As the merger and acquisition marketplace for wholesale distribution companies continues to be very 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 for assessing the attractiveness of an acquisition consistently achieve more favorable outcomes.

The following is a synopsis of key steps one should take in preparing a business for sale, the criteria that most buyers of businesses look at when considering an acquisition and some of the distribution-specific criteria I focused on while executing acquisitions for HD Supply and Hughes Supply.

Preparing For A Sale

Once an owner or group of shareholders determines 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 your overall operating performance. If recent financial performance has consistently improved, the attractiveness of the business increases. If performance is inconsistent and declining, improve performance 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. These include 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 and integration. Buyers seek acquisitions where 1+1=3. This is accomplished through both growth and cost-savings synergies.

  • Key Value Drivers

    While the aforementioned apply to almost all companies in a sale process, there are certain factors that are more specific to distribution businesses that buyers will focus on:
  • Geographic footprint. Does this acquisition expand existing geographic reach and provide access to new customers?

  • Product and service expansion. Does it allow the buyer access to new product and service lines, open new customer categories and provide for cross-selling opportunities to existing customers?

  • Systems and 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 and 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.

    Consolidation within wholesale distribution remains active and offers opportunities for quality businesses to pursue a successful sale process. For those looking to maximize the outcome of a sale, please take note of the value drivers mentioned here as you prepare for the sale.