Wholesaling Help

Wholesaling
I get asked a lot of questions about wholesaling: the pros and cons, the why’s, where’s, and how-to’s, etc. I used to wholesale, so I’m hoping that what I learned from doing so will benefit others who have the desire to do the same. If you’re just in the planning stages at this point, then you’ll want to gather as much information as possible that will help you to begin. The most basic questions I hear regarding starting to wholesale include the following.

Should I have minimums, and if so, what should they be?
How should I set my prices?
What kind of “Tax ID” will my customers need to provide?
How do I know my customer’s ID/documentation is valid?

Minimums
Most wholesalers have minimum order requirements; some require product minimums, some total order amount minimums, and many require both. I required both types of minimums. I kept my total order minimum low ($50), so that I made my products attainable to small business owners like myself, who could not usually afford high minimums. But I required the product minimums to help deter folks from buying my products for personal use, rather than for resale. And also, since many of my homemade products are scented, it was a real pain to have to make a room spray in 10 different scents, for example, than to just make 4 in one scent. It was just far easier to manage with product minimums. So my product minimums ranged from 2-6 of a given item; it really just depended on what the product was and how difficult it was to make. And as a side note, when I set my pricing for my products, the price reflected my product minimum (i.e. if I had a minimum of 4 room sprays, then the price of that product was the cost of a total of 4 room sprays). That way, there was no worry about having someone order just one room spray–they were always ordering 4, to meet the minimum.

Some wholesalers do not require minimums, and that is always your choice, of course. But my goal was always to ensure, as much as was possible, that my products were being purchased for resale, rather than for personal use. And minimums help to deter those who would purchase products unethically at wholesale prices for their own use or consumption, which was very important to me.

Pricing
Figuring out how to price your products for wholesale can be tricky at times. But you can simplify it a lot if you keep the goal in mind: to cover the costs of your materials and to make a profit.

Many wholesalers use the Keystone Pricing method. That is, half the price of retail. So if you are selling a product for a retail price of $10, you would charge $5 for wholesale. I’m sure you’ve encountered this pricing method on many websites from which you purchase products or supplies wholesale yourself. But keystoning isn’t always the best choice, and when it’s not, that’s when you just need to get creative. Many wholesalers will simply use a percentage off–it might be 30% off retail, 40% etc. But there are no hard and fast rules on pricing. You really need to do whatever is best for you, as you keep in mind that goal: cover the costs AND make a profit.

Customer Tax ID’s
In most states, though not all, in order to purchase goods wholesale, a person must have one of the following forms of documentation to legally qualify to do so. Keep in mind, some states do not require any license or documentation at all, so it’s best to verify this if a potential customer tells you they don’t need a “Tax ID.” There’s a link here on OBJ on the Small Business Resources page; it is to the Small Business Administration and it lists all the links for each state’s Tax or Revenue Department. That’s a good resource for following up on each state’s tax requirements.

Additionally, the license or documentation needed may vary from state to state, and they may be called something completely different from state to state as well. So the list I’m including here may not be all inclusive.

Federal Employer Identification Number (FEIN)
Reseller’s License
Reseller’s Certificate
Vendor’s License
Business License
Sales Tax Exemption Certificate

Validating ID’s—to Keep Your Customer’s Honest

When I was wholesaling, it was very important to me to keep my customers as honest as possible. Most of them were anyway, but sometimes it was “iffy” at best. I wanted to be sure that if I was busting my rear to make each and every product that I was wholesaling–and sacrificing retail profits in order to do so–that my customers had the legal right to purchase my products at wholesale prices. So to that end, I required that every customer who requested access to my wholesale pricing to first provide me with a photocopy of their Tax ID (in whatever form their state required). They had to either Fax it to me, snail mail, or email it so that I would have a hard copy on file of their documentation. And then I could verify a number of items:

Customer’s name and address (If they don’t match, don’t approve until you know why–most licenses are only valid for a single address);
Expiration date of the documentation, if applicable (don’t accept it if it’s expired);
State of Origin–so I could verify a state’s requirements, if needed.
Many states have websites that will allow you to search for valid Vendor’s Licenses, Tax ID’s, etc online. I wish they all did! So when in doubt, it doesn’t hurt to check with any state you have questions about.

Some other things to keep in mind as you get ready to wholesale…

It’s important to be aware that while an FEIN is a legitimate form of documentation, a business is generally only required to have one if they have employees (though there are exceptions to this). I often see sites requesting a copy of potential customers’ FEIN, and that’s just not always appropriate, because not everyone needs to have one.

It is quite common for a husband or wife to attempt to use their spouse’s Tax ID to purchase goods wholesale. They may do this for the purpose of resale, or to purchase goods for personal use. Either way, it’s unethical at the very least, and in many cases, it’s also illegal.

In many states, a Vendor’s License (or its reasonable alternative) can only be used to purchase wholesale products that match the genre of the seller’s business. Meaning, if you sell bath and body products, and a customer has a plumbing business and wants to use their Vendor’s License to purchase your products, they are not legally allowed to do so.

It is to your benefit to maintain copies of all your wholesale customers’ Tax ID’s for accounting/tax purposes. If you were to be audited, you may be required to provide proof that you were indeed selling your wholesale products to those who were legally allowed to do so.

I hope this information will serve at least as a good starting point for those of you interested in wholesaling. I am by no means an expert on this topic. But I am sharing my experience and knowledge with you, in hopes that it may be of some use and help.