Distribution Business

ColWardenColWarden subscriber Posts: 1
edited April 2008 in Business Planning
First of all, let me introduce myself. My name is Roy and I`m 24. I graduated with a degree in Economics 2 years ago and have created and operated a profitable online based import/export business for the past 3 years. I don`t have any face to face sales experience and have never had employees. I have lots of time on my hands and a good bit of capital saved.
I`ve had an interesting business opportunity come to me from an old, trusted friend and fellow entrepreneur recently. He has developed and patented a specialized tool of a type that will be required by law this summer for a group of approx. 2 million consumers (sorry I can`t be more detailed). The tool has cheaper competitors already placed in many stores, but of greatly lower quality and with lower profit potential to store owners than the new device we offer. His product will be coming in from China in large quantities and packaged, ready for sale in just a few weeks. From the research I have done, it appears that the new product will fill a needed role in the market and we can offer a good value proposition to both shop owners and consumers.
He asked if I wanted to have an exclusive sales distribution territory of about 500 potential stores in a roughly 150 by 400 mile geographical area. I will have the option to take more territory in the future if we agree my sales are acceptable after a few month trial period. We are still discussing profit margins, but it looks like we can offer stores about 50% markup (really profitable for stores to sell) and the distributor (me) and my sales reps will get anywhere from 15% to 40% of the margin between distributor and average wholesale price. We are still working out exact numbers over the next several days, but I am told that 20-30% is a comparable amount to other distributors of MSRP $25-type products. I will be supplied with advertising material like banners and brochures from the parent company.
If I take this opportunity and create my own distribution company to sell this product, I will be hiring several trusted friends as subcontractors working on % of sales commissions (perhaps 10% of total sales), plus a fuel stipend to sell this product and have it placed in stores in their assigned subregion of 75-150 stores. My responsibility will be to get salespeople (including myself) into stores as fast as possible and get this item placed before the competition, as well as building the brand and teaching retailers about the new law and how the device (or similar devices built by competitors) will be required to own.
Although it sounds promising overall, I have some concerns regarding the arrangement:
Is it a bad idea to hire friends? If you believe so, how would you recommend I hire independent sales people who will work mainly on commission?
Are my expectations to make roughly 20-30% margins too high or too low? I worry that since I only have one product to offer, even if lots of stores are interested and they sell at or above projections, I will be eventually beaten by the established distributors that offer dozens or hundreds of products using the same manpower scale as me selling only one product (even though it is a tool required by law).
How do I minimize risk if I accept this offer? I plan on creating an LLC or S-Corp to limit personal damage in case of a lawsuit. The manufacturer has $300k in product liability insurance. I will be giving salespeople a small allowance for gas (say, 0.20 a mile) in order to limit their out of pocket expenses before commissions pay out. I do not plan on offering net30 terms, so when I sell a product, it will be through cash or a check. I will not order products from the manufacturer to sell until I have orders ready for them. There will, however, be an outlay for each employee to have cases of the product with them from the very beginning. Any other suggestions to limit the money/time risked in this venture?
I would love to hear the forum`s thoughts, and will be watching and replying to the thread if it gets any responses. Tell me, am I missing something major?

Comments

  • ColWardenColWarden subscriber Posts: 1
    Hi Janie,
    Very true, I have heard that before about hiring friends. I am worried about how it will tangle our business and personal relationships, but I don`t have much to offer seasoned sales reps right now. Basically, I have an unproven product that might be a big hit, or might not. Plus, I think I can trust my friends to carry around $3,000 in product more than a guy I find on Craigslist and had a clean background check/references.
    The stores we`ll be selling to are generally small family run stores and many don`t have a lot of credit extended to them. The net30/net60 terms might be granted to a few of the more established businesses, but it would be a huge risk in a business plan that doesn`t have too many risks besides non-payment of big accounts.
  • besthealthbesthealth subscriber Posts: 4
    Hiring friends and family is quite tricky. I know which ones I wouldn`t hire as I am sure you would as well. However, there are many who work on commission basis - especially entry level candidates and seasoned sales persons who are looking for a job may take this as a challenge that they can handle. If you can throw in an incentive for reaching certain levels in sales that would even be a great boost for your staff.
    Wishing you great success!
  • ColWardenColWarden subscriber Posts: 1
    Thanks for your input, guys. It seems the overall business sounds good since it is not receiving much criticism, and the real question is whether I should hire friends or look outside my circle.
    CraigL makes a very good point that I should take every candidate and evaluate them against eachother in relation to the function they will serve. That makes a lot of sense. You are appealing to my inner economist!
    So how would you find candidates and hire if you were me? My thoughts right now are to go online and find resumes/post a description of the job and filter out applicants, mainly using topical forums for the product I am selling, and also using Craigs List. I plan on offering a fuel stipend, but all other pay will be on commission (roughly 10% of sales, and a case of these will cost about $1500.00)
    Any other ideas on how to recruit?
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