Selling an Industrial or Construction Supply Distributor

Accounts, trades and concentration

Buyers start with the customer list. A distributor that serves a mix of electrical, plumbing, concrete, framing, welding and maintenance customers has spread its risk across trades. One that sells mostly to three large contractors does not. Our post on customer concentration explains how buyers react when a few accounts carry the company, and the same logic applies here when one general contractor represents a large share of the year's sales.

Contractor business can move with the construction cycle. A buyer will look at sales across several years to see how the company handled slower periods, and at how much comes from new construction compared with repair, maintenance and industrial plant work. Maintenance, repair and operating supplies sold to a factory tend to repeat, because a plant uses safety gloves, fasteners and cutting tools every week. Project-based sales to a builder can be larger and less steady.

Buyers will ask how accounts are won and kept. If your outside sales team has carried the relationships for years, a buyer will want to meet them, review their pay plans and see how many customers talk to someone besides the owner. A counter that does a big walk-in trade is a different business from one that lives on phone and email orders, and a buyer wants to know which describes yours.

Supplier agreements and the line card

The products you are authorized to sell are among the most valuable parts of the business. A distributor with the exclusive local rights to a respected tool maker, a fastener line or a safety brand has something a competitor cannot easily copy. These rights are usually written in a distribution agreement, sometimes with a territory, a minimum purchase and a right for the manufacturer to end the arrangement on short notice.

Read each major agreement before you list. Find out whether it can be assigned to a buyer, whether the manufacturer has to approve a change of ownership, and whether the rebate or volume incentive programs carry over. A buyer's offer will often depend on keeping the top few lines. When a manufacturer declines to approve the new owner or changes terms, the price changes with it. We suggest talking to your key suppliers early in the sale about what they will need.

Volume rebates deserve special notice. Many distributors earn rebates from suppliers at the end of the year, and those payments can be a large piece of profit. A buyer will want to see how they are earned, when they are paid and whether they are recorded in the year they relate to.

Inventory and the warehouse

Inventory is usually the biggest asset on the balance sheet, and a buyer will count it with care. They will separate fast-moving items from slow ones, check for obsolete or damaged stock, and calculate how many times a year the stock turns over. Slow stock is worth less than its cost, and a buyer will value it that way. Special-order items bought for a specific customer and left on the shelf are a common problem.

Buyers also ask how inventory is tracked. A distributor with a modern inventory system, bar codes, cycle counts and clean item records inspires more confidence than one that relies on a long-time warehouse manager who knows where everything is. If a count at the closing shows a large gap against the books, the deal slows. The post on earnouts, holdbacks and working capital pegs describes how inventory and receivables are settled when ownership changes.

The physical site matters. A yard for lumber, rebar, pipe or masonry, a warehouse with racking and loading docks, forklifts, delivery trucks and a will-call counter all come with maintenance, insurance and permits. Many owners hold the property in a separate entity and lease it to the company. A buyer may want to lease it, or buy it as well, and our guide to real estate attached to the business covers the choices. If the site is leased from a third party, the lease and its term are central. See the lease is part of the deal.

Receivables, credit and terms

Contractors buy on account, which means the distributor is also a lender. A buyer will review the aging of receivables, the largest balances, the customers who pay late and the bad debt history. Mechanics lien rights, credit applications, personal guarantees and the collections process all come under review. A distributor with strong credit controls and a steady collection pattern is easier to finance, since a lender will lend against clean receivables and inventory.

Payables matter in the same way. Buyers look at supplier terms, early-payment discounts taken and any past-due balances. A company that stretches its suppliers to fund its growth may be hiding how much cash it needs. Expect the buyer to propose a working capital target in the letter of intent and to compare it to the last year of operations. Our post on letters of intent describes how that figure is set and why it matters to you.

Fleet, people and licenses

Delivery trucks, boom trucks and forklifts are costly to keep and to replace. A buyer will want a list of vehicles with age, mileage, condition and ownership, plus the driving records of those who operate them. Safety history counts as well, especially where the company moves heavy product on public roads.

The people who run the counter, the warehouse and the trucks are the business's daily face. A buyer will ask about tenure, pay, certifications and who could step in if the sales manager left. Some product categories need trained staff, for example propane, welding gas, chemicals or certain safety equipment, and those employees may hold certifications that stay with the individual. Licenses and permits for hazardous materials, resale and local business operation vary by location, and your attorney confirms what applies to you.

What tends to sink a sale

Several problems recur. A main supplier declines to keep the relationship with the new owner. An inventory count falls far under what the books show. A few large customers leave after hearing about the sale. Receivables prove less collectible than reported. Rebates were booked in the wrong period. The owner is the only person with the key contractor relationships, a problem described in our post on owner dependency. A lease on the yard expires soon.

Confidentiality matters because suppliers and customers talk to one another constantly, and a competitor who hears about a sale may call your best accounts. We market a distributor without naming it and require a signed nondisclosure agreement before a buyer sees anything that identifies it. See how we market a business confidentially.

Getting ready

Clean the books so that sales, cost of goods and rebates tie to the tax returns. Run an inventory count and deal with obsolete stock. Review the aging of your receivables and chase the old balances. Read every distribution agreement and make a short list of the ones that need consent. Introduce a second person to your top accounts. Gather vehicle titles, maintenance records and insurance history. Our guide to getting your financials ready walks through what buyers want to see.

If you want to know how a buyer would look at your company, the page on selling an industrial or construction supply distributor is a good place to start. At Business Advisors of America we begin with a valuation built from your own numbers and work with you through closing.

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.