How to sell your distribution business

10-step plan for exiting a medium-sized distribution company

“If you don’t plan, you plan to fail” – an old saying

You have worked hard for many years to build your distribution business. It has brought you income, happiness, prestige, and purpose. Now it’s time to make one last deal on the business and exit your business while making sure you get what you deserve.

A medium-sized distribution company like yours is typically characterized by strong customer relationships, a good logistics and material management system, a moderate amount of equipment, and sometimes large inventory. This combination of assets creates a unique set of challenges when it comes time to sell.

Here’s a 10-step plan to maximize your return on selling your mid-market distribution business.

1. Note that for a distributor with a valuation in the $3 million to $100 million range, Small Business Administration financing is not feasible and there are very few individual buyers who can fund this type of business on personal credit. The most likely buyer is another private company, a public company, or a PEG (see “Is Private Equity Right for Your Business”). These are professional buyers who have experience from multiple deals. Hire a knowledgeable M&A advisor or investment banker to bring deal-making experience. When valuing, acquirers think in multiples of the EBITDA of comparable companies. A good M&A specialist will help you increase EBITDA, increase the multiple and show the strategic value of the company so that you get more for your company. An M&A advisor is also familiar with the trade-offs required to maximize your after-tax earnings.

2. Check whether your company structure is suitable for a company sale. Are you a C Corp? S Corp? GMBH? Do you have multiple units with multiple purposes? Regardless of the type of company(s) you have, recovering depreciation can be a big problem for you if your distribution company has a large amount of depreciated assets. For distributors with significant assets, being a C-Corp can be a major tax disadvantage, as most acquirers prefer to sell assets rather than sell stock. In a C-Corp sale of assets, you will be taxed twice – once at the corporate level and once at the individual level! For most distribution company owners, it pays to hire your M&A advisor to fight for a stock sale.

3. Ensure that your books are in order and your financial statements are prepared, reviewed or audited as appropriate for your business. Your current accounting practices and tax structure may be designed to keep your taxes low on an operating basis, but they may not be right to leave your business (see “What Every Business Owner Needs to Know About Taxes and Valuation”). If your CPA firm is inexperienced in closing deals, consider working with a firm that does. In mid-market transactions, good tax advice can be worth hundreds of thousands if not millions of dollars.

4. Retain the right attorney for the deal. An attorney with transaction experience as opposed to litigation experience is more likely to help put together a successful deal. Many deals fail because of lawyers unfamiliar with transaction negotiations.

5. Understand how your competition is performing and how you are performing. What are your profit margins? What about inventory turnover? Is your equipment outdated? Do you have a lot of dead inventory on the books? Part of the value of the deal comes from the buyer’s perception of how you stack up against your peer group. Great companies get great reviews and mediocre companies get mediocre reviews. A competent M&A advisor can also help you package your business in a way that brings out the best in itself.

6. Reduce risk by diversifying your customer and supplier base. What percentage of your business is tied to one customer? How dependent are you on a supplier? What can you do to ensure that customers and suppliers stay with the company after the business sale? Are your contracts written in such a way that they can remain in the company regardless of ownership changes?

7. Understand and have a documented plan for your growth. How do you want to grow? Wider product lines? More services? Increase geographic coverage? What part of your business is online? How good is your site? Do you do business outside of the immediate geographic area? What makes you different in non-local markets? A good growth plan makes sales forecasts more credible.

8. Take steps to ensure your sales business transitions smoothly to the acquirer. What percentage of your business is contracts? Are they long term? How much of your business is recurring? Do you have maintenance contracts? Does one of the supplier contracts offer meaningful exclusivity? Do you have a reliable sales team or do customer relationships start and end with you?

9. Do you have any known deferred liabilities? Legal action? Problems with employee compensation? ESOP issues? Do you have adequate insurance coverage or have you been exposed to that one delivery or warehouse that catches fire and sweeps you away? If possible, address these and other similar issues before listing the business for sale. If not, discuss these with your M&A advisor to ensure they don’t become a valuation drag or deal-killer. Addressing these issues is particularly important if you are seeking a tax-friendly stock sale.

10. Be aware of the fact that business valuations are not set in stone and there are big differences in what you can get for your business (see “The Fair Business Valuation Myth”). The more you want to get for your business, the more planning and work your deal-making team will have to do, and the longer it’s likely to take. Plan early if you want to maximize your returns.

Good luck with your business sale and let us know if we can be of any assistance.