not engaged in rendering legal, accounting or other professional services. It is suggested that where ever there is mention of legal matters, or guidance is needed for accounting and taxation purposes, the reader should seek a qualified professional in those business areas.

Information contained in this publication has been carefully compiled from sources believed to be reliable, however, the accuracy of the information is not guaranteed. To the best of my knowledge there is no requirement for special licensure to use the methods and strategies outlined in this publication. I specifically disclaim any and all personal liability, public liability, loss or risk incurred as a consequence of the use, either directly or indirectly, of any information or advice provided in this publication.

Welcome! I am going to give you information on the Surplus/Liquidation industry, FREE. There are no special licenses or certification needed. There is no large financial risk involved. This information will provide you with the basic information on the Surplus/Liquidation industry.

There is no shortage of surplus merchandise. There are so many different reasons why merchandise becomes surplus, I can't cover them all. But, I will talk about some of them. It is unlikely that this business will become saturated. The amount of surplus merchandise is increasing faster than it can be moved. This is merchandise that would otherwise be thrown away. And I'm talking about new, still in the wrapper, products.

This is one business that will probably always have a future. One with the possibility of making good profits, no matter what the rest of the economy is doing. In fact, the surplus liquidation business also does well in the poor economic times, since everyone is looking for a good deal.

When you locate surplus merchandise, they will gladly provide samples for you to show your buyers. You will be "offering" surplus for a fraction of what it costs retail and "selling" it for a profit/commission and your buyers are still getting a great discount off the regular price.

Let me explain one thing, now. When I say "buy" or "sell", it does not require any of your own money. You will actually be brokering the merchandise. This is the same way real estate agents, insurance agents, and many other professionals work. In some cases, you may actually purchase and resell the merchandise, but most of the time you will be locating a buyer who actually purchases the products. You will receive a commission either from the seller or the buyer, depending on how you structure the transaction and your agreement with the seller.

O.K., you're wondering, why would anyone want to let you have their merchandise so cheap? You will helping them with a major problem. Merchandise which doesn't sell anymore through a company's normal channels is considered excess, unwanted, surplus, et cetera. It costs them money to dump their excess/surplus merchandise. The company has two choices: pay someone to haul it off or liquidate. Many companies have excess merchandise sitting in their warehouses just taking up space. When you find these kinds of things, you are helping solve their problem. Most of the time, the merchandise has already been "written off". You offer them the opportunity to make some money from their surplus. They will let you do this for them because, they are too busy running their own operations and don't have the time or the resources to find the buyers for this type of merchandise.

This article will give you the basic information you need to locate, buy and sell surplus merchandise.

FORGET IT!!! There are all kinds of advertisements offering "Get Rich Quick" schemes. Most of them are "come ons" and some are illegal or bordering on it. Don't let anyone make you think you can get rich quick. You may be able to get rich, but it will take some time and effort. In any case, there are many businesses which can be quite profitable, but there will be costs, not to mention the time and effort. In this business, most of your costs will be associated with phone bills, advertising, and postage. However, you can start with very little investment and build the business by reinvesting your profits.

The Surplus/Liquidation business is simple in concept and has great potential, however like any business, it is dependent upon the amount of time and effort the individual puts forth. The more time and effort, the greater the reward potential. You may do exceptionally well on the first deal or it may take numerous attempts before the right one comes along. The key to it all is attitude and persistence. Of course, this is a customer service business, so developing a reputation of honesty and building a relationship of trust with your sellers and buyers, is imperative to survival. There are many who offer good products, but the ones that sustain themselves offer great service. One of my biggest irritations is when I call on someone and it sounds like they are "doing me a favor" to take the time out of their busy schedule to talk to me.

The other important aspect to honest broker relationships, is the ability to gain a wider client potential. I have seen many who try to "get rich" on a deal by overpricing the merchandise. By setting a fair selling price, you can make a decent profit and make everyone feel they got a good deal. It may take a little longer to make the same amount, but the potential for referrals and future business will be much greater.

There are a number of sources that can provide information: S.B.A. - Small Business Administration; S.C.O.R.E. - Service Corps Of Retired Executives; State Comptrollers Office; IRS; local Chamber of Commerce; City Hall; etc...

The following information should help you in getting started.

1. Check with City Hall / City Planning Dept. for Deed Restrictions or Zoning Ordinances in your city on the legality of operating a business, regardless of size, from your home. Operating from a Post Office Box does not exempt you from having to comply with Deed Restrictions. (NOTE: If there is no traffic associated with your business, i.e. customers or vendors, you need to let them know. It may or may not make a difference as to whether the business is allowed in your neighborhood. Also whether you post signs for your business may make a difference.) City Hall should be able to tell you if there are any neighborhood associations which may have Deed Restrictions filed. You need to also find out if any permits or licenses are required.

 

2. Now you need to determine what your going to call your business. Whether it's "Smith Enterprises" or a unique name, you will need to file a D.B.A. ("Doing Business As") with the County Clerks Office or the Secretary of State. It is recommended to have several names picked out in case another business has already filed the name you picked. You may want to call and see if they will check the computer for the name you chose before going to the Clerks office. If you are starting a partnership, all partners will have be present to sign the form.

 

3. If you plan to Incorporate, you will need to contact the Secretary of State. You may also want to hire an attorney to draw up the papers. However there are forms that can be bought at an office supply store and books that can tell you how to draft your own Articles of Incorporation. The Secretary of State also processes Corporate Name Reservations, Limited Partnerships, Limited Liability Companies, state-wide DBA reservation, Certificate of Authority, Non-Profit registration & filings, etc.

 

4. Contact the State Comptrollers Office for information and an application for a State Sales & Use Tax Permit. There are local offices in most major cities which can send you this information.

 

5. Contact your local IRS office and request a "New Business Tax Kit". In this kit will be a form SS-4, Application for Employer Identification Number (E.I.N. or F.E.I.N). This is not required if you are a Sole Proprietor and have no employees, however it is recommended. Should you open a bank account for your business or in the future try to get a business loan, they will probably request your E.I.N.. In any case, there is no fee to file this application and it will preclude any unnecessary delays or questions and provides the legitimacy of your business.

These are the basic legalities to setting up your business. Once you have filed your D.B.A., you need to visit your office supply store for a few things. In order to give your customers, as well as other businesses, the right impression, it's a good idea to get business cards, stationary and envelopes with your business name imprinted on them. Computer generated business cards and letterhead on stationary are not acceptable by some companies or agencies. The printed products are usually higher quality and have a raised print.

The best price on business cards and stationary I found was Office Depot. Customized business cards with two colors and custom business logo cost $33 for 1000 cards. My stationary and envelopes were printed with custom logo and two colors, also. The cost for stationary was $53 / 500 sheets, and the envelopes were $61 / 500 envelopes.

Other costs to be considered: Postage, Advertising, Phone Bill, etc...

• Postage - Correspondence and Advertisement Mailings. (Pitney-Bowes offers a 90 day free trial on their postage meter equipment for new small businesses. You only pay for the postage. note: wait until you are ready to start doing a lot of mailing)
• Phone - While a separate business phone is not necessary, it should be seriously considered. (makes it easier at tax time when trying to figure deductions.) My initial deposit cost $145, installation cost was about $80 and my basic monthly bill is about $39 / month. (You will get your deposit back after 1 - 2 years with interest if you have continually paid your bill on time.) A separate fax number should also be considered. You don't have to get another phone line. For about $6/month, you can get "Distinctive Ring". If your fax machine doesn't detect the "Distinctive Ring", there are boxes on the market starting at $30 and up that will detect the ring and direct it to your phone or fax machine.
• Advertising - May be in the form of type written letters to potential customers or printing costs for flyers or other types of advertising media ( i.e. newspapers, magazines, yellow pages, handouts, etc.)
• I am running an ad in two different sections of the Yellow Pages. The cost for the first year was $768. I had to put down an initial deposit of $115 and billed $54 / month for 12 months starting when the new edition came out. The same two display ads are now costing $108 / month (no deposit required), but is still the best advertising for your dollar. When you get a business phoneline, you get a one line listing (called squint print) under the heading you choose at no charge. So I am actually listed in three different headings.

The most common home based business is a sole proprietor or general partnership. To get started in a Sole Proprietor or General Partnership:

1. File DBA with County Clerks Office. (Usually a small fee is required)
2. Contact the State Comptrollers Office in your area to obtain an application for a State Sales & Use Tax Permit. In this business, you won't be collecting sales tax very often, but you must have a permit to do business. (Usually No Fee is required)
3. Contact your local IRS office and request a "New Business Tax Kit". In this kit will be a form SS-4, Application for Employer Identification Number (E.I.N). (No Fee)
4. Purchase business cards, stationary and envelopes with your business name imprinted on them. (Approx. cost = $150)

 There are some "companies" who offer a list of so-called "wholesale contacts". However, from what I've seen, you are not missing much. I would suspect that many of them copy names & addresses from ads in other publications, faxes, etc. I have been contacted by people telling me they found us in "so-and-so" publication, and I had never heard of the "publication", much less advertised in it. All in all, the lists seem to be somewhat outdated, since those same people are often asking about a product that had been gone for a long time. Do you really expect them to reveal their good sources? I am familiar with some of the companies who offer information on the Surplus/Liquidation business and others who are in the business. A few of them are somewhat unethical. (I have dealt with them before.) Some are no longer in business. Some are importers that sell cheap junk, at "discount?".

The best way to find real sellers and buyers is to pull out the phone book and start calling. Or you may want to get one of the CD Phone books. You can look up companies by SIC code for the market they deal in. If you contact only Liquidators (not brokers who say they are liquidators), you will have to have something that is a "steal" or you will probably be wasting your time. That means the product will be first quality merchandise, at a rock-bottom price. While it depends on the product, 10% of retail (or less) may be their "rule of thumb". Keep in mind, when I say retail, I do NOT mean 'Suggested Manufacturer Retail Price', but the normal price or the price found at discount stores, such as Walmart, KMart, etc. (These are the ones your buyer may be competing with). Making contact with wholesalers, retailers, "true" exporters, etc. can be some of the better targets. Talking to other brokers is OK, as they sometimes have valid contacts, but most of the time, they are only talking to other brokers (50% of the calls I get, are from other brokers). Know who you are dealing with. If they are reluctant to provide information, use extreme caution!

Don't get carried away with the idea of finding that great deal. It might not be such a great deal. Make sure it is legal and determine the reason for the sale. If they are reluctant to provide the information you ask for, it might not be such a good deal.    If in doubt, pass it up!

Always ask if there are any Market Restrictions. These might be due to a number of reasons.

A seller may not want their product in the normal retail markets. This jeopardizes their normal "target" market for generating new sales.

Due to various reasons, the product may be for Export Only. It may be to keep the product out of the normal market. It may be due to U.S. Customs regulations or other government agency requirements.

I worked one deal, which consisted of a shipment of imported Olive Oil. The FDC (Food & Drug Commission) had changed regulations on the label requirements prior to this shipment reaching the Port of Houston. The Olive Oil could only be sold to a restaurant or hospital or other establishment involved in food preparation or it had to be exported. It could not be sold at retail to the general public, because the labeling did not meet FDC requirements.

Another deal was for a unit called an electronic muscle stimulator (EMS). The owner was sued by another company for patent infringement. The court ruled that the units were not to be sold in the U.S., so he had to throw them out or export them.

We hope this has provided a basic understanding of this business. Please click here for our Surplus/Liquidation FAQ to obtain additional information.

To learn more about the Surplus/Liquidation business, I recommend buying the book Hidden Wealth, by Henry Kulesza, which details the workings of the surplus industry. Henry Kulesza operates the website, CRICorp Liquidators and has been involved in the surplus industry for nearly twenty years.

Recognized as an author and industry expert, Mr. Kulesza was appointed to the advisory board of an Internet start-up company developing an E-bay-type Website portal for business equipment acquisition and disposal. He was qualified as an expert in the surplus goods business by the US District Court for the Northern District of Georgia and has also been hired by several top law firms to testify as an expert witness in surplus goods cases brought by federal prosecutors. The book, Hidden Wealth, is an excellent source for in-depth information on the Surplus/Liquidation business. I personally recommend Mr. Kulesza's book to anyone wishing to pursue this business.