As the M&A marketplace for wholesale distribution companies continues to be active, an increasing number of distribution company owners have begun to contemplate selling their business.
While the sale of a company is equal parts art and science, one thing is clear -owners and operators who properly prepare for a sale and take into consideration the main criteria buyers use in assessing an acquisition, consistently achieve more favorable outcomes.
Here is a synopsis of criteria buyers of businesses consider in an acquisition and what I focused on while executing acquisitions for HD Supply and Hughes Supply.
Preparing for a Sale
Once owners determine their desire to sell the company, it is necessary to follow a core set of steps to best position the business:
Develop A Reasonable Rationale for Selling. Buyers want to understand your intentions and believe that you are committed to selling.
Examine Overall Operating Performance. If recent financial performance has consistently improved, the attractiveness of the business increases. If performance is inconsistent and declining, improve it before entering the marketplace and be able to explain the declines.
Are the Financials Clean?” If there are extensive personal expenses throughout the financial statements (i.e. club memberships, excessive T&E, salaries to non-employees), remove those to improve bottom-line performance and valuation. If the company does not have audited financials, consider an audit.
Prepare A Strategic Growth Plan. More than putting together next year’s budget, management must articulate how to successfully grow the company over the next few years.
Tie Up Loose Ends and Prepare for Inspection. This can involve everything from solidifying key customer and vendor accounts to cleaning up the physical appearance of branches.
What Buyers Want
In addition to the sale preparation steps mentioned above, it is important to recognize what a buyer of a business will look for in a potential acquisition. Future sellers can use these guidelines when considering improvements to their businesses or in determining if they are an attractive acquisition target:
Financial Performance. Acquirers focus on several financial benchmarks to determine an acquisition’s attractiveness, including gross margin, operating margin and growth performance.
Return on Invested Capital. Acquirers, especially in distribution, typically only consider companies with a return on invested capital (ROIC) that exceeds the buyer’s cost of capital.
Market Factors. Is the acquisition serving large, growing markets and are the trends within these markets favorable? Slower growth and smaller markets are less appealing.
Company-Specific Risks. Are there issues related to environmental, asbestos, or customer concentration?
Growth Potential. Can the acquisition continue to grow organically or through acquisitions/consolidation?
Synergies &Integration. Buyers seek acquisitions where 1+1=3. This is accomplished through both growth and cost savings synergies.
Key Value Drivers in Distribution
While the aforementioned apply to almost all companies in a sale, there are factors more specific to distribution that buyers will focus on:
Geographic Footprint. Does this acquisition expand existing geographic reach and provide access to new customers?
Product &Service Expansion. Does it allow buyer access to new products &services, open new customer categories and provide for cross-selling opportunities to existing customers?
Systems &Processes. Does the acquisition operate on a current version of a distribution IT system and have standard business processes in place (this speaks to ease of integration)?
Vendor Alignment. Do the target company’s main vendors line up well with the acquiring company’s preferred vendors? Buyers also look favorably upon targets that consolidate purchases with a core group of vendors.
Management &Talent. Distribution is a people business and quality management and sales talent are crucial. People are what the acquirers are really buying. Cultural fit with the acquiring company is also important.