How to start a scratch and dent appliance store

What scratch and dent means to shoppers

To the shopper, scratch and dent is a deal with a catch they can see. They will accept a mark to pay less than the big box price. They will not accept a surprise.

Shoppers often care more about where the damage is than how big it is. A dent on the side of a refrigerator that sits between cabinets can be hidden once it is installed. A scratch across the front of a range is something they see every day.

Many stores use scratch and dent, open box, customer return and refurbished loosely. Use them precisely. Scratch and dent means cosmetic damage on a unit that works. If a unit was returned, repaired or used, say that instead. A supplier's condition code is a starting point. Your own grade, after your own test, goes on the tag.

The paperwork before the first buy

Get the legal setup done before you approach suppliers. Many wholesale sellers ask for it before they quote you.

• A business entity. Many owners form an LLCLLC An LLC (limited liability company) is a business entity registered with a state that exists separately from its owners., a company registered with the state that exists separately from you.
• An EINEIN An EIN (Employer Identification Number) is your business's federal tax ID number, issued by the IRS., your federal tax ID, issued free by the IRS.
• Sales tax registration with your state, and resale documentation. A resale certificateResale certificate A resale certificate is documentation used under applicable state rules when buying qualifying inventory for resale, so the supplier does not collect sales tax on that purchase. lets you buy qualifying inventory without paying sales tax on it, because the tax is collected when you sell. It is not the same thing as an EIN. See EIN vs resale certificateEIN vs resale certificate An EIN is a federal tax ID for your business. A resale certificate is a state-level document used when buying qualifying inventory for resale..
• A business bank accountBusiness bank account A business bank account is an account in the company's legal name, and it is where the business's provable financial history comes from. in the company's name. Every purchase and every sale goes through it.

Rules and forms differ by state. Use the state resources linked on this page to find your state's official revenue agency, and confirm with an accountant. Call your city or county about business licenses and zoning before you sign a lease.

Sourcing scratch and dent units

Scratch and dent appliances come from wherever new appliances get handled: retailer distribution centers, manufacturer warehouses and freight carriers. A forklift catches a side panel, a box gets crushed in transit, a floor model gets scuffed. It can't be sold as new, so it moves into a secondary channel.

You can reach that supply at several sizes:

• Single units and small lots from local auctions, other dealers and liquidation marketplaces. Good for learning.
• Pallets or partial loads from wholesalers and liquidation sellers. Appliances often ship one unit per pallet or loose, so an appliance "pallet" is a different thing than a pallet of small goods. See the appliance pallets guide.
• Full truckloads from larger sellers and programs. More units per dollar of freight, much more cash per purchase, and you take the mix that comes.

Whatever the size, the questions are the same. What condition codes does the seller use, and what do they mean in practice? Is there a manifestManifest A manifest is the supplier's list of what is on the load, typically model, quantity, condition and a retail reference value., the seller's list of what is on the load, and how accurate has it been? Who pays freight? What happens if a unit arrives with damage that wasn't described? How often can you buy again?

Inspecting and grading units

Every unit gets tested before it goes on the floor. Not most units. Every unit. A cosmetic discount only works if the appliance works.

A basic receiving routine looks like this:

1. Check the unit against the manifest or invoice: brand, model, serial number, and whether it is the unit you paid for.
2. Look up the model on the CPSC recall list. Do not put a recalled unit on the floor. Federal law prohibits selling recalled products.
3. Check for missing parts: shelves, drawers, racks, knobs, hoses, power cords, manuals and install kits.
4. Power it up and run it. A refrigerator should get cold, a washer should fill, agitate, drain and spin, a range should heat on every element, a dishwasher should fill and drain. Run it long enough to see a real cycle, not just a light coming on.
5. Look for damage that matters for function: a door that won't seal, a cracked liner, a bent hinge, a leak.
6. Grade the cosmetic damage, photograph it the same way every time, and record the grade with the serial number.

Write your grade scale down. Three grades is enough to start, for example light, moderate and heavy cosmetic damage, each with a short description and a photo of a real example. Grade by location as well as size: front, side, top, back. The point is that two people in your store would give the same unit the same grade.

Anything that fails a function test is not scratch and dent. It goes to a separate pile: repair, sell for parts with clear disclosure, return to the seller under their claims terms, or dispose of properly. Refrigerators, freezers and other units with refrigerant fall under EPA rules that require the refrigerant to be recovered before disposal. See the EPA source below.

Pricing against new

Your customer is comparing your tag to the price of the same model new, at a store down the road or on their phone while they stand in your aisle. So your price has two anchors: what the unit cost you, and what it costs new right now.

Start from landed costLanded cost Landed cost is what a unit really costs you once it is in your building and ready to sell, purchase price plus freight, handling, parts and the cost of what could not be sold., what the unit really costs once it is in your building and ready to sell. That is the purchase price plus freight, handling, parts and your share of the units that couldn't be sold. Never price from invoice cost.

Then check the current new price of the same model, and what comparable scratch and dent units actually sold for nearby. Set a target by grade. A light grade can sit closer to new. A heavy grade has to be a clear bargain. Know your numbers in gross marginGross margin Gross margin is revenue minus COGS, usually shown as a percentage of revenue. It is what is left to cover everything else., the share of the sale left after the cost of the goods, not just markup. Markup and marginMarkup vs margin Markup is measured against your cost. Margin is measured against your selling price. The same dollar of profit produces a bigger markup number than margin number. are different percentages, and mixing them up overstates profit.

Decide your markdown schedule when you buy, not after a unit has sat for months. Inventory does not improve with age. The field guide on pricing walks through a markdown clock.

Don't publish a fake "compare at" price. If you show a reference price, it should be a real current price for the same model new, and you should be able to show where it came from.

Showroom, storage and delivery

• Receiving. A dock or a safe way to unload, plus a pallet jack, appliance dollies and straps. No dock means planning for a liftgate or forklift.
• Testing. Power, water and a drain for washers and dishwashers. Gas only with a safe, code-compliant setup. Disclose what you couldn't test.
• Back stock. Units stored upright, protected and labeled with grade and serial number.
• Showroom. Clean units, grouped by category, with the damage visible and the grade on the tag.

Delivery is part of the product. Decide early whether you deliver, use a local delivery service or require pickup. Delivering takes a truck, two people, the customer's doorway measurements and a haul-away policy for the old unit. Installation is a separate decision. Water, gas and dryer vent hookups can require a licensed installer in some places, so check local rules.

Delivery damage is your damage. Wrap units, strap them and photograph them before they leave.

If you need a building, read the commercial leaseCommercial lease A commercial lease is a multi-year contract for business space, usually with a personal guarantee and costs beyond the base rent. definition first. A lease is usually the largest fixed cost a store takes on, and the hardest one to reverse.

Setting buyer expectations

Disclosure is how a scratch and dent store protects itself. Put the grade and the location of the damage on the tag and on the receipt. Show the damage in photos for anything sold online. Have the customer initial the condition at the sale.

Be specific about warranty. Whether a manufacturer warranty still applies depends on the manufacturer's terms and how the unit was sold off, so don't promise one you haven't confirmed. If you offer your own, write down what it covers and for how long. If you sell "as is", say so clearly and in writing. Federal law doesn't let you disclaim implied warranties on a product you give a written warranty on, and some states limit "as is" sales further. See the FTC guide below and your state attorney general's office.

Write a return policy before your first sale, print it on the receipt and apply it the same way to everyone. A complaint about disclosed cosmetic damage is handled by your disclosure. A functional failure needs a fast, fair repair or replacement.

Turns, cash and consistency

A scratch and dent store ties up a lot of cash in a small number of units. Each appliance is expensive compared to most resale goods, and the money stays tied up until the unit is sold and delivered.

Watch three numbers from the first month:

• Inventory turnInventory turn Inventory turn is how many times you sell through your average inventory in a period, COGS divided by average inventory value.: how many times you sell through your average inventory in a period. Faster turn means the same cash buys more units in a year.
• Inventory agingInventory aging Aging groups your unsold inventory by how long it has been in the building, typically 0–30, 31–60, 61–90 and 90+ days.: how long each unit has been in the building. Units past your markdown dates are a pricing or buying problem.
• Working capitalWorking capital Working capital is the money available to run day-to-day operations: current assets minus current liabilities.: the money available to run day-to-day operations. It has to cover the next buy, freight, rent and payroll while today's units are still on the floor.

Track COGSCOGS COGS (cost of goods sold) is what the items you actually sold cost you, not what you spent on inventory during the period., the cost of the units you actually sold, separately from what you spent on inventory this month. Otherwise a heavy buying month looks like a loss and a month of running down stock looks like a win.

From units to pallets to truckloads

Most scratch and dent stores grow in three stages. Each one has different work and different risk.

• Units and small lots. You choose each appliance. Higher cost per unit, low risk per purchase, and the best way to learn your market.
• Pallets and partial loads. Lower cost per unit, more mixed condition and more freight. You need a real receiving routine and a plan for units that don't make the floor.
• Truckloads. Usually the lowest cost per unit and the most cash per purchase. You take the mix that comes, and you need the space, crew and sales to move it before the next truck.

Move up only when the current stage is boring. That means you are selling what you buy at a steady pace, your aging report is clean, your books close every month, and you can pay for the next purchase without stretching. Suppliers notice that too. Vendor termsVendor terms Vendor terms are an agreement that lets you receive inventory now and pay the supplier later, up to an approved limit., where a supplier lets you pay after delivery, come from a record of paying on time, not from asking for them.