As one of the many industries experiencing intense fragmentation, the demand for distribution companies is on the rise among strategic and financial buyers.
If you’ve built a successful distribution company and you’re considering an exit, now may be the perfect time to sell: both financial and strategic buyers have pent-up demand for M&A after deals stalled during the COVID-19 pandemic, strategic buyers are especially well-capitalized heading into a potential recession and are positioned to pay top dollar to acquire firms that are complementary and offer opportunity for cost synergies. Distribution focused models remain a favorite of financial buyers (such as private equity firms) who are eager to deploy uninvested capital that accumulated during the pandemic (also known as “dry powder”).
If you are exploring the sale of your distribution company, it is important to understand the specific factors that drive value among the buyer universe. Below, we have identified 14 value drivers for you to focus on.
Financial Value Drivers for Distribution Companies
- EBITDA: Buyers generally like and value the distribution business model. They tend to look for opportunities with the potential to scale and they tend to aggressively seek targets with more than $4mm of EBITDA. Generally, higher levels of EBITDA present opportunities for scale and growth, which often contribute to higher valuation multiples.
- Margin, Margin, Margin: Buyers will focus on both gross- and EBITDA margin to gain comfort with the business model and opportunity for growth. EBITDA margins in excess of 10% indicate “value-add” and will differentiate your company in the marketplace.
- Product-Level Margin & Historical/Projected Trend: Buyers will do a deep dive into product-level performance and will seek to understand historical and projected gross margin by product. Are margins eroding? Are there opportunities for margin expansion? How does anticipated margin drive a shift in product mix? Are there new products you could bring on to drive margin improvement? Is a disproportionate percentage of revenue tied to one product or a select few?
Other Characteristics That Maximize the Value of Distributors
- Established Supply Chain: Buyers will seek out distribution platforms with an established and efficient supply chain with the ability to meet customer demands. Sole sourced suppliers in China or other politically-volatile countries will be diligenced heavily.
- End-Market Opportunity: How large is the end market you are serving? Is the end market growing? Are there opportunities to expand the end market through the addition of new products or services?
- Value-Added Offering: When evaluating a distributor, buyers will seek to understand the opportunities to maximize profitability and customer retention through value-added ancillary services. Do you provide additional services to improve profitability and retention? Can you introduce value-added offerings to improve customer relationships? Do you have a service component to your business that requires additional follow-up? Can you leverage technology to maximize efficiency and customer experience?
- Product Diversity: Does your company offer a broad range of products with multiple SKU options? Are sales concentrated into one product or product category? Diversification helps potential buyers feel confident in the sustainability of cash flow, therefore product diversification is critical to maximizing value.
- Customer Diversity: Buyers will want to see low customer concentration – if any customer contributes more than 15% of total revenue, buyers will want to understand the potential switching risk and sustainability of that customers revenue stream.
- Opportunities to Add New Products/Services: Can your company easily add new complementary products or services to fortify the offering? Has your company identified acquisition opportunities or roll-up opportunities in the sector? Have you successfully acquired a company in the past?
- Recurring Revenue: Buyers seek out revenue streams that are recurring and frequent in nature. Do you offer consumable products that need to be replaced? Can you offer subscription-based models to drive predictability of revenue? Recurring and re-occuring revenue streams are a highly sought after component and can translate to valuation premiums.
- Management: The quality of your management team will be a critical component in the final valuation of your business. Does your company have an established and experienced management team? Is the second layer of management qualified and prepared to take the company forward? If the company’s ownership is looking to exit and/or retire, have you developed a team to drive performance in the future? How are those managers incented and have you established long-term alignment with your growth objectives?
- Size & Infrastructure of Sales Force: Buyers will seek out companies with a large and effective sales team. Is your sales team stretched too thin? Are metrics in place to measure performance? Do you manage your sales team to a set of KPIs designed to produce growth? Do you compensate them appropriately to drive growth and performance?
- Availability of Data: Buyers will look to “dive in” on product-level trends and performance. Understanding price and volume trends as well as profitability by product will be instrumental during valuation discussions. Do you have a CRM in place? What technology are you utilizing to help drive data availability and growth?
- Working Capital: Buyers of distribution assets will require a base of working capital to be left in the business. Inventory planning is critical when considering a sale and a lack of inventory can negatively impact your final valuation. Working capital is often overlooked by Sellers who focus solely on headline purchase price. In many cases buyers will utilize the net working capital adjustment to extract additional value and most sellers are unaware or uneducated on the process.
Curious about the M&A market for your distribution company? If you aren’t looking to sell, but would rather stay with the business and grow it, are you aware of the capital options that can help you achieve your goals?
Contact us today to schedule a complimentary consultation with our distribution experts. Bridgepoint has valuable experience helping distribution companies and value-added distributors find the right buyer or growth capital partner so you can grow or sell your business with confidence.