Can you sell your distribution business?
There continues to be plenty of M&A interest in distributors. But the sales process can bring specific challenges.
If you run a profitable distribution business, with solid supplier and customer relationships, you have a good chance of attracting interest from buyers.
Strategic acquirors are drawn to distribution businesses for a variety of reasons, including owning more of the value chain, securing their own supply chain, growing into new niches or industry verticals, or expanding their geographical footprint. Depending on the nature of your business, you may also get interest from Private Equity firms, who are particularly keen on businesses that supply critical products or components that must be replaced on a predictable schedule.
At Rockworth, we have worked on numerous transactions with distributors in a range of end markets, including electronics, industrial chemicals, and laboratory supplies.
There are various issues that can crop up during the sale of this kind of business.
Preparing carefully before you begin a sale process, and having expert guidance as you negotiate the deal, can help to overcome these challenges and maximise the value of your sale proceeds.
Some common issues include:
Stock management and the working capital adjustment
Discussions with a buyer about the levels of stock and working capital in your distribution business have the potential to make a big difference to the money in your pocket at the end of the process. As such, it is important to handle these negotiations carefully.
The ‘working capital adjustment’ is a technical area of M&A transactions. It is designed to adjust the purchase price to make sure the business has a ‘normal’ level of working capital for day-to-day operations.
However, reaching agreement on what is ‘normal’ can take time. As a minimum, the buyer will need to understand how quickly your stock turns over, your stock obsolescence policies, payment terms and cash flow cycle, and how accurately you can forecast near-term demand.
There have been additional challenges in this area in recent years, because many distribution businesses have been holding excess stock due to various macro-economic and geopolitical disruptions to the supply chain. A business that is now bringing its stock levels back to a lower level, will need to demonstrate that the corrected level is the true ‘normal’.
Customer concentration
Acquirors will want to know how many customers you have, and confirm that your revenue is not too concentrated with a small proportion of them.
As a general rule of thumb, if you derive more than 10% of revenue from a single customer, or more than 25% from your top five customers, then customer concentration could affect the value of the business. That said, rules of thumb should always be taken with a pinch of salt. Buyers will have different attitudes to concentration risk, depending on factors including the nature of their own customer base and the extent to which your customers could source products from alternative suppliers.
Supply chain resilience
You can also expect close scrutiny of your supplier relationships and contracts. Buyers need to have confidence that your supply chain is diverse and resilient enough to ensure you can continue to meet the demands of your customer base.
Common questions from buyers will focus on issues such as exclusivity arrangements, minimum purchase commitments, change-of-control contract provisions, geographic concentration of suppliers, and any single-source arrangements for important product lines.
Technology infrastructure
The technology you use to operate your business can make a difference both to the value of your business and the efficiency of the sale process.
Acquirors will be considering how to integrate your business into theirs. If your technology stack is built around a widely known and respected ERP system, buyers will be able to quickly gain confidence in the integration. Robust systems will also help you respond to due diligence data requests more easily, helping to reduce the time taken to reach a successful completion.
By contrast, businesses running legacy systems, self-developed databases, or bespoke software will have an additional obstacle to overcome on the path to exit. It won’t be insurmountable, but it could slow down the process.
At Rockworth, we specialise in helping distribution businesses navigate these complexities. If you are thinking of selling your distribution business, either soon or in the future, we would be delighted to talk through the issues above in the context of your business. We are always happy to share insights about who the likely buyers for your business will be, and the factors that will drive a successful outcome for you.
