What Matters Most in a Private Equity Transaction in Distribution - Modern Distribution Management

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What Matters Most in a Private Equity Transaction in Distribution

Success depends largely on two factors, according to a recent panel.

We continue to see a big impact from private equity investment on the wholesale distribution industry. Private equity firms like the industry because of strong cash flows, multiple growth and margin enhancement opportunities and diverse end-markets, according to industry experts. Most sectors are still relatively fragmented, as well, providing a lot of opportunity for building out platforms.

In a recent article on Knowledge@Wharton, the author writes that successful private equity investments result from a number of factors, including a clear plan with just a few priorities and careful research pre-purchase.

The article, based on a panel at the 2013 Wharton Private Equity & Venture Capital Conference, outlines at least two other factors that may be critical to success:

1. The right company. Just as with any acquisition or investment, a deal is more likely to succeed if the investors did their homework. This applies on both sides of the aisle, however. Private equity firms must choose the right company, but as we’ve seen, it’s just as important that the targeted distributor select an investor in line with its goals.

In the MDM article, Private Equity Drives Deal Demand, Joost Thesseling of CI Capital Partners, agreed this was important: “Talk to multiple people. Most good companies get calls from investment bankers and private equity firms. Money is money, but most private equity firms are small places. If you’re selling your business to a private equity firm, particularly if you are staying on, you will be partners with these people for a long time. Chemistry is incredibly important.”

2. Support from distributor leadership. According to the panelists quoted in the article, the leader of the company must be an “eager supporter” of the new owner’s strategy. Many private equity firms use a 100-day plan starting on the day the deal closes, which makes it even more important to have the leadership of the target company on-board, according to the article.

Read about the impact of consolidation in distribution the 2013 Distribution Trends Report.

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