How to Engage in Retail Arbitrage for Fun and Profit

Tuesday, March 30th, 2010

I love my wife. She’s a great woman who gives me all the support I need to run a business in a tough economy. She also takes care of the house, cares for our six month old, pays the bills, keeps us socially active with our friends, and… doesn’t have an entrepreneurial bone in her body. (Unless marrying a guy like me counts.) I call her a “rules sheriff.” She’s never been one day late on a bill. She chides me for shortcuts and despises when I say things like, “due on the 1^st, late on the 15^th means due on the 14^th to me” or “I think that sign is more a guide than a rule” when I cut across lanes. So last night when I was writing about how to make money online, she kept making me go back and forth between these links in search of proof I was somehow breaking a rule again. I assured her I wasn’t; these opportunities just exist now.

What opportunities, you ask? If you are unemployed, a stay at home husband or wife, or simply have time to burn, there is no reason you can’t start a small business with nothing but a credit card with a $500 limit.

I call it retail arbitrage. Back in college, before the Internet was anything close to the force it is today, a friend of mine and I made $50,000 in a single summer using retail arbitrage. We did it by buying and selling some ugly shoes you couldn’t get everywhere, especially if you had extra large or extra small feet. This was the heyday before suppliers caught on and shrunk margins to try to eliminate or drastically reduce market inequalities. (For the most part they’ve accomplished this now, but not entirely.)

In ’99 when my friend said, “Dude, those shoes are like $150 on eBay” pointing at the ugly foam-sided basketball kicks selling in the local outlet store for $29.99, I said “Well let’s buy a pair and check it out.” Two days later, we had $175 plus shipping in our PayPal account, and the scheme was born. Almost without fail, we were picking up a pair of shoes at an outlet store for $29.99, posting them on eBay, and getting back $110 a pair—mostly from buyers overseas where there was no outlet mall to speak of. When we discovered the “market inconsistency,” we fueled up my Toyota pickup and hit the road to every outlet store in Oregon, maxing out our credit cards by buying every pair we could find. We developed what we called “The Magic Margin”—the shoes had to be marked down either 70%, or be a really odd size (super small or pretty large) and marked down 50%. We found you generally get 70% of full retail value at auction on popular brands. Minus eBay fees and processing fees, we would net about a 90% markup per item—and if it we had several pairs to auction at once, which we often did, we could post them all really fast and our hourly rate soared. It was literally a $50k summer.

I haven’t sold anything on eBay in probably a decade, but even today when I wind up at an outlet store, I find myself mentally scanning for the “magic margin” we came up with and I assure you, it still exists.

What I noticed last night is that now you can find retail arbitrage available online too. (Never mind needing a Toyota truck—you don’t even need to leave your house!) Look here

http://bit.ly/a144QM. This trench coat just sold on eBay for $69.99, plus a $2 markup in shipping. However, you can buy this exact jacket here for $49.50, plus shipping of $7 (and if you wait, the price sometimes drops to $39.50 with free shipping) http://bit.ly/clgP7L. Once you back out the fees, you can still net a quick $10-$15 for what might take 15 minutes. That’s $40 an hour for nothing other than filling a market need by connecting buyers and sellers. I found this example in less than 3 minutes, which would lead me to believe it exists 1000 times over online.

So set up your own retail arbitrage business! Write off your home office, your Internet connection, and gather travel reward points on your credit card. It’s fun and easy! If you are unemployed, bored, or just curious about whether you can actually make money online… why not give it a try?

Tell us about your cool retail arbitrage finds. Once you have taken advantage, of course.

Tags: start a business
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The Truth About Getting Help Raising Capital

Friday, March 26th, 2010

Can you help me raise money?

In short, define “help?” Will we give you a list of investors? Sure.

Will we make introductions to any of the private equity firms who have reached out to us for our best work over the years? If it fits. Will we pitch your business plan for you to people we do and don’t know?

Absolutely not.

In the last 6 months there has been a growing trend for business plan companies to promise some form of capital raising services. The thought goes, if they offer more than just the business planning engagement, they can secure more clients by touting how much they will help you post-planning. And you might think, “This will be really helpful to have the same company write my plan AND help me get funding.” EXERCISE EXTREME CAUTION.

For a company to TRULY represent you or present your business plan for funding, there are a number of legal requirements:

First and foremost, they must be a registered broker dealer. (Ask if they are, and listen carefully to what you hear.)

Second, any security being offered must be registered or meet the criteria for an exemption from registration in each investor’s state, as well as your company’s home state. Now, many “capital raising consultants” will tell you they can sidestep this legal obligation by tacking on the caveat, “This is not an offering of a security.” This claim is laughable and naive. It doesn’t matter what YOU call it, it’s what the SEC calls it. For instance, you can call it “constructive receipting,” but if the IRS calls it “tax evasion,” guess who wins? If you are essentially asking someone to invest in something and they are expecting profits derived from the efforts of others, you are offering a security. Whether it be debt (e.g., promissory note), equity (e.g., stock or LLC interest), an “investment contract” (which has been construed very broadly), or any other type of reciprocal transaction, the fact remains: if someone is investing money in your company with the expectation of profits derived from the efforts of others, it’s a security and it must be registered or satisfy a federal exemption from registration.

So that’s the law, what’s the reality? The reality is, people send around business plans with ROI calculations, investment propositions, and the like all the time. 99 times out of 100, nothing bad happens. However, if 1 time you accept investment and later the business goes south, you may be held responsible for anything your UNLICENSED business plan/funding consultant said. If they were licensed, they would likely have errors and omissions insurance, but your typical unlicensed representative will NOT, leaving you very vulnerable to legal trouble for anything they said.

In summary, DO NOT engage with an unlicensed company that says they will “show your plan around” or that they “have investors to share your plan with.” You may be personally liable for what they say or present. Since start-ups by their very nature have high failure rates, it’s likely your investors will scrutinize anything they perceive they were promised. Looking to recap any money they lost, lawsuits may fly if they feel deceived. At least if you pitched the plan yourself, you know what was said and not said, and you have some protection as a founder/shareholder in the company. But bringing in an unlicensed gun is just setting yourself up for an SEC mess you don’t want.