Welcome to our “How to Sell” series with industry-specific information on how companies are valued and key factors affecting final sale price.
Companies distributing durable or nondurable goods to retailers, other distributors, industrial clients and commercial clients.
Key Valuation Considerations
- Inventory Management: Profitability of companies in this sector is reliant on efficient inventory management and order fulfillment operations. Companies with quality systems and up to date technology will command higher multiples. This includes having the right software in place to help manage operations. Depending on the product line, consignment programs with manufactures who will take back inventory after a certain period of time are a major plus. If a buyer feels that additional CapEx (capital expenditures) are necessary to upgrade systems, it will be reflected in the sale price.
- Customer Concentration: Reliance on a few key customers will drive down valuations multiples and affect payment terms as it poses significant risk to the buyer. This is particularly true when customer relationships are directly tied to the owner(s) exiting the business. Companies sold with a high customer concentration often have deferred payment terms where the proceeds from the sale are paid over the course of years and vary based upon revenues and retention. Long-term contracts with key customers may negate risk associated with higher customer concentration. In general, higher multiples are awarded when no one customer accounts for more than 10% of sales.
- Supplier Competition: With improvements in logistics systems and accessible technology, manufacturers are increasingly operating their own distributions systems. In addition, many large retailers are approaching manufactures in attempts to bypass distributors. This not only makes customer concentration more important, but supplier concentration as well. The highest valuation multiples are achieved by companies who do not have any supplier accounting for over 5% of revenue. Companies with strong supplier relationships who do not sell directly to customers will also command higher valuation multiples.
- Management Team: It is common for business owners to be hands on in day-to-day operations in a way that makes the business reliant on the owner. This could manifest itself in a variety of ways, such as failure to develop staff or by directly managing customer relationships. A well-rounded management team will command higher valuation multiples and give buyers confidence that the business will continue to run smoothly after the owner exits. If management, or the company in general, is heavily dependent on the owner, the final sale price and terms will be affected and the owner may be required to stay on for a certain period of time to help transition the business.
- Other Important Considerations:
- Value Added Services
- Industries Served
- Geographical Concentration
- Exclusive Relationships
- Internet Sales
These are only a few variables. A professional valuation is strongly recommended for accuracy. Contact us for a simple, free valuation today or for information on our full suite of valuation services.
1 SDE: Seller’s Discretionary Earnings is EBITDA plus all owner compensation and benefits.