While M&A activity was strong in 2018, there are a number of factors lining up to make 2019 even stronger. (Disclaimer: MDM is not a financial advisory service; these are just my observations of how the tea leaves look in the kettle of distribution from watching 30 years of business cycles play out.)
When you look at the average age of owners, the business ecosystem of wholesale distribution not surprisingly aligns with broader generational trends – baby boomers are retiring in record numbers. Those who own distribution companies are looking carefully at the current business cycle and evaluating options and timing. Anecdotal reports into MDM are that deal pipelines are chock full – deal makers are running full tilt.
And even though rising interest rates and volatility in equity markets created more turbulence in financing markets in 2018, there is no shortage of investment capital looking for landing spots. Sellers are in a great place to catch it and prosper in a hot market – for the most part.
The main story really doesn’t change that much from cycle to cycle. Well-run companies that optimize their pricing and profitability command higher multiples; those that haven’t are targets for private equity firms to unleash untapped EBITDA. Companies less susceptible to economic cycles attract more attention. That success formula doesn’t change much. What changes are the new market dynamics in each cycle that impact valuation.
I’m writing this during MDM’s third annual Sales GPS conference, where we focus on ways to transform a traditional outside sales model into a more integrated, digitally-supported and team-based approach. It’s difficult to change generalist roles of sales people; that challenge is compounded when you consider that the trending demographics of distribution sales forces is a picture of reps in their 50s and above. Similar to the owner’s tenure, many have been in their generalist role for decades.
Companies that are proactively addressing this sales force challenge are worth more – simple equation. They are bringing millennials into the mix and creating specific sales, support and service roles for a team. They are updating their sales model to one that is more effective and profitable in an increasingly digital marketplace.
The other new metric that’s emerged in this cycle has largely been driven by the three-year growth of Amazon Business to a $10-billion distributor and marketplace. Distribution companies that are more Amazon-proof are more valuable. They have developed a more service-focused versus transaction-based model; products are the cover charge to get in the door, not the margin generator.
These new dynamics in 2019 are shaping M&A decisions for owners as well as the strategic and financial buyers. No one can accurately time market cycles; those who have moved the levers to increase value and EBITDA have a lot more control over their destiny. Those companies with an aging sales force, exposure to digital competitors and dependency on transactional margin are more vulnerable than ever. That bitter brew seems to be setting up a potentially record year for deal activity.