10-Step Plan to Exit a Mid-Market Distribution Business

“Whoever does not plan, plans to fail” – An old proverb

You have worked hard for many years to build your distribution business. He has provided you with income, satisfaction, prestige, and purpose. Now is the time to make a final deal in business and get out of business while making sure you get what you deserve.

A mid-market distribution business, the type of business you have, is typically characterized by strong customer relationships, a good materials and logistics management system, a moderate amount of equipment, and sometimes a large amount of inventory. . This combination of assets creates a unique set of challenges when it comes time to sell.

Here’s a 10-step plan to maximize the sales performance of your mid-market distribution business.

1. Keep in mind that for a distribution company with a valuation in the $3 million to $100 million range, Small Business Administration financing is not feasible and there are very few individual buyers capable of financing this type of deal with personal credit The most likely acquirer is another private company, a public company, or a PEG (see “Is private equity the right option for your business?”). These are professional buyers who have experience in multiple deals. Hire a competent M&A adviser or investment banker to provide negotiation experience. Acquirers think in terms of multiples of EBITDA for comparable companies when it comes to valuation. A good M&A specialist will help increase EBITDA, increase the multiple, and expose strategic business value to get more for your business. An M&A advisor will also be deeply familiar with the trade-offs necessary to maximize your after-tax income.

2. Check if your corporate structure is adequate for the sale of a business. Are you a C-Corp? S-Corp? LLC? Do you have multiple entities with multiple purposes? Regardless of the type of corporation you have, if your distribution company has a large amount of depreciated assets, depreciation recovery can be a big problem for you. For distribution companies with a substantial amount of assets, being a C-Corp can be a big tax disadvantage since most acquirers prefer an asset sale to a stock sale. In a C-Corp asset sale, you pay taxes twice: once at the company level and once at the individual level! For most distribution company owners, it’s worth it to have their M&A adviser fight for the stock sale.

3. Make sure your books are in order and your financial statements are compiled, reviewed, or audited as appropriate for your business. Your current accounting practices and tax structure may be designed to keep your taxes low on an operating basis, but may not be suitable for exiting your business (see “What Every Business Owner Should Know About Taxes and Valuation” ). If your CPA firm doesn’t have any experience making deals, consider working with a firm that does. In mid-market transactions, good tax advice can be worth millions of thousands, if not millions, of dollars.

4. Hire the right attorney for the deal. A lawyer with transaction experience rather than litigation experience is more likely to help achieve a successful settlement. Many deals collapse due to attorneys unfamiliar with transaction negotiations.

5. Understand how your competition is performing and how you measure up. How good are your profit margins? What about inventory turns? Is your equipment outdated? Do you have a lot of dead inventory on the books? Part of the value of the deal comes from the acquirer’s perception of how you rank in their peer group. Excellent companies get excellent ratings and mediocre companies get mediocre ratings. A competent M&A advisor can also help package your company for the best deal.

6. Reduce risk by diversifying the customer and supplier base. What percentage of your business is linked to a customer? How dependent are you on a provider? What can you do to ensure that customers and suppliers continue to do business after the business is sold? Are they writing their contracts so they can stay with the company regardless of ownership changes?

7. Understand and have a documented plan for your growth. How do you plan to grow? Broader product lines? More services? Increase geographic coverage? How much of your business is online? How good is your website? Do you do business outside of the immediate geographic area? What differentiates you from non-local markets? A good growth plan makes sales projections more credible.

8. Take steps to ensure your distribution business transitions easily to the acquirer. What percentage of your business is under contracts? Are they long term? How much of your business is recurring? Do you have a maintenance contract? Do any of the vendor contracts provide significant exclusivity? Do you have a reliable sales team, or do customer relationships start and end with you?

9. Do you have any known latent liabilities? Legal actions? Workers’ compensation issues? ESOP problems? Do you have reasonable insurance coverage or are you at risk of a shipment or warehouse catching fire and taking you with it? If possible, address these and similar issues before listing the business for sale. If not, discuss them with your M&A advisor to make sure they don’t become a drag on valuation or business destroyer. Addressing these issues is especially important if you are seeking a tax-advantageous stock sale.

10. Be aware of the fact that trade valuations are not set in stone and there is a wide variability in what you can get for your business (see “The Myth of Fair Trade Valuation”). The more you would like to get for your business, the more planning and work your negotiating team must do and the longer it is likely to take. Plan ahead if you want to maximize your return.

Good luck selling your business and please let us know if we can help you.