Requirements to Become a Distributor

Wholesale distribution has its origins in historic trade markets. Providing goods in exchange for money is one of the oldest business models in the world and is common to most cultures and countries. In the U.S. alone you’ll find over 300,000 distributors, and they are responsible for over $3 trillion in revenues each year. Most of those are small businesses, so if you become a wholesale distributor, you’ll find yourself in a big industry with a lot of company.

Still, every day more and more new entrepreneurs look into how to become a distributor so that they too can join the ranks of that industry by creating small businesses that specialize in moving products between manufacturers and the businesses that eventually sell those products to consumers. In order to successfully become a wholesale distributor, you'll need basic business skills including finance, management and marketing skills. You may also need one or more types of licenses or permits, adequate storage space for your inventory and strong sales skills, among other requirements.

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In addition to basic business management and finance skills, you’ll need the necessary licenses for storing and distributing the products you sell, as well as adequate warehouse or other storage space to keep your inventory secure.

Wholesale distributors fill a very important role in modern commerce. Manufacturers fill important roles in commerce, of course, but without a way to move their goods to the market, they cannot realize a profit. Companies that manufacture specific products need some method or way to get their goods to retail businesses, which then sell those products to the end users or consumers.

For example, a business may produce a high-quality specialty food item, such as spice mixes for home and restaurant use. The business could possibly establish retail stores of its own to sell its products directly to the end user. However, in many cases, such a company would prefer to focus on production and leave the selling to others. Wholesale distributors step in to fulfill this function. They purchase the goods from the originating company and then sell the goods at a profit to the end user.

Wholesale distributors thus act as a conduit to move products of all kinds from the manufacturer to the market. As opposed to selling the goods directly to end users, a wholesale distributor sells to the retailers, who then move the goods to the ultimate purchasers who use the product. To accomplish this purpose, distributors take physical possession of the products but also acquire legal title to them through purchase. They then store the items in inventory, typically in one or more warehouses where inventory is stored and managed until it is sold and transported to retailers.

According to August 2018 figures from the U.S. Census Bureau, monthly wholesale distribution trade accounts for approximately $500 billion in sales on inventories worth about $600 billion. Annually, wholesale distributors account for about $3.2 trillion in sales in the U.S. alone.

Successful wholesale distributors build on an existing history and expertise in the industry that produces the products they sell and represent. That expertise and familiarity allow a smart distributor to identify emerging trends in their fields and capitalize on strong professional relationships they’ve built in that industry. Thus, becoming a distributor for a product with which you are deeply familiar through past experience or use is an excellent way to increase your chances for success.

To become a wholesale distributor, you can either start a business from scratch or purchase an existing distribution business from someone who’d like to sell it. The latter option is often more attractive to new wholesale distributors in that you may be able to save some money and reduce the risk you’d otherwise assume from building a business from scratch. Additionally, many sellers of wholesale distribution companies will assist by throwing their expertise and existing customers into the mix, saving you enormous time and effort. Building your own business from scratch also means starting from zero in terms of your business reputation as a wholesale distributor.

You can elect to pursue opportunities that involve distribution for a wide range of products. Alternatively, you could explore a wholesale distributorship model that specializes in tightly defined niches, such as men’s ties for clothing stores or specialty soup mixes for grocery stores. Typically, the wider the assortment of your inventory, the larger your operations need to be in order to maintain and grow your business.

Most manufacturers and associated distributors will enter into a written agreement or contract that lays out the terms and obligations of each party. Typically, these contracts will specify what actions a distributor may take to promote and sell the manufacturer’s products. Other clauses may require both parties to act in an ethical and moral manner and comply with all applicable laws and regulations. In addition, the contract should spell out all the details regarding pricing and payment terms.

It is crucial to investigate and perform due diligence on every manufacturer or vendor with whom you decide to do business. Your reputation impacts their business operations, but the opposite is also true. If you are the exclusive distributor in your territory for the products made by a company that is later discovered to have broken the law or acted in an unethical way, the tarnish to their business reputation may well expand to damage your reputation as well.

Specific licensing requirements for your wholesale distribution business will vary depending on your state and the type of products you’re selling. It's important to research those licensing and permitting requirements thoroughly before you begin operations as a wholesale distributor. These licensing and permitting programs can be found at all levels of government, from local to state to federal. Fortunately, learning what your obligations are with respect to licenses is as simple as making a telephone call to the right agency or department, in most cases.

Many municipalities and states require new businesses of all kinds to obtain a business license. The process for obtaining a business license is usually fairly straightforward. You’ll most likely need to fill out an application form with personal and business contact information and details about the nature of your business as well as what your expected revenues will be. You will also likely need to pay an application fee.

Other licensing requirements may require a bit more research and effort. For example, you may want to apply for a wholesale license if your state provides them. These licenses allow wholesale distributors to buy inventory without paying tax on the products. These licenses are usually administered and issued by the state’s tax or revenue office.

In addition, trading in some specific products may require further permits or licenses, depending on the nature of the product. For example, in the U.S. wholesale distributors of alcoholic beverages must be licensed by the Tax and Trade Bureau.

Storage needs will depend on how tightly focused your distribution business is and what sorts of products you’ll be distributing.

If you choose to specialize in only a very limited array of small products with little variation in size, style or other features, you might be able to operate out of a basement or converted garage, at least for a while.

However, most distributors who take legal and actual ownership and possession of the products they distribute find that running a distribution business out of the home is not a practical long-term solution.

Most wholesale distributors instead use warehouses that are located in areas of town where space is plentiful and relatively inexpensive. Distribution warehouses typically are located well off the beaten path as opposed to well-manicured industrial parks or high-end shopping areas.

Initially, most new wholesale distribution business owners find that it’s much more economical to rent warehouse space as opposed to purchasing it outright.

As with any small business, wholesale distributors should possess a strong understanding of the basics of running and managing a small business. Those basic tasks include preparing a business plan, devising a distribution model, basic financial skills such as forecasting cash flow and start-up costs and creating an effective marketing strategy.

Good wholesale distributors possess a knowledge of the underlying industry, excellent negotiation and interpersonal skills and solid sales ability in addition to the usual core business ownership skills including finance, management and organization. Successful distributors either possess an outgoing, extroverted personality or at least can take on the burden of cold calls and reaching out to prospective customers individually. Wholesale distribution is a complex business model that requires excellent organizational and operational skills.

You’ll need to have enough cash on hand to purchase sufficient inventory to launch your business. How much money that will require depends on what products you’ll be selling. Typical starting inventory needs for wholesale distributors can range from a few hundred dollars to over a million dollars’ worth of required inventory, which may need to be financed.

Other costs include basic office equipment and furniture. At a minimum, you’ll need a relatively new computer, printer and scanner, as well as a telephone and internet access. You may also need to rent out separate office space if your warehouse doesn’t include appropriate facilities.

Most wholesale distributors who start from scratch will begin to turn a profit in two to five years, a time frame that isn’t that different from the average figures for most startup businesses.

New wholesale distributors should give serious consideration to specializing in a type of product with which they’re already familiar and a field or industry in which they have significant experience. If you’ve worked extensively in the restaurant industry, specializing in products that restaurants need (tables and chairs, for example, or specialty food items) gives you a head start in terms of both sales and prospective customers. Once you’ve identified the type of product, you’ll need to identify vendors for that product.

Most importantly, you’ll need to locate reliable suppliers or vendors. Whatever you decide to sell as a distributor will need to be sourced. You’ll need to find trustworthy, dependable suppliers with whom you can establish an ongoing relationship. More importantly, these vendors will need to consistently supply products for your business of suitable quality and at an acceptable price point to allow you to make your profit margins.

It’s wise to begin your inquiries with companies with which you’re already familiar. If you’re skilled and experienced in home decor, start with those companies that produce home design products you know and like. Contact those manufacturers and ask them about wholesale rates and procedures. You’ll want to compare their wholesale rates to prices you see for their products in retail stores. Add in shipping and your overhead expenses in carrying these products to decide if this manufacturer is a good vendor for your company.