When a company needs to get a good deal on supplies but does not have the budget for their own procurement staff, a procurement company can fill an important gap. To start a procurement company, it is best to have some contacts with suppliers in your industry or have a talent for negotiating good deals.
First Step: Market Research
Before starting any business, it is important to know the market you will be getting into. Procuring construction equipment is a vastly different market than buying computers. If you have little experience in the market you want to enter, consider working in it to begin with, or at least get to know people who are already in that business to find out everything you can.
You will also need to find out who your potential clients are, and what they currently do to buy equipment or supplies. This will invariably lead you to who your competition is. Find out as much about them as you can. Ideally, you want to learn what their processes are, where they buy from and how much they mark up the price on the goods they sell.
Example: Computer and IT Procurement
Suppose you have a background in purchasing computers and decide that is the market you want to enter. You send a survey to 100 businesses in your area, asking them where they buy their computers from, what their budgets are and what they like or dislike about their current systems. You soon discover:
- 15% buy their computers online.
- 10% buy their computers from local retail outlets.
- 75% buy their computers from one of three local value-added resellers (VARs).
Upon further investigation, you find that the VARs have trained engineers who are certified by computer and network equipment manufacturers to give them authorized reseller status. The VARs buy their computer equipment for their clients directly from the manufacturers at discount prices as authorized resellers. Talking to one sales rep, you then discover that they make most of their money selling renewable service contracts and bundle the cost of the computers into these contracts at little to no markup.
Trying to enter this market would be extremely difficult unless you have a competitive advantage.
Identify the Best Niche for Your Procurement Company
Even if you have plans to turn your company into a multinational conglomerate in the future, the best course of action when starting out is almost always to stake your first claim where the profit potential is the highest. The nature of a niche may be a single product, a few related products, or it may be a specific type of customer or a geographical area.
Example: Open-Source Laptop Computers
During your market research of local businesses, you discovered that nearly half of them are dissatisfied with their laptop computers. It turns out that two of the three local resellers are slow to fix problems, do not replace them promptly and, in the customers' opinions, charge too much.
You discuss this with a friend who tells you about the merits of open-source software and you decide Linux-based laptops are a profitable market. Initially, local sales would be only about 85 units, however, if you market these laptops to other cities, the company will drop-ship them directly to clients in less than five business days.
Selecting the Best Business Structure
Legitimate companies are only interested in doing business with other legitimate companies. This means that you will have to register your business and select a business structure. Selecting a business structure can affect how much you pay in taxes, your personal liability, as well as your ability to raise financing. It is important to consider your options first, because if you decide to change to a different structure later, there could be tax consequences. It is usually best to talk to a lawyer or business accountant before deciding on a structure.
This is often the ideal structure for a business that is just starting out. The good news is that this is the least formal structure, requires the least paperwork and gives you full control of the operations.
The bad news is that you can be held personally liable for your business's debts and obligations. Banks are usually hesitant to lend money to a sole proprietorship and investors are often skeptical about helping you with financing. Similarly, for a procurement company looking for its first customers, this structure could be a barrier, unless your business model is that of a product-sourcing consultant instead of a procurement company.
A corporation, or C corp, is an independent legal entity from its owners. It can make profits, be taxed and can be held legally liable. Owners are protected from personal liability. Forming a corporation costs more than other structures and requires more extensive record-keeping. However, good record-keeping is exactly what banks, investors and potential customers will be looking for.
An S corporation, or S corp, is another option. It is similar to a C corp, with differences in how profits are passed to the owner's personal income for tax purposes.
If you are going into business with one or more other people, a partnership may be an option. A good partner would usually bring skills, experience, contacts or money to the table to augment what you are bringing to the new company. There are two kinds of partnerships to choose from: a limited partnership (LP) or a limited liability partnership (LLP).
In an LP, one partner has unlimited liability and must pay self-employment taxes. The other partners have limited liability and claim their share of profits on their personal tax returns. Meanwhile, an LLP gives every partner protection from company debts and they are not responsible for the actions of their partners.
Limited Liability Company (LLC)
You also have the option to form an LLC, or limited liability company. This, in general terms, is like a hybrid between a corporation and a partnership. Some personal assets are protected should the company get into trouble, however you are considered self-employed.
More Paperwork to Do
In addition to your business structure, there are several other legal requirements that will need your attention, like local business permits and licensing where required, and liability insurance. If you are hiring employees, you will need to register with the IRS and, in some cases, with your state government for payroll taxes. You will also need to check out state requirements for sales taxes.
Nearly all of the information and forms you would require are available online from the corresponding government department websites. However, it would be a good idea to talk to a lawyer or accountant about these considerations when you set up the structure of your company.
Financing a Procurement Company
There are many types of businesses you can start on a shoestring budget, however, a procurement company is not generally one of them. To begin with, if you are sourcing products from suppliers and reselling them to your customers, you will need to anticipate a delay between the day your invoice is due and the day the customer pays you. It is possible to minimize this lag by offering your customers incentives to pay early, or even to pay as soon as shipping has been confirmed. However late payments, partial payments, refusals to pay and even bounced checks are some of the headaches you need to anticipate.
If you really are on a tight budget and financing is not an option, you may be able to convince suppliers to give you a line of credit. This is actually something you should try to negotiate as soon as possible. For example, if you have financing and a budget anticipating $20,000 in monthly sales, what would you do if a reliable customer suddenly wants $100,000 in materials? Having a good relationship with your supplier can help bridge such gaps, however, such amounts are usually dependent on an established relationship (which is where having an experienced, trusted partner can help).
Becoming an Independent Procurement Consultant
If proper financing just is not in the picture right now, you may want to consider starting off as a procurement consultant or a product-sourcing consultant. Instead of buying products and services and reselling them at a profit, you can sell your services to companies when they need you. Typically, as a consultant, you could charge clients a flat fee, an hourly wage or a percentage of any money you can save them in their procurement.