A Guide to Buying Closeouts: Everything You Need to Know

Last Updated: March 5th, 2020

Finding the perfect merchandise to resell is a never-ending struggle for any entrepreneur or small business. Finding the right market, finding the right merchandise, the suppliers, it is all part of the game. Amidst all of this, you might have heard that closeout merchandise is a profitable kind of merchandise online resellers can rely on to secure healthy profit margins and put some extra cash in their pockets.

In fact, closeouts can be a great resource to take your business to a new level and increase your profits, if all is done right. However, to take full advantage of this kind of merchandise, you have to understand what it is and what to look for, whether your business complies with regulations, where you can find closeout merchandise, how to choose the right supplier and how to price the products. All of this will be discussed in more detail in this guide.

What is Closeout Merchandise?

In simple terms, closeout merchandise is the best merchandise you could look for because these products can have high resale value and significantly boost your profit. There are several reasons for this statement, but these are also dependent on how well you do your job prior to purchasing, but we’ll get to that later. First, let’s look at examples of closeout merchandise, how and why it gets to be sold.

Closeout sales can be arranged for a number of reasons. For example, if a store is closing and is looking to wring out every possible penny out of the stock it has not sold yet, it might organize a closeout sale. This means that all the items remaining are simply packed up and sold in bulk at discounted prices.

Another example is seasonal merchandise. Clothing items, such as bathing suits or ski jackets, are a prime example of such merchandise. If a store is selling bathing suits at the end of the season, it will offer this merchandise at huge discounts to clear the shelves, sell excess items and ready the store for the incoming products for the fall season. The same goes for the winter gear when the winter is over, and this cycle repeats itself four times each year.

But this is not only limited to clothing merchandise. It could be grills, sports equipment or electronics devices. Products such as smartphones are the best example of this type of merchandise. The technology is developing at an incredible rate and it seems like every day a new product is introduced. With this quick turnout of new models, stores organize closeout sales to sell older models and clear the shelves for the new models. Both examples have one thing in common: these are actually brand new products that have not been sold or used before, which means you can acquire quality merchandise for your business, especially if you are purchasing top brand names like Apple, or Samsung. These are the top examples of closeout merchandise. As noted previously, whether you get your hands on quality merchandise depends on your research skills.

Another type of merchandise sold through closeout sales are customer returns. This category of closeout merchandise can be the trickiest to handle. At times, retailers will refurbish the products if possible, bringing them back to their factory state, while at other times, you could end up buying items that have been slightly used, damaged or even broken. However, closeout items, especially if you are targeting top-tier branded products, are the perfect items to stock your online resale business with, as they are sold for pennies on the dollar at these closeout sales but, due to their higher quality and brand reputation, have a high resale value.

Closeout Merchandise Game Plan

The same way any good business is usually developed based on a detailed and well-thought business plan, your purchases of closeout merchandise can’t be done on a whim, but have to be carefully thought through. In other words, you must have a plan of action.

Closeouts merchandise is usually sold in bulk. You could buy it by the pallet, or a truckload. For someone without a plan, this could actually be an issue, especially if you have not dedicated a storage space for the merchandise because the quantity can sometimes be overwhelming.

Since we mentioned pallets and truckloads of closeout merchandise, you have to factor in the initial investment. Buying a truckload of products can be a sizeable investment, even a pallet can be a bit out of range for some. This is why you should first sort out your budget and make sure you have the finances to cover the initial investment at least.

With the finances sorted, the next step you have to take is one that you should consider no matter whether you are buying closeouts merchandise, brand new merchandise or liquidated stock. You have to determine what products you are comfortable working with and start by making a list of these products. After you have done that, check whether there is actually a demand for these products. This is your way of making sure that you will actually have a market to place your products on. There is no point in entering a market that is already oversupplied and where you would not be able to stand out from your competition, either with price or quality. If you find that there is a demand for a product from your preferred list, that much the better, you can proceed to the next step.

However, what happens if none of the products is really in demand? You look for one that is. You look for a niche market. These are gaps in the market where demand outpaces the supply and will give you the best chance of making a name for your business. If you tap such a market and provide quality products and services, you can grow your business and start building a reputation as a reliable seller. It bodes well if you decide to branch out and possibly start competing in a market different from your initial ‘preferred products’ list. This way you will not be just another newcomer, but an established seller with a positive reputation. This is a huge advantage in any market and with any customer.

Now that the products and your target market have been picked, you must decide how are you going to market your products. Are you going to set up a personal website, open an account at an e-commerce website such as Amazon, or maybe you will open a brick and mortar store and sell your products that way? No matter which option you choose, you have to figure out how to arrange the store, online or physical one, how to display the items and list them. A very important aspect of the selling part is figuring out the right price. Closeout merchandise does come at a cost lower than the wholesale, which we will discuss soon, but this still does not mean that you can just slap a ridiculously low price on your products and take the market by storm.

Winning over buyers is a bit more complicated than that. Many are price sensitive and will turn away if the price is too low as well as if it is too high. Sometimes, too low a price is a red flag that there might be something wrong either with the product, or the listing. So, before marketing your products, scout the market and your potential competition, compare prices, factor in your purchase price, including the shipping costs and see what your profit margin could be. The goal is to set your prices just below those of your competition. In the end, it is a win-win situation both for the customers, who are getting cheap, quality products, and you, since you are selling at the highest profit margin the market conditions allow you to. This also means that you have enough room to play if you have to reduce the price eventually.

These are some of the aspects of a game plan and now our focus shifts on setting up your business, learning how and where to purchase closeout merchandise as well as how to secure quality products as well as reputable sources.

Setting Up a Closeout Merchandise Resale Business

We briefly touched on the space and financial requirements of the business above. But there is also a legal point to this. You should always check with your local authorities if you need any special licenses to run your business. In many cases, you could run these operations as a sole proprietorship, the easiest and very common legal form that is often used by individuals who are the owners and only employees. In this case, there is actually no legal distinction between the business entity and the owner who is responsible for all profits and liable for all losses and any other issues.

To help you with some ground rules on setting up your business and registering for taxes visit our guide on how to register your business for sales taxes and exemptions in your state. It is worth mentioning that in most sales, buying merchandise for resale is tax-exempt, but you might be required to present a resale certificate or a certificate of exemption, depending on the state you live and operate in. Whatever the case, make sure you are operating within the legal framework in your state to avoid any possible issues or repercussions.

Where to Buy Closeout Merchandise

But where will you find the stock to supply your business? You have a number of options, wholesale suppliers being one of them. However, in your market research, you might find that prices of single units listed on e-commerce platforms are nearing those of wholesale, meaning your room for play is reduced and your profit margin is not really worth the effort. 

In an ideal world, you would be buying directly from retailers or manufacturers, who might also organize closeout sales. Manufacturers, however, have a high requirement when it comes to the minimum amount of merchandise you have to order. This can be a sizeable investment, and one you might not be ready for yet. If you are among those buyers who are looking to run the business from your home and want to purchase smaller quantities of closeout merchandise, you should look into another option: liquidation companies.

Usually, liquidation companies offer unsorted customer returns and untested merchandise, or even products that have been tested but are not working. This does not get you too far in the quality department, even though it is the cheapest merchandise you can buy to resell. There is, however, a way of sourcing from retailers and manufacturers through liquidation companies. This is because a liquidation business is actually set up as a platform through which businesses like yours can have access to stock sourced from retailers and manufacturers. This is a win-win situation as you are buying below wholesale prices and retailers and manufacturers have a way of quickly clearing excess stock. 

However, buying without previously doing any research on the suppliers, liquidation companies, retailers or manufacturers is a recipe for failure. This is because if you don’t know what you are buying, you could end up with a pallet of cheap wholesale merchandise that is cheap for a single reason: it is scrap. To avoid such potential issues, it is best to go online and search for customer reviews, which are the best indicator of a company’s quality. Reputable liquidation companies will have a large number of satisfied customers, and a bad reputation is certainly a sign to stay away from a company. You could also visit your local liquidators and check the merchandise and their services in person. Having your supplier near is certainly another advantage in the supply chain as you save on the shipping costs.

Another indicator is the presence of manifests. These lists show you the type and the quantity of merchandise within a pallet, as well as the condition of the merchandise. These are a sort of a litmus test of a liquidator’s reputation and confidence in the products it offers. Top-tier liquidators will provide a manifest with each pallet on offer either by themselves or on demand. If a supplier is withholding information or completely declining to provide you with any information, it is best to stay away from them.

And lastly, top-tier liquidators form ties with top-tier retailers and manufacturers. Through exclusive contracts, liquidators set a high requirement that the products have to reach in order to be eligible for listing on their website. This is why you will see a Walmart liquidations storefront on Direct Liquidation. Walmart, as a top retailer, is a guarantee of quality and chooses to liquidate its merchandise through a top liquidation company. The same goes for manufacturers and other retailers.

So, to conclude, if you are looking to engage in closeout merchandise purchase and resale business, make sure you have a gameplan, know what you want to work with, find the right products and only work with reputable suppliers. This will not only give you the best chance of securing top quality merchandise but it will also do so at the lowest prices providing you with a chance to reap rewards through more significant profit margins.

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