What Buyers Look For in a Food and Beverage Distributor

The supplier agreements come first

Most of the value in a distributor sits in the right to sell certain brands in a certain territory. A buyer will ask to see every supplier agreement, how long it runs, whether the territory is exclusive, and what the producer can do to end it. Some producers can terminate on short notice. Others need a reason, and a few require their own approval before the distributor changes hands.

That approval is where many sales get tight. A producer that likes the current owner may have no feeling about a stranger, and a producer with a second distributor waiting in the wings can use a sale as the moment to move the brand. We suggest owners read each agreement closely before listing, sort the brands by how much gross profit each one produces, and decide which suppliers need a conversation early. A distributor whose top three brands all have clean, assignable agreements is a different business from one whose top brand is on a handshake.

Routes, trucks and the cost of a delivery

Buyers want to see what it costs to put a case on a customer's shelf. That means delivery cost per stop, drop size, fuel, truck maintenance and driver pay, all broken out by route. A route with large drops to a few grocers behaves differently from a route with a dozen small bars and cafes, and the second one usually looks worse on paper even when the customers are loyal.

The fleet matters too. Buyers will ask for the age and mileage of each truck, whether the trucks are owned or financed, and what refrigeration units are on board. Drivers who hold the right commercial licenses are hard to find, so the buyer will count how many you have, how long they have stayed, and whether any of them are close to retiring. If the owner still runs a route on Fridays, a buyer will notice, and will ask who covers it after closing.

Customers, receivables and the sales team

Customer concentration shows up fast in this industry. A distributor with one regional chain accounting for a large share of sales has a different risk than one with a few hundred independent restaurants. Neither is automatically better. The chain gives volume and the independents give margin and loyalty, and buyers price each differently. Our post on customer concentration explains how a buyer weighs this.

Receivables get close attention because restaurants fail and grocers pay slowly. Expect a buyer to ask for an aging report, a list of write-offs over several years, and how credit is approved for a new account. A clean aging report is a quiet selling point. A pile of old balances from closed restaurants is a reason to cut the price or hold some of the purchase money back.

The sales team holds the relationships with buyers at the stores and kitchens. A buyer will want to know who owns each account, how reps are paid, and whether they have signed anything that would stop them leaving with a customer list. Reps who have been with the company for years and are paid on gross profit tend to make a buyer comfortable. Reps who only answer to the owner do the opposite.

The warehouse and the product on the shelf

Buyers walk the warehouse. They look at racking, pallet movement, dock doors, cold rooms, freezers and the systems that track each lot. In food, a recall can start with one bad pallet and end up at a hundred customers, so lot tracking and temperature logs are examined closely. Expect requests for inspection reports, sanitation records, pest control contracts and any history of recalls or corrective actions.

Inventory is a deal point of its own. Shelf life, damaged goods, slow movers and expired product all affect what a buyer will pay for the stock on hand. Most sales of a distributor include a count of inventory at closing, and the purchase price moves with the result. An owner who has let slow inventory pile up will see it come out of the price, so clearing it before listing is usually better than defending it during diligence. Our post on earnouts, holdbacks and working capital pegs covers how that adjustment is set.

Licenses, permits and the lease

A distributor operates under a stack of approvals. Food handling and warehouse registrations, local business permits, vehicle registrations, and for anyone moving beer, wine or spirits, wholesale alcohol licenses that are held by the entity and reviewed by regulators. Some of these transfer, some have to be applied for again, and the alcohol licenses in particular tend to move slowly. Rules vary by state and your attorney confirms what applies to you.

The warehouse lease deserves the same attention. A distributor cannot move easily, because cold rooms, dock doors and truck access are expensive to rebuild. A buyer and their lender will want enough lease term left to justify buying the business, plus renewal options at a rate that can be predicted. If the owner holds the building personally, the sale usually includes either a new lease or a purchase of the property, and our post on real estate attached to the business covers that path.

What sinks a sale

Most failed distributor deals trace back to a short list. A major supplier would not consent. The numbers by brand did not match the tax returns. A large customer left during the process. The trucks needed replacing sooner than the buyer budgeted. The books showed sales that were rebates or pass-through items, and the buyer reclassified them downward. Each of these can be fixed in advance, and none of them is easy to fix in the middle of a deal.

Confidentiality needs care as well. Suppliers, drivers and sales reps all hear rumors, and a producer that learns of a sale before the owner tells them may start calling other distributors. We market a company without naming it and require a signed nondisclosure agreement before anyone sees identifying details. Our post on how we market a business confidentially describes the process.

Getting ready

Start by pulling every supplier agreement into one folder and reading them. Build a gross profit report by brand, by customer and by route, and check that the totals match the tax returns. Clean up the receivables. Clear dead inventory. Write down how orders are taken, picked, loaded and delivered, so a buyer can see that the business runs without the owner on the dock. Talk to the landlord about the lease before a buyer does.

Business Advisors of America prepares the valuation from your own numbers, builds the materials a buyer and lender will expect, and screens buyers before anyone sees the company. If you are weighing a sale, our page on selling a food and beverage distribution business is a good place to start, and a short call with us is the usual next step.

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.