I started a Distribution business for General Electric Company, going from zero dollars of Sales
to $450 million of annual sales in two years. The sales growth was due to the impact of the
initial and bolt-on acquisitions.
The key aspects of selling a distribution business include:
Contracted exclusive relationships with vendors; this is, representation rights or territorial
rights. Buyers are terrified of buying a distribution business when the vendor representation
rights can walk away. Contractual rights are powerful in countering the Buyer argument that the
sales rights go away when the Owner walks out the door.
Inventory Management is a big key. It is great that the inventory is large and supports sales.
What is the inventory Turnover? What is the obsolescence in the inventory? How quickly will the
inventory go bad with technological advances? If a Distribution business is sitting on a lot of
inventory and think it is valuable, they must be able to demonstrate that the inventory is vibrant and
commercial.
Buyers do not want to buy a lot of old inventory, except when the inventory supports older
equipment that has no other source of spare parts. I worked on a transaction acquiring a
company’s inventory of old parts for installed equipment all over the world. The Seller thought
they were getting rid of a lot of old dog inventories to make their balance sheet look better. The
buyer made the purchase price back in six months when there was a major outage for two
installations requiring parts to maintain the equipment.
Does the Distributor buy products for inventory to shorten customer lead times? This is an
important factor in some distribution businesses.
The market basket of product offering is important. Many distributors have a few unique
products, this represents a huge risk for the buyer. The broader the market basket offering to
the customer base has two advantages. First, customers have one stop shopping. The
customers want to go to one source that offers the products they need at a great price. Second,
vendors become dependent on the Distributor’s relationships with customers.
Quality financial information is critical. Buyers want to be able to look at the business
metrics with actual, correct information. If a Buyer has to recast and recreate financial information
to determine what the business metrics are, the Distribution Business’s value goes down.
Receivables Management is another major factor. If the Distribution business is providing soft
terms to get the business from customers, they are buying the relationship versus earnings the
business through service and product availability.
All other factors include Sales Trends, Sales Force, and Sales Network. Let’s discuss.
If you are thinking of selling your distribution business, don’t work with generalists who say they
can sell anything. Sellers have better pricing and timing success when working with brokers who know
what a distribution business is, how to market the key aspects of the business and why it
has a future.
Dale Shepherd, Capital Business Solutions
Vice President and Managing Director, TN, NC, VA
Master Certified Business Intermediary
Certified Franchise Broker
Kingsport, TN
