How to Avoid Overextending Your Business

Often, new entrants into the liquidation industry are enchanted with getting rich by buying merchandise for pennies on the dollar. Regardless of the type of the chosen sales channel(s) used for their business, the new entrants all have the same goal. That common goal is to progressively move toward buying in larger volumes as quickly as possible. The progression generally looks like this:

Buying Small Lots → Buying Pallets → Buying Truckloads → Securing Direct Contracts

Since the industry is a volume business, it requires significant assets to grow. The capability to secure and process large volumes quickly, is made possible by assets owned by the company in the form of warehousing, equipment, technology, staffing, and bankroll. A business ability to provide these assets either has to be built up over time from the business profits or from well-capitalized funding at start-up. Some of the assets that a business must bring to the table are:

• Large areas of square footage
• Staff to process the inventory
• Equipment to be able to move, process, and store the inventory
• Logistics capabilities to move the product in and out of the warehouse
• Technology requirements for receiving, tracking, processing, and selling the inventory
• Large network of both suppliers and customers

Large bankroll to buy volume deals, enter contracts, and show ability to pay Most of the new entrants into the industry try to grow a business too quickly without a proper asset base, and in doing so, over-extend their businesses. This over-extension can cause anything from a minor cash crunch to a long-term problem that holds the business back. In extreme cases, it can easily cause a business to fail. BuyLow Warehouse almost met its demise due to a combination of several items listed below. We are no stranger to seeing the potential in the industry and trying to go too fast.

Common Mistakes:

• Leasing too large of a warehouse
• Entering too long of a lease term
  • This can cause problems both from over-extending size requirements to out-growing the square footage faster than the lease term
• Being under-capitalized for the attempted speed of growth
• Risking too large of a percentage of the business’s cash on a single purchase
• Purchasing inventory too fast and losing control over the business’s growing inventory
• Entering into a contract with a retailer too soon
• Growing
  • Diversified set of sales channels
  • Diversified supplier base
  • Diversified & large customer base
  • Slows down the sell-through of product and causes a significant increase in the cost of carrying the product. As one of my mentors stated, “We are in the wholesale business, not the warehousing and storage business.”

Most new entrants do not have the depth of experience to quickly grow a company that can withstand the ups and downs of the industry. It simply takes too long to accumulate all of the assets necessary to have a stable company that can operate on a large scale consistently. New entrants tend to over-value the assets they have built and minimize the assets they have not yet attained. They tend to not see the complexity in their planning. In my experience, there are many moving parts in a business that cause some factors to be weighted heavier or lesser, depending on the situation.

The consistent lack of understanding of the intricacies of this industry causes new businesses to quickly over-extend. Unfortunately, the mistakes are generally not realized until they are detrimental to the business and it is too late for a simple “fix”. Most of the work in this industry has to come on the “front-end” to avoid the mistake, not on the “back-end” fixing the mistake. Most people who are new to the industry will not have the foresight to understand what safeguards to put into place. If that is you, you should strongly consider growing your company at a slower, more stable pace than you would otherwise want to.

Without experience in the industry, it is easy to look at the “other guy” and think that it is easy to duplicate, and even exceed, what they have done (many people have done this with bin stores lately). This business is inherently messy, which sometimes helps hide the genius of what the successful industry participants have done to grow their businesses. In addition, it is easy to listen to your customers asking you for everything you don’t have, instead of the customer buying what you do have. Most of the customers asking for something new will never buy the items they requested once you get them, even though they requested them!

Instead of this article being a list of “do not do” or “watch out for,” it is really a warning to be cautious, calculated, and careful as you grow and make plans for your company. It is exciting to grow a company fast, but it is more exciting to have an established company that provides you with various freedoms twenty years from now. Don’t rush it.

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Building Relationships This business can be very profitable, but it does not come without risks.

As with any start-up business, it takes experience, testing, and adaptation to create success. I hope I have helped prepare you for the beginning stages of your upcoming business venture, and perhaps interested you in developing a relationship with me. If you have additional questions, comments, or just want to chat about the industry, please do not hesitate to reach out to me through our contact page. I am here to help you!