There are several important aspects of getting into the tool business I have learned since I thought of doing the same thing. I will use Snap on as an example, because it is what I researched. I'm fairly confident they are all pretty close to the same, with some differences here and there.
History - Snap on got in a lot of hot water putting more "feet on the street". In theory it seemed like a good idea (More dealers, more tools being sold). However, the territories they were given could not support them all, and lawyers proved that Middle/Upper S-O management knew this. This whole plan backfired on them with numerous lawsuits, which I think they are just now settling. They used to have a website where with wives of snap on dealers sued and made Jerry Marks a hero to many ex-dealers.
1. Territory, does your territory support it (There are a finite amount of buyers of tools in any given area). Remember, the guy trying to sign you up will tell you what you want to hear.
2. Competition, What does your tool company offer that is better than the others (Service, quality...etc)? I believe the dealer can make some difference with his personality and dedication.
3. Your liquidity; I think this may be the most important. Owners get stretched if they do not have a whole lot of cash to begin with. I believe snap on's requirement was 30K but that was a little bit ago.
Here's how they get themselves in financial trouble.
- Don't put away for taxes.
- Don't keep good books.
- Don't factor in all costs.
- Don't have enough cash to cover them through rough spots.
- They get cash in their pockets and spend it without thinking about what they truly owe.
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Why do new tool dealers go down? Many times is that they simply are over-leveraged.
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Here's how it happens:
- Recipe for disaster. Let's hypothetically take a set of Snap on screwdrivers: (This is a small and overly simplified analogy, but multiply this by a whole truck full of tools)
1. Retail is $120.
2. You pay $96 (You have bought them on credit from snappy because you can't pay cash for a whole tool truck worth of tools!). You have bought these for a 20% discount on retail.
3. You sell them to joe the mechanic on time for $10 a week.
4. You now have no set of screwdrivers on your truck anymore and you do not have the cash to buy more. This will take you three months to get the total bill paid for what you own Snappy (If Joe pays on time), but you have financed them with snappy, so you are still paying snappy's credit plan for your tools, Joes $10 a week pays the snappy credit.
5. Lets assume Joe skips town. You wrote the note. U=screwed.
6. You need to order more tools because your tool truck has sold out (A good thing right? Not so much). You are waiting on all your accounts recievables to pay up with actual cash so you can buy more tools (on credit from snappy again). Snappy management says they will raise your debt ratio to them, You get more tools and put more tools on the street, your problem is compounded again, waiting for money to come in. Then you have a setback, you must leave town, you get sick, your wife gets sick, medical bills pile up, WHATEVER, when you are not "Toting and promoting" you are not bringing in any cash.
7. Then you cannot afford to pay your tool bill to snappy, they put you on tool hold (Ever see an empty Snap on/MAC/MATCO Truck? That is a sure sign the guy is in trouble!!). By the way you must STILL pay your gas bill, maintenance, insurance, shots for your kids and those household luxuries like food and heat.
8. This does not even factor in the fact that you may have a territory that cannot support more that 2-3 dealers (Of all brands of tools), or you have a fellow snappy guy "Crossing the line, and selling out of territory".
Guys who make it have the cash to literally finance it themselves. Usually when a truck is paid off, the guy retires on selling back his Paid off inventory to Snap on (Think about what a Snap on truck inventory is worth).
It is a dangerous game to play with too little startup cash. I am convinced the best dealers are the ones who have been in the game the longest and are not worried about every cent (Because they can give discounts for cash and don't need to count every dime). These guys have paid inventories and make decent money.
There are so many variables that I think I will keep my day job.
Just my two cents.
-BWP
