Is this wholesale business a good buy? Also is it worth it for us?!
February 26, 2016 5:59 AM   Subscribe

We're thinking of adding a new element to our business, a wholesale business to business arm. I run a DIY shop on the high street and one of our long-standing suppliers is moving to Southern Spain to retire and her 30 year established wholesale business of supplying little sundry items has been offered to us first before she offers it to the wider market.

She sells for example: washing up bowls, sink plugs, WD40, dustpan brushes etc etc.

Her prices (for us to buy from her at 'trade') have always been remarkably good and the quality of her products excellent. She used to deliver to us in a small green van. That was the way the business was run.

If we bought the business we'd try to convert the company's trade customers (there are thirty+, I'm told) to order online from us on a specialist B2B website and then we'd either drive out with the goods or despatch them with a courier depending on distance and weight.

The business stats are:

Turnover: £35,000
Asking price: £5,500
Net profit: £5,000
Customers: 32 exactly, all serious and regular.

What do you think? The standard markup margin applied by the lady owner across all products was 33.33%.

Turnover and net profit are both quite low, but we hope with a bit of effort we can recruit more customers and with an easy to use website rather than having to place orders by telephone...

The question is, is the extra toil worth it for the (currently) small bottom line?

Thank you - I know this isn't a business forum but there are some wise old owls here.
posted by anonymous to Work & Money (8 answers total)
Well, to buy a business for one year profit is very cheap.

The problem: It is a tiny business. 5000 pound "profit"? I assume she did not pay herself a salary.
Assume you would have to pay someone to run the business a normal salary. What is the profit then? You could be deep in the red....
posted by yoyo_nyc at 6:03 AM on February 26, 2016 [1 favorite]

For what its worth it is my understanding that restaurant pricing (the sales price of restaurants as businesses, not the prices they charge for food) usually reflects 1-3x the annual income generated (combined profits and payments to owners).
posted by Exceptional_Hubris at 6:21 AM on February 26, 2016

If her markup is 33%, that means she takes in £8750 annually. Do you think it is reasonable to cover delivery, admin, overhead, losses, customer service, etc. for £3750 annually in order to leave that £5,000 profit? It sounds more likely that the net profit is the wages to pay for the person to run this business. How much time would that take? More than £5,000 annually?
posted by ssg at 7:04 AM on February 26, 2016

Things to think about and investigate (as someone who is very familiar with small businesses and has some retail management experience):

1) What's her process and cost (time and money) and relationship with her suppliers? Are any of them possibly going out of business or moving to requiring large orders that she can't meet? This sort of "small wholesaler" business seems on shaky ground as more and more manufacturers are able to either deal directly with retailers or prefer to deal with giant chain stores or large wholesalers that order large quantities all at once.

2) we'd try to convert the company's trade customers (there are thirty+, I'm told) to order online from us on a specialist B2B website

What if this doesn't happen? I could certainly see a situation where some of her customers are uncomfortable ordering via web and/or prefer the personal touch of calling her on the phone and getting a little chit-chat in while they order from her. What if, say, ten of her current customers either refuse to use the website or just move on to another supplier? What does that do to your profit margin and/or do you have the personnel and time to continue to service those customers by phone?

3) then we'd either drive out with the goods or despatch them with a courier depending on distance and weight.

What's her current delivery schedule? Does she have regular rounds? Or are her customers used to giving her a ring with an order and she'll pop round in 24 hours or less? This could be more of the "personal touch" that some people really like, and if you try to force them to a more impersonal schedule they may balk. Or you could continue the "personal touch" aspect if you have the people and vehicles to do it or if you're willing to spend on couriers, but both of these will affect your profit margin.

4) You need a look at her books to see the schedule of payables vs receivables. IOW, if she has to pay her suppliers in 30 days but lets her customers float payment for 60 to 90 days, there could be cash flow problems. Do you have enough of a financial cushion to cover that kind of situation?

I'm not saying it can't work out, it very well might, but (speaking from experience) when you're looking at expanding a business to cover something similar but not the same, it can be easy to see the similarities and harder to recognize the differences and to consider whether your time and people and profit margins can handle the different aspects of the new business.
posted by soundguy99 at 7:17 AM on February 26, 2016 [3 favorites]

How much time will this additional work take you to do? It's a very different question if it'll be 10 hours of work or 40. And is it work you actually like to do? Dealing with b2b is often not as fun as craft shop customers.
posted by Candleman at 9:19 AM on February 26, 2016

an easy to use website rather than having to place orders by telephone

You are assuming that the current customers want to do this.

I don't know how things are in England, but where I live this sort of little local distributor is dropping like flies. There's markup every time product changes hands and many places are cutting out the middleman.

There are still people out there -- and some of them run businesses this way -- who really, really dislike using the internet for things. Some people have a preference for using the phone even if they have internet access and market their business online.

There is a definite market segment that can be served by taking phone orders, but it's a shrinking market. Maybe some of these people will be willing to order online from you. Maybe some of them will order elsewhere if they can't order by phone. And you might lose some of them even if you take phone orders, because you don't have the same personal relationship that the previous owner did.

There are also some advantages to a small distributor in using the phone -- you are much more likely to hear about new things your customer needs, about expansions and closings, about problems they are having that you might be able to solve.

As to recruiting new customers with a website -- these businesses are already getting their products somewhere. If there aren't other little local wholesalers taking orders by phone, they are buying them online, possibly cheaper than you would provide them.

Where does this business buy it's stock? Does that place only sell to wholesalers, or would they be one of your competitors?

Customers: 32 exactly, all serious and regular

This is not nearly enough to know about the customers. First of all, are they retailers who will resell the items, or other businesses that need WD-40 and sink plugs as sundries? What's keeping the customers from buying things online now, do they need the items immediately? Is there some special reason why they prefer the phone, such as a boss who is in the field all day and needs orders delivered onsite? Are some of the customers ready to retire and close shop?

There's only 32 customers. That's not that many. Learn about them. Yes, it's some extra toil to learn about them, but you will have to if you buy this business anyhow.
posted by yohko at 10:12 AM on February 26, 2016 [1 favorite]

One other question is the opportunity cost. What if you were going to put that time and money into building your business? Is there something that you could do to invest in your core business that might give you better returns?
posted by metahawk at 11:17 AM on February 26, 2016 [1 favorite]

How many hours of work a week are required to make the 96 pounds a week profit?
posted by LoveHam at 12:51 PM on February 26, 2016

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