September 12, 2022
Adam Hoeksema
Interest in the liquidation business has been exploding over the last several years. So much so that A&E even produced a reality TV show called Extreme Unboxing that follows entrepreneurs from around the country that are buying liquidated merchandise for pennies on the dollar and hoping to convert it into riches.
We can see the trends as well when we look at Google Search Trends data for “Liquidation Pallets” over the last 5 years which has shown a massive increase in search volume.
Over the past decade as the Executive Director of an SBA Microloan program (learn more about SBA Microloans here) I have had the opportunity to work closely with a couple of wholesale liquidation startups and have witnessed the process of launching and growing the business into what is a substantial operation today.
In this article I want to walk you through how you can start a wholesale pallet liquidation business, walk you through the key numbers and help you determine whether the numbers make sense for you to pursue as a business owner.
What is a Wholesale Liquidation Business?
First of all, we need to understand what exactly we are talking about when we say a wholesale or pallet liquidation business. To put it simply, retailers will receive returned merchandise from their customers, or will pull inventory from the shelves or from their website that is not selling well, and they will bundle this inventory up on a pallet and sell the pallets of returns and overstock inventory at liquidation prices.
Clients that I have worked with would commonly get to purchase this inventory by the truckload from the retailers for 5 to 10% of the MSRP (manufacturer's suggested retail price). For example, a wholesale liquidator might get a coffee maker that typically sells for $50 at a retail store for $3 - which is 6% of the retail price.
Now the pallet liquidator can resell that merchandise in a number of different ways. I have seen various models and there are companies that play at every level of the industry. Let’s talk through the different models next.
What are the Different Business Models in the Pallet Liquidation Industry?
There are many different business models and approaches to playing in the wholesale liquidation business; each approach has some key differences. There are at least 4 types of distinct players in the market:
- Buy by the Truckload, Sell by the Truckload
- Buy by the Truckload, Sell by the Pallet
- Buy by the Truckload, Sell by the Unit via Retail Channels
- Buy by the Pallet, Sell by the Unit via Retail
Let me describe each business model in a bit more detail.
Buy by the Truckload, Sell by the Truckload Liquidation Model
These are the large liquidators that have contracts directly with retailers to help liquidate returns and overstock merchandise. This type of wholesale liquidator will have a large warehouse, or many large warehouses where they will buy and store truckloads of return merchandise. Often these liquidators will have a contract with the retailer that guarantees a steady supply of merchandise to liquidate. In some cases it may even be an exclusive contract where the retailer sends all liquidated merchandise to one single liquidator. When dealing with large quantities of merchandise the liquidator is probably buying by the truckload and selling by the truckload. For example, they might buy 100 truckloads per day from WalMart returns and sell 1 truckload per day to 100 different smaller liquidators.
Buy by the Truckload, Sell by the Pallet Liquidation Model
That next level down the food chain are liquidators that might purchase by the truckload directly from retailers or from larger liquidation companies and then sell that merchandise by the pallet. In this business model, the liquidator will need to build up a customer base of smaller companies that will buy individual pallets of merchandise.
Buy by the Truckload, Sell by the Unit via Retail Channels Liquidation Model
There are also a number of companies that buy return and overstock merchandise from retailers in bulk and then resell through their own network of retail stores. Marshall’s is a good example of this business model. They say,
“Our team of buyers are both opportunistic and entrepreneurial, so when a designer overproduces, a manufacturer makes too much product, or other stores overbuy, we step in and negotiate the lowest possible price and pass the savings on to you.”
There are a number of retailer examples like this that help liquidate merchandise through a chain of retail stores.
Buy by the Pallet, Sell by the Unit via Retail Liquidation Model
The last example business model is how a lot of people get started in the pallet liquidation business. These businesses will buy pallets of merchandise from one of the wholesale liquidators up the food chain, or perhaps directly from retailers, and then they will break down that pallet and sell the individual items through their own retail store, flea markets, eBay store, pop up store, or other channels.
How the Liquidation Pallet Business Works
Next I want to give some general guidance on how I have seen this industry and business work over the years. Here are a few key takeaways:
Access to a Steady Supply of Liquidation Inventory is Key
One of the initial challenges that I witnessed with my clients is that they might find a great deal with a source of cheap, quality inventory and everything would be going great, then one day their supplier was out of inventory to sell them. When you are small, and you can’t get a contract directly with a retailer or manufacturer you are at the mercy of your suppliers to continue to sell you inventory. If you grow too much, your supplier might start to see you as competition and cut off your access to inventory.
Over time, you really need to build a diverse set of suppliers, and aim to secure contracts with those suppliers so that you can be certain you will have a steady flow of inventory.
It is a Marketplace Business Model
This is a marketplace business model which means it is a tough business to start because you have to worry about both sides of the marketplace. You need buyers and sellers and you need the supply of merchandise that you have and the demand from your customers to be roughly in alignment to keep everyone happy. For example, if you get a contract to liquidate 100 trucks of merchandise per day, but your customer base will only buy 25 truckloads per day, you are going to quickly overflow your warehouse and have to fail to fulfill your contract with your supplier.
At the same time, if you have customers willing to buy 100 trucks of inventory per day, but you only have access to 25 truckloads to sell, your customers are going to quickly find another supplier. So you need to build up your supply and demand side at the same time and keep the two sides in equilibrium as best you can.
We help you model the complexities of this business model with our Wholesale Financial Model and our Online Marketplace Financial Forecast.
It is a Seasonal Business
One other challenge that I learned from my customers is that retail liquidation businesses are highly seasonal. After Christmas retailers are bombarded with return merchandise and they literally have no place to put it, so they are willing to give it away for pennies on the dollar to anyone that can take the problem inventory off of their hands at scale. This means that the wholesale liquidation companies need to be ready with warehouse capacity as well as cash to be able to scoop up great deals when the retailers are desperate to get the inventory out of their stores and warehouses.
With those challenges in mind, it really is a high potential business opportunity. There are low barriers to entry to get started, and if you build it right, there is a lot of opportunity for growth as well.
Next, I am going to highlight some of the key numbers in this business and will be using our Wholesale Business Financial Projection Template as a tool to help create a forecast for what this business could do financially.
What are the Typical Startup Costs for a Wholesale Liquidation Startup?
The startup costs for a pallet liquidation business is roughly $10,000.
Here is what is really cool about this business, you can get started for next to nothing. It was nearly a decade ago when I helped a client secure a $5,000 microloan that helped them buy their first truckload of merchandise. They didn’t have a fancy warehouse or website yet, they literally had the truck delivered to a storage unit facility. To the truck driver’s dismay they only had a hand powered pallet jack and they had to painstakingly remove each pallet from the truck and wheel it through a maze in the storage unit facility and stuff it in their particular unit.
Today, the company has over 100,000 square feet of warehouse space and liquidates millions of dollars in merchandise each year. The startup costs for a pallet liquidation business can be as little as $10,000:
- $500 - first month’s rent for storage space
- $500 - insurance
- $500 - business registration and licenses/permits
- $500 - pallet jack
- $8,000 - for your first truckload of pallets
With that you are up and running.
How to Forecast Revenue for a Wholesale Liquidation Business
Now that you have some inventory to sell, how do you actually sell the inventory, and how do you forecast revenue for the future?
Well to start, you might need to get scrappy. I am not even sure if this is in line with the terms of service, but I know that clients have listed inventory for sale on Facebook Marketplace, Craigslist and certainly on eBay to get started. As you sell that first truckload of merchandise your goal is to build a relationship with each customer, learn what kind of merchandise they might like to buy in the future and how much. Create an email list with Mailchimp or some other simple email software so that you can email these customers that next time you have inventory for sale.
Over time, that email list of willing buyers is going to be one of your most valuable assets. From a financial model perspective you will want to estimate:
# of active buyers
x # of pallets purchased per buyer per month
x Average $ sales price per pallet
= Revenue forecast for liquidation business
Gross Profit for a Liquidation Pallet Business
The typical gross profit for a liquidation business is 75%.
It is tough to estimate the typical gross profit for a pallet liquidation business because it really depends on which of the 4 business models that we discussed above you fall into. If you are buying by the truckload and selling by the truckload you might have a lower margin, but high volume business. On the other hand if you buy by the truckload, but then break down the pallets and sell the individual items you might have a much higher gross profit margin.
AML does a wonderful job of breaking down the assumptions you need to consider in order to estimate your gross profit for a pallet liquidation business.
In my experience I have seen a liquidator buy a truckload for 7% of retail and then sell pallets for 28% of retail to end customers. So in that example, if you had a truckload with $115,000 of retail merchandise, 7% of that would be roughly $8,000 for you to purchase the truckload. If you then sell it all for 28% of retail that is roughly $32,000.
That means that your cost of goods sold is $8,000 / $32,000 or 25%.
Put another way, your gross profit for a pallet liquidation business would be 75% before taking into consideration freight costs.
Fixed Costs for a Pallet Liquidation Startup
Your fixed costs for a pallet liquidation business can be very minimal, especially when you are just getting started. At the bare minimum you should expect the following operating expenses for a wholesale liquidation business:
- Accounting/Bookkeeping - $100 per month
- Insurance - $100 per month
- Rent of a small warehouse space - $1,000 per month
- Utilities - $300 per month
- Wages - Maybe $0 if you are able to do the work yourself to start out with
So at the bare minimum we are probably looking at $1,500 in monthly fixed costs. If you can achieve gross profit margins in the 50% range or higher, you ought to be able to breakeven before paying yourself with just one truckload per month.
Wholesale Pallet Liquidation Profit Potential
If we assume that you are buying and selling one truckload of merchandise per month with 50% gross profit margins and $1,500 in monthly fixed costs we could assume the following potential profit:
Purchased $8,000 truckload of pallets
Freight $2,000
Total investment of $10,000
Fixed costs of $1,500 per month
= $11,500 in expenses
Pallets sold at 50% gross profit = $16,000
$16,000 - $11,500 = $4,500 in potential profit for a pallet liquidation business that is buying and selling one truckload per month.
Of course this business can scale dramatically. I have seen financials for my clients with $3 million in annual revenue with net profit of roughly 15% of sales which amounts to $450,000 in annual profit. My clients were still small fish in a vast sea, so we know there is a lot of growth potential in this business. I encourage you to build out your own financial projections based on your business model, strategy and the amount of capital you have to invest. Our wholesale business financial projection spreadsheet will be a great head start in helping you forecast your pallet liquidation startup. Don’t hesitate to contact us along the way with any questions. Best of luck!
