Whether you’re actively looking to sell or buy a distribution company in 2021, or stay out of the pool altogether, it will pay to stay on top of what’s happening in M&A in 2021.
In or out, your competitive landscape is likely to change shape as M&A across all distribution sectors keeps ramping up. After the pandemic froze 2020 M&A activity in the second quarter, deal-making roared back to life in the fall and winter months. The pace of deal announcements so far in 2021 has been blistering.
So as the MDM team prepares for our upcoming virtual Distribution M&A Summit on Feb. 25, it was timely to check in with Brent Grover, a longtime distribution industry consultant who sold his family company more than two decades ago, and now focuses on his M&A advisory practice.
Grover has been a generous contributor of strategic insight to MDM for that time as a writer, speaker and presenter at our 2017 M&A Conference. He also authored one of our best-selling books, The Little Black Book of Strategic Planning for Distributors.
On our latest podcast, Grover spoke with us about the state of M&A and how companies can become more strategic in their buying or selling pursuits.
Pandemic Impacts on M&A and Valuations
From a financial outlook, consensus economic forecasts are positive for a strong recovery, particularly in the second half of 2021. And while financing was disrupted in the first part of 2020 and contributed to grinding M&A to a halt (along with nearly everything else), financing activity “is getting pretty similar to the way it was before the pandemic,” Grover said on the podcast. “Distributors over the years have become very good investments for private equity investors, and that news is attracting even more investors.”
While PE funds may be driving up prices — to the potential disadvantage of strategic buyers — multiples have been pressured, though not as hard on the larger deals.
“Multiples on smaller deals — companies with EBITDA between $2 million and $5 million — compared to a year ago … they’re down about one turn,” Grover said. “If they were six turns last year, six times EBITDA, in other words, five turns now. There’s less competition from PE funds in that size range. And it’s harder for funds to get favorable financing or any buyer on a really small deal.
“Multiples on mid-sized deals, maybe the $5 million to $10 million category, are about the same,” Grover said, “because the underlying factors really didn’t change much. And as far as the largest deals, EBITDA of $10 million or more, interest had dropped off, but it’s come roaring back.”
Grover’s comments reinforce the nature of distribution’s fragmented markets. Some distributors had record years while others were severely challenged. Some benefited from sales of PPE or other pandemic-related products that may be a one-time spike. Valuations, deal structures, negotiation and due diligence will be more complex to factor in the variables and one-time impacts brought on by the pandemic.
Advice to Sellers and Buyers
Grover’s advice to sellers: “Ideally, you would have closed your deal in February of 2020. But I would say sellers shouldn’t give up the ship. I think they have to rethink the way they do it now. And I would consider having a banker work for you and find multiple bidders as opposed to going out there and trying to cut a deal with a buyer without a stalking horse. You want to find buyers who are confident that if they bought your business, they know how to increase your profits. That’s the buyer you want to find.”
And his advice to buyers: “If I were a buyer, I might sit back and wait. If I were trying to compete with the market that private equity funds are in, I would let them overpay and not screw up my balance sheet because of that. But as far as the dabbling with the companies that are smaller, that are below the radar, I would be interested as a buyer to pursue those. But I would also price in the risks about the pandemic sales that I mentioned, the pandemic product sales. And also the inability to predict future earnings. When it all comes down to it, when we price a company, we’re trying to project future earnings. And I think it’s harder today than ever.
Grover’s two thoughts for distributors to keep in mind for the year ahead: risk and deal creativity.
On risk: “We have a lot of risks out there that we’re not accustomed to,” he said. That includes global political insecurity and potential impacts on overseas supply chains, domestic political and health instability with uncertainty about a return to more normal and stable operating environment.
On deal creativity, “I think sellers are going to be more receptive to the idea of reinvesting in their business. And buyers are going to be more open to that also, where if the seller is going to keep working for the company, that they will have some skin in the game. Their ultimate buyout of the balance of their shares will come later.”
Other creative deal elements on the table in 2021, in his view: Insurance for representations and warranties, more earn-outs, and more sellers getting independent quality of earnings assessments before they put the company on the market to speed up the sales process.
To listen to the podcast and hear more advice from Grover, click below.
Join Us (Virtually) at the 2021 Distribution M&A Summit
Grover will dive deeper into his perspectives and advice to buyers and sellers on important factors to consider in this current business cycle, valuations, creative deal structures and more during his presentation at our M&A Summit, so don’t miss out on this six-hour masterclass on distribution M&A, which you can attend live and/or review with your three-month on-demand pass.
You’ll take away insights on how your competitors may be planning their M&A strategy, how and where to build value in your business, and tips from an all-star line-up of some of the most experienced dealmakers on strategy drivers, negotiation, valuations, due diligence, integration – all the insider details that make for successful M&A transactions.