What does an A" company look like?
In MDM's recent Webcast, Distribution M&A 2008 Update: Value Redefined in a Tough Market -order the recorded presentation/transcript here -Evergreen Consulting's Brent Grover addressed why some companies draw smaller premiums in the M&A marketplace.
One factor: the quality of the distributor's assets. Smaller companies generally draw a smaller premium but can boost their value to the higher end if they consider the following, according to Grover:
"It will have a well-balanced sales force meaning, not being overly dependent on any one or two salespeople. The sales force will have a good balance of age and experience so they're not all going to retire at the same time. Oftentimes, companies who have customer-facing personnel who have non-competition agreements have an added element of stability.
"Contractual relationships with excellent suppliers: sometimes suppliers can react to an acquisition that they don't like by withdrawing support for the company after it's acquired, so a good relationship with the right suppliers and having the top suppliers in the market is crucial.
"And, of course, it is a company with a good culture that can easily be managed through the transaction process and integrated into another company. Our good friend Jack Welch has reminded us many times companies with an excellent strategic fit but not a good cultural fit often don't do well in acquisition situation. That's how I would define the solid gold target in addition to the other reasons mentioned."
The other top qualities mentioned earlier in the Webcast by the two other speakers -Supply Chain Equity's Jim Miller and PCE Investment Bankers' Jon Skelly -included:
- A quality management team
- An IT system
- Diversified customer base
- Diversified and long-tenured vendor base
- Geographic diversity or dominance
"They have everything
there so that the business can largely continue to grow organically, and it has the capabilities to be able to fold in add-on
acquisitions," Miller said. He added: "If a buyer can invest in the company and largely leave it alone, the company may be
considered an "A" company.
Distribution M&A 2008 Update provides an overview of the M&A market in distribution and case studies of recent deals, including HD Supply and Industrial Distribution Group. It includes a discussion of economic trends as well as the credit markets, commodity volatility and valuations. Learn more here.