The first step in selling your distribution business is to start looking at your distribution company as a potential buyer. This will help you gain higher valuations when the time comes to sell your business. Before putting your distribution company on the market, you need to determine what makes it special. You will also need to assess your company’s value and review financial statements and corporate documents.

Buyers seek strong, cash-flowing businesses. They need confidence that they can take a firm to the next level. So, you need to focus on aspects that will entice buyers and increase your firm’s value as a seller.

Vendor Relationships

Aside from financial success, certain traits can make your company appealing to potential buyers. First, establish a good vendor relationship. Usually, distribution firms face a competitive market with saturated supply chains, causing business competition. Having major vendors is one of the most important ways to set yourself apart from the competition.

As you consider exit strategies, carefully evaluate your most important vendors. Find ways to fill gaps in your catalog to increase value. Nurturing a comprehensive vendor line can lead to premium valuation and a reasonable pay-out.

You must demonstrate your role as a vital supplier partner and the value you add to the vendor relationship. Selling and marketing the firm’s product to buyers effectively while working within the manufacturer’s frameworks builds strong vendor relationships. Position yourself as a worthy partner to the vendor, and your firm will benefit post-sale.

Customer Relationships

Buyers, like vendors, value customer relationships. The M&A paradox requires reliable customers with strong growth prospects. Most successful deals are driven by a desire to gain a specific customer base or sector. Show prospective buyers the value of your clients and how the relationships can grow before selling.

Firms should know their ultimate customers and their churn rates. Long-term relationships with growing purchasing patterns will be valued over customers who only buy occasionally.  While you may not want to turn down potential revenue, prospective buyers value transactional relationships over relationships. In the years leading up to a sale, work to minimize revenue from other distributors and other transactional buyers while broadening your base of long-term customers.

Also, show how your company can grow and retain customers. With larger customer concentrations, you will need to show the depth of relationships and explain why and how different concentrations are important.

While relationships are necessary, having metrics and data for each customer will help you manage and understand them better. Some essential metrics are:

Order frequency/volume
Delivery accuracy/ efficiency
Average order size

You will be better able to serve your customers and sell more effectively if you collect and understand these metrics from your inventory management system.

Value-add Services

To prevent commoditization and thus margin compression, most distributors actively create value by selling value-added services that set them apart from competitors. Value-added services are attractive to acquirers because they reduce customer churn and increase margins. Sellers must clearly define their value proposition and understand how they differ from competitors.

Large distributors often lack a customized approach, so value-added services are an effective competitive strategy. In addition to providing differentiated services, distributors can increase revenue in several areas. These are:

Light fabrication
Education and training
Quality inspection
Product Kitting
Vendor Managed Inventory (VMI)
Same and next day delivery

Inventory Management Systems/ Warehouse

Buyers should consider a comprehensive inventory management system as supply chains move faster. Effective throughput management and problem assessment systems increase profits and value. These systems optimize and analyze important metrics like:

Total demand by product
Obsolete inventory carrying cost
Average days to sell
Inventory turnover
Write-off costs
Number of back orders
Rate of order fulfillment

Prospective buyers will closely scrutinize these metrics. Reliable historical performance and a valid commitment to investing in technology show an attractive opportunity.

When deciding whether or not to invest in a warehouse management system, keep in mind that technology is constantly changing how supply chains are managed. To be a distributor, you must fully grasp inventory and orders. It will help you save money, increase profits, and improve processes. Without it, companies can overstock or understock inventory. These are some of the things a prospective buyer may ask.

Inventory movement
Order selection
Inventory audits/cycle counts
Received goods stocking

These systems collect valuable data that will help you throughout the sales process.

Sales-Peoples and Channels

Technology is constantly changing industries, including the distribution industry. Use this new trend to boost online sales, but do not ignore traditional distribution channels. Maintain and grow these established accounts. Focus on how your company varies from competitors. What value-added services do you offer to win a client? A buyer will want to know the answer.

Invest in your employees and keep important salespeople. A buyer will find value in trained company employees.  It is necessary to show that there is no focus on a single salesperson during the transaction process. Your diverse sales efforts will influence the value.

Growth Capacity

Before starting the sales process, assess your company’s ability to expand and grow within its current structure. Verify that existing facilities can expand and that vendor agreements do not restrict sales territories. Such issues should be identified early rather than during due diligence when a prospective buyer can see them.  It would help if you communicated with your growth plan. Among the key questions are:

What can we do to grow our online presence and increase revenue?
Will a capital investment in new warehouse space or systems assist in increasing revenue?
Are there new territories to venture into?
Is there a need to hire additional salespersons?
What new end-markets should my firm focus on?

Seize growth opportunities before entering a market. It is your chance to explain how your firm’s existing relationships and assets can add value.

Clear Understanding of Margins

Any distribution industry transaction attracting high multiples requires a strong margin history. Reducing non-essential costs while improving customer service is a financial advantage in distribution.

Growing critical vendor volume and breaking points will boost margins. Adding value allows the firm to charge more and make more money.

Management and owners must constantly monitor EBITDA and gross margins’ effect on business decisions. Talk about fluctuations because buyers will see them at the sale. High margins always attract serious offers. These metrics are vital for business owners planning to sell in the next few years. Take time to improve your company’s margins.

Timing is Key

To maximize your company’s value, timing is vital. Your business depends on the state of the economy and product demand. If the end market weakens, distribution company valuations fall. However, value-added services and diversification can help. Spend some time on the above to maximize your business. Investing in your distribution company can increase its value.

Prepare for Success

Selling your business is a life-altering decision. It’s never too early to prepare for a successful sale of your distribution business. Some of our most successfultransitions began five years prior to the actual sale. We are glad to discuss how you can integrate value-adding strategies in your business now that will boost your value in the future. Contact us today to learn more about how we can assist.

Integra Business Brokers has a team of credentialed valuation experts and brokers available to assist you. Whatever you want to achieve, our team can define, evaluate, and identify solutions for your next step. Give us a call at 1 (888) 415-5118. We’re here to help.