Published January 2025

SOURCING 102: Making It Real

Launching a business requires several essential steps (and some expert guidance) and instituting some foundational business practices to ensure success. Here we get into critical aspects like company formation, asset protection, financing, production, and pricing strategies.

SOURCING at MAGIC is the place for savvy entrepreneurial fashion pros to find great new resources, learn about the latest trends in fashion and business, and connect with each other, but it’s also where to learn about some of the basic skills a budding entrepreneur needs to succeed. Having a great idea isn’t enough: establishing a business means thinking long-term and getting some outside help to form a company, protect your assets, and arrange financing. In Sourcing 101, we spoke to SOURCING at MAGIC executives about some of the basic steps required to launch a fashion brand. Once those critical steps are taken, it’s time to revisit the business plan and take a deeper look at production, profit, and sales. Here, we dive into the next steps on the journey.

FORMING A COMPANY

Legally establishing a new company is one of the most critical milestones in its growth. It’s so important, in fact, that we recommend getting professional help. While there are easy-to-use, seemingly cost-effective online legal services, working directly with an established law firm — preferably one which specializes in your industry — could save time and money in the long run.

"When establishing your fashion business, it's crucial to choose the right entity type, such as a sole proprietorship, LLC, or S corporation,” says a SOURCING at MAGIC executive. “Each option has different implications, particularly regarding taxes, which vary by state; for example, California requires an annual fee regardless of profit, whereas New York's taxes depend on your earnings. We recommend consulting with an accountant to determine the best structure for your specific needs and location.

"If this is not the first time you’ve established a company, you may have the right experience to make affordable online legal services work. If you don’t, however, we highly recommend hiring a lawyer.

“Business owners should focus on the big picture: sales, marketing, and branding. Hire people with expertise in their fields so that you can focus on a higher level. Don’t get tied up in the details and lose focus on the trajectory of your brand,” says a SOURCING at MAGIC Buyer Relations Specialist.

The SOURCING at MAGIC executive adds, “You’ll also need a seller's permit to sell, and tax regulations vary by state; if you sell online, you are required to collect tax from every state. Understanding these implications is crucial when establishing your business, as state-specific rules can significantly impact your tax responsibilities. Again, we recommend hiring an accountant to give you good guidance."

Here are a few more things to consider:

The most commonly established start-up structures are the sole proprietorship, the LLC, and the S-corp. You can review these structures in more depth at the U.S. Small Business Administration, but basically:

*A sole proprietorship does not produce a separate business entity, so you can be held personally liable for the debts and obligations of the business.

*A limited liability company, or LLC, offers some protection from liability, but profits and losses can get passed through to your personal income without corporate taxes. You will be expected to pay self-employment tax contributions towards Medicare and Social Security.

*A corporation is a legal entity that is separate from its owners. The structure offers strong protections but costs more to form and requires more extensive record-keeping, operational processes, and reporting, according to the Internal Revenue Service:

“S corporations elect to pass corporate income, losses, deductions, and credits to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.”

There’s even more to it, and laws vary from state to state (and country to country), hence our suggestion to be sure you have legal help in setting up your company.

"When establishing your fashion business, it's crucial to choose the right entity type.”

- A SOURCING at MAGIC Executive

FINANCING AND CASH FLOW

Financing your new venture and making sure that there is a steady supply of cash to pay for everything from rent to employees, equipment, materials, and manufacturing is the next critical step.

“How are you funding this business? Who’s paying for it? Are you self-funding it from savings? Are you borrowing money? Do you have investors? All these things need to be considered at the start of a business and, again, should involve working with an accountant who can advise you on the basics of funding a startup,” says a SOURCING at MAGIC executive.

An established business may choose to work with a factor. Factors can help apparel manufacturers get through a particular season, agreeing to advance the business the equivalent of a season’s orders. For instance, if you have $100,000 in orders from retailers, the factor can front you the amount you’ll need to produce the collection, freeing up cash for other expenses. Keep in mind, the factor will charge interest on that loan.

Once basic financing is in place, it’s time to address costing product, so that the initial investment generates a steady profit.

UNDERSTANDING THE TARGET CUSTOMER AND WHERE TO PRODUCE

Several basic questions should be answered in the business plan, including:

*Where is the product positioned in the market? (e.g., luxury, fast fashion, etc.)

*Who is the competition?

*Who is the customer? Are you targeting the retailer or going direct-to-consumer?

Answering these questions informs the target price point. Once that’s established, it makes it easier to decide where to produce. Cost will drive the quality of goods, e.g., the higher the quality of a product, the more it will cost to make. Making a high-end luxury offering will require specialized skills and exceptional materials that add to the bottom line. A more value-oriented product may be produced using automation and more commonly available materials, bringing the cost down. Different manufacturers, different countries, and even different regions specialize in making products for these diverse parts of the market. (Check out our SOURCING at MAGIC Country Guide Library for guidance on specific nations’ specialties.) Visit SOURCING at MAGIC to connect with manufacturers at all levels and to get a firmer handle on how much it will cost to make your product.

PRODUCT DEVELOPMENT/PROFIT MARGINS/SALES

Once you have bids for production, those rudimentary figures are used to set up a pricing structure that allows for a profit. Profit margin is the term used to describe the difference between what the product finally sells for, and the amount paid to produce and sell it. Options include selling direct-to-consumer (DTC) on your own website or in your own store, wholesaling the collection to retailers, or both.

In wholesale, allowing retailers to make a profit on the sale must also be incorporated into the cost. (Remember that working with retailers can introduce your product to an established customer base without list-building and expensive consumer marketing.)

"I always recommend incorporating a wholesale pricing model from the beginning. This strategy keeps the door open for potential retail partnerships while maintaining a healthy margin for your brand. If you later choose to pursue direct-to-consumer sales, you won't need to raise prices that could alienate your existing customers," says a SOURCING at MAGIC Buyer Relations Specialist.

Will you work with agents, regional salespeople, or other intermediaries to sell your product? Those expenses also need to be built into the pricing structure. Include a marketing budget: a DTC business must invest in lists to build an audience. A wholesale brand may be asked to contribute co-op money to its retailer clients; e.g., a percentage of sales to help the store support its own marketing efforts. And finally, be aware that products that do not sell will get discounted, adding further pressure to that profit margin.

RETAIL MATH

Markup is the term the fashion industry uses to express the difference between a product's wholesale price and its final retail price. A common markup multiplier is 2.2x, meaning if a retailer purchases an item at wholesale for $1, the Manufacturer's Suggested Retail Price (MSRP) would be $2.20. This markup allows retailers to maintain profitability while accommodating periodic discounts or "markdowns."

TECH PACKS

We discussed Tech Packs in Sourcing 101. For fashion industry sourcing professionals, Tech Packs are the basic building blocks of any product, providing a sketch and all specifications for how the garment will be produced. We bring those up here because the data in the tech pack will also provide critical information for our next step, creating line sheets.

LINE SHEETS

A line sheet is like a tech pack for sales. It provides all the relevant product details that a retailer needs to know to decide which product to buy and how many. A typical line sheet includes, by style:

*A sketch or photo of the product

*Available colors

*Size range

*Wholesale pricing vs. MSRP

A line sheet may also include information about whether a minimum order is required, when orders are due, and whether or not this product will be included in an in-stock program.

TAKING YOUR PRODUCT TO MARKET

Once the customer has been identified, figuring out where to go to market should be clear. If you’ve chosen a direct-to-consumer model, you probably have a good idea of the aesthetic that your website or store will present. You know where a store will be located. Wholesale brands will know where their customers shop so they can target the appropriate retail buyers and/or trade shows.

FINAL TAKEAWAYS

Here are a few basic rules to keep in mind when developing the brand’s cost structure:

*All prices must cover costs.

*The best and most effective way of lowering your sales prices is to lower costs.

*Your prices must reflect the dynamics of cost, demand, changes in the market, and response to your competition.

*Prices must be established to assure sales. Do not price only against a competitive strategy, you must price to sell.

*Product utility, longevity, maintenance, and end use must be judged continually, and target prices should be adjusted accordingly.

Bringing a new fashion brand to life requires more than just a great idea — it demands careful planning, expert guidance, and a clear understanding of the market. From legally establishing a business and protecting intellectual property to managing cash flow, choosing the right production strategy, and developing a pricing structure, every step is critical to success. By combining creative vision with sound business practices, while leveraging the expertise of accountants, lawyers, and industry professionals, aspiring fashion entrepreneurs can turn their ideas into profitable, sustainable ventures. Rely on SOURCING at MAGIC for connections to great manufacturing and technology resources, but also for the knowledge and inspiration entrepreneurs need to navigate this challenging journey. Make plans now to attend SOURCING at MAGIC Las Vegas, February 10 to 12, 2025.

With our SOURCING at MAGIC community of entrepreneurs, you are not alone.

Meet your peers, join us at SOURCING at MAGIC Las Vegas.

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February 10-12, 2025

By its very nature, the fashion industry requires us to keep on top of trends, but that goes way beyond knowing the latest styles. MMGNET, home of the fashion industry’s ecosystem (and SOURCING at MAGIC's parent brand) produces leading content such as reports, guides and seasonal trend sessions. Navigate to SOURCING at MAGIC’s Resource tab where we offer valuable industry insights, reports, guides, and more. SOURCING at MAGIC's Seasonal Editorial page houses our library of Region and Country Guides, as well as event recaps, digital issues, and editorials. Check out some of our latest sessions and reports below.

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