The Secret to Buying or Selling a Distribution Company
Brent Grover, President — Evergreen Consulting
• distribution management best practices • management strategies • Wholesale Distribution Industry • mergers & acquisitions
Monday, January 15, 2018—What goes into selling or buying a distribution company? In this interview, Brent Grover discusses what you need to know if you plan on acquiring other distributors or eventually selling your own company.
Brent Grover is an expert when it comes to buying and selling wholesale distributors. His company, Evergreen Consulting, is a boutique consulting firm which, among other things, helps distributors navigate the often murky waters of wholesale distribution company sales. Much of this experience comes from Brent's own time as the head of a distribution company, which he later successfully sold. To avoid the monotony of retirement, Brent began consulting so he could share his expertise with other distributors. He's also the author of 9 books about distribution, the most recent of which was Mergers and Acquisitions for Distributors: Advice from the Experts.
"Here's one piece of advice: whether you're writing a book or selling a company, bringing in experts can save you time and trouble," Brent said. "For my most recent book, I partnered with a deal lawyer, a deal CPA, and an investor banker who specializes in wholesale distribution companies. As a result, we were able to provide a collection of information that you wouldn't otherwise be able to find in one place."
"If you're thinking of buying or selling a distribution company, you're going to need outside help," Brent continued. "If you've never handled a sale before, there's a lot you can miss. However, even if you've been through a few mergers or acquisitions, it's still very useful to get an independent evaluation from experts who make these kinds of deals. And the sooner you bring them into the process the better."
There are always opportunities to grow your business through acquiring other distributors. You may be able to find companies your size that aren't being properly run or where the owner needs to sell due to a family emergency. Remember to exercise caution, though, as there are a few mistakes you might make.
"The most obvious (and biggest!) mistake is overpaying," Brent said. "The easiest way to discuss valuation involves talking in terms of multiple turns. If you're buying a company for 6 times its EBITDA, that's 6 turns. Lately, because we've been in an overheated market, the premium is 2 turns. So if the price range should be 4 to 6 turns, it's been 6 to 8 turns although we'll occasionally see outliers in the form of 10 or 12 turns."
"People might overpay for several reasons," Brent continued. "The buyers may start to make unjustifiable adjustments on their spreadsheets for their return on investment analysis. They might also look at the synergies the new company offers and give some of the synergy to the seller rather than keeping it all for themselves. Finally, they might buy based on projections rather than historical analysis."
"Bear in mind that there are three major categories for these companies," Brent said. "The first are $2M to $5M EBITDA companies, the second is $5M to $10M, and the third is over $10M. Companies with less than $2M in EBITDA aren't of interest to big buyers. Your opportunity as a distributor is to go after those companies. As soon as you go after larger targets, you begin to compete with financial groups and larger companies."
Having sold a company myself, I can say that one of the best things for me was having an exit plan. You can't always time the market to what you want and you don't have time to prepare to get a good multiple. Should you have a family emergency yourself, it pays to have a plan in place.
The other major takeaway from my experience is that – even if I never intended to sell the company – the exercise of making it salable added discipline to my thinking. We started to make decisions based on evaluations and got really aggressive about write-offs. If we were going to take a hit on profitability, the sooner you took it the further in the past it'll be if we needed to sell.
"A good analogy is having a nice home," Brent added. "Even if you don't plan on selling your house, the things that make it more valuable – such as repairs and improvements – also make it more pleasant to live in."
"When it comes to selling a business, it helps if you have a track record of growth and profitability," Brent continued. "You also don't want to be too heavily concentrated in any one supplier or customer. Buyers like diversification because there's less risk involved. Demonstrating that you're a good asset manager and have a well-managed balanced sheet can also go a long way in swaying a buyer."
For more information about Brent Grover, visit: www.evergreenconsultingllc.com