A Question of Worth
Working out what you can get for your business can depend on who is in the market and why, says Paul Green
How much is your distributor business worth?
This question is uppermost in the mind of a business owner considering a sale. However, a more suitable question is who might be interested in buying your business and why?
If you can determine this, you are more likely to maximise the sale value; knowing which interested party has the most need to buy may allow you to command a premium price.
Different strokes
In one such example, two distributors looking to make an acquisition had different business models themselves. One operated predominantly via a highly optimised website and the other had a more traditional face-to-face approach. The overall profit margin of the business for sale, which was a face-to-face business, was 25%.
The second distributor deemed this too low at the asking price as their minimum profit margin requirement was 30%. For the online distributor, however, the profit margin was not an issue. In fact, they had an urgent need to find additional trained staff to handle the volume of enquiries coming through their website. Buying the business enabled them not only to increase the proportion of face-to-face sales but, more importantly, to resolve the problem of a shortage of trained staff and they were happy to meet the seller’s asking price.
Brokered deals
If it is not possible to identify potential buyers and the preferred route to a sale is through a business broker, then unless the broker has previous experience of selling distributor businesses, it is possible that they will suggest an unrealistic multiple of earnings. However, it’s worth noting that there may be buyers who will accept this valuation, such as a new entrant or a foreign company with little industry experience or knowledge of the domestic market.
So, if a multiple of earnings may be unrealistic, what would be a realistic alternative?
My experience has been that assessing value starts with a review of three years’ worth of accounts, including the operating profit, the profit margin in each year, customer data (such as numbers and purchasing frequency), and the contribution to the operating profit from the top five customers. Any long-term contracts, the age of the business and the number of key staff will also affect the valuation as well as the route to market.
Based on my knowledge of completed sales in this sector, the valuation usually falls within a range of 75% to 125% of one year’s gross (or operating) profit, coupled with a current valuation of the net assets of the business.
The deal
Payment for the business may be in stages or in the form of an outright purchase, depending on the valuation. Stage payments normally vary in timescale from one to two years, with an initial payment and the balance linked to future profitability. The seller usually continues in the business and is paid a salary during the buyout period to ensure that operating profit is at least maintained to justify the valuation agreed.
An outright purchase or a reduced buyout period may adversely affect the valuation, especially as the loss of the owner or key members of staff may negatively impact customer retention. This is where the valuation of less than 100% of gross profit accounts for loss of business as a result of change of ownership.
I have been involved in the industry for almost 40 years and have recently witnessed a surge in sales and acquisitions of distributor businesses more than ever before. There may be a number of reasons for this which I will not delve into here and now, save to say that while I have no direct involvement in this activity, I would be more than willing to offer guidance to anyone considering selling.
If you have questions or need assistance with valuations or any aspect of the process, please feel free to get in touch at paul@galpeg.com.
Paul Green is managing director of the Galpeg Network which provides back-office support for promotional merchandise distributors.
