Why Join a Buying Group?
Because wholesalers give pricing breaks to customers who buy in large volumes, small businesses are at a disadvantage. They usually can’t afford to purchase in huge quantities like the larger vendors. Many small businesses are turning to buying groups to level the playing field and allow them to compete with bigger sellers.
Attorney Harry B. Ray, of BuyingGroups.com, defines a buying group as “a group of businesses in the same industry who combine their purchasing power to negotiate better prices and terms from the vendors.” Buying groups can potentially do a lot for your small business:
• Because you’re buying in larger quantities, you get pricing breaks that enable you to be more competitive.
• With the combined buying power of your group, you can meet the enormous purchase minimums you could never afford on your own.
• You get better payment and freight terms. With certain-sized orders, wholesalers will even waive the freight altogether.
How Do They Work?
There are different models for buying groups but two are the most common:
• The democratic model—everyone owns an equal share in this type of group. Ray asserts that this is a good model for a new group because “you get instant loyalty from the members if they feel like they own the group. They’ll more likely contribute their time and effort to make the group successful and certainly be more willing to put money into the group to make it work.”
In this model, everyone has a say in everything—vendor selection, product selection, group policy, etc. The manufacturer rebates are divided equally among the members.
• The benevolent dictatorship model—one person, or maybe a few people, start this sort of group and own it. In these groups, decisions can be made quickly.
The other members are like subscribers—they get the advantages of belonging to the group, but have no say in the way things are run. The owners can also keep the rebates for themselves, or keep back a percentage and pass the rest on to the group.
What’s Their Financial Structure?
Oftentimes, buying groups use their manufacturer rebates to pay their operating expenses, and divide the remainder among themselves. Since the rebates are found money—money the members wouldn’t have anyway—no one minds using them to cover business overhead. They also charge a fee to join and participate in their benefits, as well as membership dues.
Most buying groups just break even on their investment—their purpose is saving money, not making it. Whether or not you expect to make money is one of the primary factors in deciding how to structure your group. A C-Corp and an LLC (limited liability company) are the most common types of structures for these groups and generally the most practical. If you’re starting a new group, make sure you talk with your attorney about which one’s right for you.