Thinking about buying 1 of my vendors...

[CPisHere]

I own a retail store (just had our 1 year anniversary!) but have been keeping my eye out for an opportunity to buy a vendor, since it seems that manufacturing scales easier than retail.

Today, we went to re-order with one of our vendors only to find out she had closed up shop. I contacted the sales rep group they use and was able to get the contact info of the owner (they said they thought it was closed for personal reasons).

I asked the owner if she would consider selling and she said yes, to follow up with her via email. So I sent the email a little while ago asking about inventory levels, what price she would consider selling for, to send me the financials, etc.

We'll see what she comes back with, but here are the complications.

#1. Her warehouse where she ships/receives is located on the other side of the country from me.
#2. She mentioned the product is manufactured in Thailand, so I did some research and found her manufacturer.

After finding her manufacturer, I was able to figure out that her gross margins are 50% (2x markup), which seems low after accounting for import fees/shipping and paying a sales rep firm, correct?

There's nothing stopping me from going to the manufacturer directly, but I don't know anything about the import/export business.

With her shutting down the business, I could fill her spot by bringing in the items myself with a new brand name, but there has to be some value to keeping her brand & established retailer relationships, but how much???

 

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[DealMaker]

I think this all boils down to her established relationships. If you can source the product yourself at comparable margins, there is not huge longterm value there unless she has done extensive branding as you mentioned in your post.

I would certainly want to take a look at the business financials p&l, etc.) before moving much further in this discussion if it were me.

 

[CPisHere]

Yes, I know I can't make a decision till I see the Financials, but for her to just shut down the business seems to strongly imply she couldn't have been making much money (profit wise)....

 

[CPisHere]

Okay, some more info. It looks like duty taxes are only 5% (for product + shipping), but the manufacturer offers free shipping and a 13% discount for the size orders I would be placing.

That puts gross margins at 54%. I could use the back of our store (or sub-lease a small part of my father-in-law's warehouse) for shipping/receiving. Shipping to the retailers gets passed down.

The costs I can think of are: a warehouse employee to ship/receive ($20k/yr), a % fee for manufacturer rep (10% of sales is my best guess - anybody know??), 3% for credit card fees, and maybe 5% in catalog/miscellaneous costs. I could do the billing myself (no A/R or net terms)... Am I missing anything?

With those costs I'm calculating the break-even to be $56k/yr in sales. An average retailer might spend a little under $1k/yr, which would mean break-even is at 60 retail stores, which seems pretty doable. I'd need to hit sales of $150k/yr to make any decent money.

 

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[purplekeys]

With her shutting down the business, I could fill her spot by bringing in the items myself with a new brand name, but there has to be some value to keeping her brand & established retailer relationships, but how much???

Have you considered buying her list and also asking her to send out some vendor transition emails to her list? That could get you somewhat similar results for a fraction of the cost. This would especially be true if you can get the same Thai production.

 

[CPisHere]

This thread didn't get many responses, but I'll go ahead and post an update.

The owner never got back in touch with me so I went ahead and put in a $500 order directly with the manufacturer. The product arrives later this week and we're going to start with it just in our store to see how it goes and if we feel like trying to scale it.

I'm also going to lunch with another 1 of my vendors to talk about a possible partnership tomorrow.

 

[PatrickP]

I think you made out good with a good choice. Thanks for the updates.

What sort of store do you own if you don't mind saying?

 

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[andviv]

I just saw this thread right now, very interesting.

Have you considered buying her list and also asking her to send out some vendor transition emails to her list? That could get you somewhat similar results for a fraction of the cost.

This is the first thought that came to mind. The only value she has is the clients list. Send her an email and ask her to name a price for the contact list, or simply offer her $1,000 for it.

Have you contacted her sales rep group? Maybe hire them to sell your stuff and suddenly you have a buying list by using the same sales people she had.

What about contacting other manufacturers? Maybe compare to manufacturers from China.

I am sure you don't need the extra employee just yet, and your $500 order looks to me like a great way of testing the waters.

How do the retailers find and order this product? If there is a little of sophistication in this industry, it may be worth the money to have an "ordering" website where they can put their order, saving you the sales rep costs. Usually with small retailers this is not the case and they prefer to order directly when the sales rep visits them, or by phone.

 

[andviv]

I'm also going to lunch with another 1 of my vendors to talk about a possible partnership tomorrow.

What type of partnership are you expecting out of this? Do they sell any other products? What would you gain by partnering with them?

 

[andviv]

How did it go with your vendor at lunch today? (can't wait to hear an update)

 

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[CPisHere]

I own a children's store with my wife.

I followed up, but the original vendor has not responded in regards to her customer list, or brand name. I could easily take her place with the sales rep group, it's just a question of if I want to get into that business.... would need more space and additional employees, but am looking into a new store location so it might work out. The other issue right now is cash flow, as all my money has to go into inventory for the store leading up to Christmas.

As for the vendor that I had lunch with, she is making each piece by hand and not taking the business anywhere, which she knows, but because she's put $25k into it she doesn't want to let go for psychological reasons. She's an awful business person (like stops returning calls, collects but doesn't cash checks, etc), but a good person and friend of my wife's. As far as being partners with her, she's a liability if she has controlling interest, so I would need at least 51% ownership.

I found a manufacturer that I think could make the products for $1 or $2, and we could do everything out of our new, bigger store - but then what value is she bringing to the table? I am still thinking about what kind of offer I could make her that would distribute profits fairly, and definitely don't want to go direct to the manufacturer and compete with her since she's a friend.

 

[andviv]

What if you buy product from her then? It sounds like what she really likes is to build the pieces, so buy from her if the price makes sense.

Of course, you make a big deal about the fact that it is hand-made in the US of A.

Give it a try with higher prices and fat margins to see what happens.

I don't see any other potential opportunity here with the limited info I have.

 

[CPisHere]

UPDATE: We did indeed end up moving to a bigger, better location. That move has not only consumed all of our cash-flow (more space = more fixtures and inventory + higher rent), but also has taken our focus off of possibly getting into manufacturing.

It's still something in the back of our minds and we'll be keeping an eye out on it. I will let you know if anything happens.

And FYI, we're now in our 3rd month at the new location (MUCH more visibility & twice as big) - January was our first month here, which was down about 10% year over year. February matched our year over year, and March has finally started to take off - hopefully it continues.

 

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