Selling a Consumer Goods or Apparel Distributor

What a buyer is paying for

A buyer is paying for the gross margin that is left after freight, returns, markdown help and the deductions retailers take off invoices. The headline margin on the price list matters less than the margin that reaches the bank, and a careful buyer will rebuild it from the ledger. Expect them to ask for sales and margin by brand, by customer and by season, because a blended number hides the lines that make money and the ones that only look busy.

The second thing is access. A distributor holds relationships on both sides, with the brands whose product it carries and with the buyers at the stores that stock it. Some of that access is written down in distribution agreements and vendor setups, and some of it lives in the head of the owner or a long serving sales rep. A buyer wants to know how much of it would still be there on the Monday after closing. If every important account answers to you personally, the price will reflect that, and our post on owner dependency covers how to start moving those relationships to other people before you list.

The third is working capital. This is an inventory business, and a buyer will think about how much money the business needs to keep shelves stocked, how fast it turns, and how much of the stock is the kind that sells at full price. A distributor with a modest, fresh inventory and fast collections is a different purchase from one with a large warehouse of last year's colors and sizes, even if the sales are the same.

What makes one distributor worth more than another

Exclusivity is usually the biggest factor. A distributor holding the exclusive right to a brand in a territory or a channel has something a competitor cannot copy, provided the agreement runs long enough to matter and does not end when the ownership changes. A distributor buying open market product from whoever has stock this month is a trading operation, and buyers pay less for that, since anyone can walk in and do the same.

Spread of customers counts. A distributor with a few hundred active accounts across independent retailers, regional chains and online sellers is easier to value than one where a single department store or a single marketplace seller provides most of the revenue. Our post on customer concentration explains how buyers think about that, and in this trade the concern goes both ways, since a concentrated supplier is just as worrying as a concentrated customer.

Brand strength matters in a quiet way. If the brands you carry are growing, retailers reorder without being chased. If they are fading, the distributor ends up funding markdowns to move product that nobody asked for. A buyer will look at whether your best brands are gaining shelf space or losing it, and will probably talk to a few of the brand owners before they close, with your permission and at the right moment.

Private label and your own trademarks can add value, if the brand is registered and the designs and supplier relationships belong to the company. They can also add worry when the paperwork is thin. Buyers will check who owns the artwork, who holds the factory relationship overseas, and whether anything is registered in your name instead of the company's.

Seasonality cuts both ways. Apparel and gift products tend to sell in waves, with big purchases months ahead of the selling season, so the cash cycle swings. A buyer will want to see at least two or three full years by month so the swings look familiar and not alarming. A business that missed a season because a shipment arrived late will need to explain it, and the explanation should be written down before anyone asks.

The records a buyer will ask for

Buyers and their lenders will ask for business tax returns, monthly profit and loss statements, balance sheets, an accounts receivable aging, an accounts payable aging, and the inventory report by item with quantity, cost and age. They will want sales by customer and by brand, the open purchase orders on both sides, and the credit line statements. If you use a factor, they will want those agreements and the notification history.

The deduction history deserves attention before anyone asks for it. Large retailers take money off invoices for returns, damaged goods, late shipments, labeling errors and advertising allowances, sometimes months after the sale. A buyer will want a schedule of what was taken, what was disputed and what was recovered, and an owner who has never tracked it will be surprised how much a careful accountant finds. It is better to find it yourself and decide how to present it.

Expect questions on inventory counting. A buyer will probably want to watch a physical count, and the count should tie to the general ledger within a small and explainable difference. Slow moving and obsolete stock needs a reserve that makes sense. If the books carry old inventory at full cost, a buyer will mark it down on their own and take a bigger cut than you would have chosen. Our post on getting financials ready for a buyer walks through how to bring the books to a point where the numbers hold up.

Then the agreements. Brand distribution agreements, vendor applications and routing guides from the large retailers, sales rep contracts, warehouse and freight agreements, and any licenses to use someone else's logos or characters. Buyers read the termination clauses first.

What has to transfer

The distribution agreements are the first thing to read, and the clause to look for is what happens on a change of ownership. Some say nothing, some require the brand's consent, and a few let the brand end the relationship once the company is sold. In an asset sale the buyer is stepping into a new contract entity, and the brand may have to agree again. Our post on asset sales and stock sales explains why that choice matters for contracts like these. A distributor should find out which agreements need a phone call, and whether the brand is likely to give a favorable answer, before a buyer is in the picture.

The warehouse is the next piece. Many distributors lease space with racking, dock doors and an office, and a lender will want the lease to run long enough to cover the loan. The landlord has to agree to an assignment, and warehouse landlords in tight markets do not hurry. Some distributors use a third party logistics company for storage and shipping, and in that case the question changes to whether that agreement can be assigned and whether the pricing stays the same. See the lease is part of the deal for what that conversation usually looks like.

Vendor numbers and compliance setups are easy to overlook. A retailer assigns each supplier a vendor number and expects electronic orders, specific labels and shipping notices. When the supplier changes hands, a retailer may re-qualify it, which takes weeks and can interrupt orders. A buyer who understands this will ask for a plan, and the best plan is a short note from your operations person describing what each large account requires.

If product comes from overseas, import documents, duty classifications and the relationship with the customs filing company all matter. Tariff changes in the last few years have moved the cost of some categories a great deal, so buyers will ask how much of the cost of goods is exposed and whether prices to customers have kept up. Rules vary by state and by product category, and your attorney confirms what applies to your products, labels and any registrations you hold.

Key people also transfer, or fail to. The sales reps who hold the retail relationships, the person who runs purchasing, and the person who handles chargebacks are usually the three a buyer worries about. Our post on when to tell employees is worth reading before you decide who knows what and when.

What tends to sink a sale

Brand loss is the most common one. A distributor loses its best line, or learns during diligence that the agreement ends in a few months and will not renew, and the price changes the same day. The second is a retailer that reduces its orders after learning about the sale, or after a buyer calls to ask questions the retailer was never prepared for. Both are reasons to keep the process confidential, and we market a distributor without naming it, with buyers signing a nondisclosure agreement before they see anything that identifies the company. Our post on how we market a business confidentially covers the steps.

Inventory causes more late disputes than almost anything else. The buyer counts, finds less than the books show or finds more of the wrong things, and the discussion about price starts over. Agreeing early on how inventory is valued at closing, and how slow stock is treated, saves a lot of friction. Our post on earnouts, holdbacks and working capital goes into how those adjustments work.

Deductions and returns that surface after the sale are the third. A retailer takes a large chargeback three months later for something that happened before closing, and now the buyer and seller are arguing over who owes it. The purchase agreement can handle this, but only if both sides saw it coming.

How to get the business ready

Start a year out if you can. Put the key brand relationships into a form that does not depend on you, with a second person who knows the buyers and has been introduced to the brand owners. Clean up the inventory by selling or writing down what is old, and keep a count schedule that your bookkeeper follows every quarter. Build a deduction log if you do not have one. Read your distribution agreements with an attorney and make a list of which ones need consent.

Talk to your landlord about a renewal option well before a buyer asks. Make sure your trademarks, domain names and supplier contacts are in the name of the company. If you can, show the business growing in a new channel or with a new brand, since a buyer looks for a story they can continue.

When you are ready, we start with a valuation built from your own numbers, then prepare the materials a buyer and lender will expect, and screen buyers before they see the company. At Business Advisors of America we work with owners from the first valuation through the closing. If you want to see how buyers look at a company like yours, the page on selling a consumer goods and apparel distribution company is a good place to start, and a short call with us is the next step after that.

This article shares our opinion and general information. It is not legal or tax advice. Always speak with a licensed attorney for legal advice, and a qualified tax professional for tax questions, before you act.