Multiples / considerations for distributor businesses

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June 10, 2024

by an investor from Duke University in Texas, USA

Has anyone acquired or invested in distributor businesses?

Trying to figure out what the multiples should be? It's a scale business with about $2.5m EBITDA

Also, any considerations? This one is a steel distributor


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Reply by a searcher
from The University of Chicago in Nashville, TN, USA
I haven't invested in a distribution company but before going into search full time I had spent the last 10 years working in it, first in chemicals and then in hardware. Distribution is a tough industry to make money in since your value-add is limited and both your end customers and vendors may view you as a "necessary evil" and will often try to work you out of the deal if possible, Your primary value adds will be customer service and your delivery network, be very cautious if either of those components are heavily outsourced.

Steel in particular would have a couple call outs. As ^redacted‌mentioned, steel will have considerable commodity price risk. High weight products will also limit how far products can economically be delivered to end customers so it is possible to carve out a local niche but expanding to new locations may require investments in new facilities. Feel free to reach out directly if you would like to discuss.
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Reply by a searcher
from Rhodes College in Houston, TX, USA
At the size range suggested, a hypothetical distributor of a specialized product in a growing market with tangible competitive advantage/differentiation may trade at HSD LTM EBITDA.

Commoditized products with low end-market growth = LSD.

The working capital cycle tells many tales; if you're serious, study it and ask a ton of questions. Also beware commodity price exposure.
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