By: Richard Parker: Author of How To Buy A Good Business At A Great Price ©
Having been in the distribution business for many years, I can understand how it can be attractive as a business to buy. The key consideration is to determine what drives the revenue and profits of the particular entity. It will either be sales or logistics and you must be certain that whichever one is the “driver” must be your greatest strength.
One would think that generating sales is the main ingredient and surely that makes sense. If your greatest strength lies in selling, then you’ll want to find a wholesale – distribution business where sales drives the business. However; there are many businesses in this sector where logistics are key and that can be in a stocking distributor, or local wholesaler where having the products in stock, available to ship in an efficient manner, are what generates the customer activity.
What to Consider When Buying a Wholesale – Distribution Business
- Does the company have any element of exclusivity in the product it distributes?
- What is the relationship with the suppliers? Are there contracts in place? If so, will these transfer to you? If not, can you get them or what is your potential exposure?
- Be sure that you meet the key supplier(s) prior to closing
- Are there any customer concentration issues?
- Do you have a keen eye for product? One surefire way to build the business is to add additional products to your base and sell them to your existing distribution channel.
- Do you have access to additional funds for expansion?
- What are the working capital requirements and specifically, what is the DSO (Days Sales Outstanding) because receivables and cash flow can get pretty tight in these businesses.
- The purchase will generally include an optimal operational level of inventory. You want to be certain that the inventory is good and re-saleable and not obsolete. Verify the items against the prior 12 month’s sales for each item.
- Is location critical to the business’ success? If so, be sure that you have a solid, long-term lease in place.
- If the company has delivery vehicles you will want to get a valuation done but more importantly you need to know how long they will last before needing replacement. Be sure to adjust the Owner’s Benefit downward for future capital expenditures to allow for replacement costs.
- Can your customers potentially buy these items from a cheaper offshore supplier?
- Does the business thrive based upon price, or quality, or service?
- Margins in these businesses can be quite slim and so the systems in place could have a dramatic impact on the profitability. If they do not have state of the art systems, you’ll want to determine what it will cost to implement them.
- What does the owner do each day? Is he the “face” of the business? How easily can their skill set and “know how” be transferred to you?
You may find that these type of businesses have a lot of moving parts to them. Unlike service businesses for example, a wholesale – distribution business is the “whole smorgasbord” – there are employees, inventory, receivables, suppliers, capital costs, low margins, competitive pressures, etc. That is why it is especially important that you do an exhaustive job of researching the industry and properly preparing yourself for the process of buying a wholesale or distribution business.