Considering a Liquidity Event? Value Drivers for Distribution Businesses

Ongoing M&A activity within the wholesale distribution industry has an increasing number of owner’s contemplating the sale of their business. Those who properly prepare and consider the criteria buyers use for an acquisition consistently achieve more favorable outcomes.

Below are some of the key metrics buyers will evaluate and the main criteria I used in analyzing potential acquisitions:

Preparing for a Sale

  • Develop A Reasonable Rationale for Selling. Buyers want to understand your intentions and believe that you are committed to selling.
  • Examine your Overall Operating Performance. If recent financial performance has consistently improved, the attractiveness of the business increases. If performance is inconsistent and declining, improve performance before entering the marketplace and be able to explain the declines.
  • Are the Financials “Clean?” If there are extensive personal expenses throughout the financial statements (i.e. club memberships, excessive T&E, salaries to non-employees), remove those to improve bottom-line performance and valuation. If the company does not have audited financials, consider an audit.
  • Prepare A Strategic Growth Plan. More than putting together next year’s budget, management must articulate how to successfully grow the company over the next few years.
  • Tie Up Loose Ends and Prepare for Inspection. This can involve solidifying key customer and vendor accounts and cleaning up the physical appearance of branches.

What Buyers Want

  • Financial Performance. Acquirers focus on several financial benchmarks to determine an acquisition’s attractiveness. These include gross margin, operating margin and growth performance.
  • Return on Invested Capital. Acquirers, especially in distribution, typically only consider companies with a return on invested capital (ROIC) that exceeds the buyers cost of capital.
  • Market Factors. Is the acquisition serving large, growing markets and are the trends within these markets favorable? Slower growth and smaller markets are less appealing.
  • Company Specific Risks. Are there issues related to environmental, asbestos, or customer concentration?
  • Growth Potential. Can the acquisition continue to grow organically or through acquisitions/consolidation?
  • Synergies and Integration. Buyers seek acquisitions where 1+1=3. This is accomplished through both growth and cost savings synergies.

Key Value Drivers

While the aforementioned apply to most companies in a sale process, certain factors are especially meaningful to distribution businesses.

  • Geographic Footprint. Does this acquisition expand existing geographic reach and provide access to new customers?
  • Product and Service Expansion. Does it allow the buyer access to new product and service lines, open new customer categories and provide for cross-selling opportunities to existing customers?
  • Systems and Processes. Does the acquisition operate on a current version of a distribution IT system and have standard business processes in place (this speaks to ease of integration)?
  • Vendor Alignment. Do the target company’s main vendors line up well with the acquiring company’s preferred vendors? Buyers also look favorably upon targets that consolidate purchases with a core group of vendors.
  • Management and Talent. Distribution is a people business and quality management and sales talent are crucial. People are what the acquirers are really buying. Cultural fit with the acquiring company is also important.

Consolidation within wholesale distribution remains active and offers opportunities for quality businesses to pursue a successful sale process. To maximize the outcome, please take note of the value drivers for distribution listed above as you prepare for sale.

If you have comments or questions about this article, or would like more information on this subject matter, please contact us.
Michael Poole

Investment Banking
mpoole@pcecompanies.com
Orlando Office

407-621-2100 (main)
407-621-2112 (direct)
407-621-2199 (fax)