Pros and Cons of Acquiring a Distribution Business
November 03, 2023
by a searcher from University of California, Los Angeles in Orange County, CA, USA
For those who have closed on distribution business deals, what are some of the benefits and challenges you experienced buying and operating the business? Any particular metrics to pay special attention to during DD?
Any feedback is welcome and appreciated.
in Montreal, QC, Canada
Benefits are probably what you expect, low capex, lean, good margins, few employees, simple business overall for the most part. Lots of potential as I see most distributors in my area are not really setup with a professional sales team and marketing is also lacking or inexistant.
As for challenges, suppliers can be hard to deal with, they can change agreements, not renew exclusivity contracts, not be very flexible, etc. Some of them prefer to diversify and have multiple distributors or simply skip the middleman and start doing the distribution themselves. Relationships with suppliers can be difficult and interests are not always perfectly aligned.
If not done properly, moat can be lacking as well and you'll end up competing on price. In my experience, you need to be an expert in your field first and become a trusted partner/advisor to your customers and you just happen to also distribute some brands. Without expertise and without added-value, you're just one more distributor and anyone with a website, a cellphone and a Linkedin profile can eat your lunch.
What I look for in DD:
* Do they have a moat? That could be an exclusivity agreement ideally, but it doesn't have to be. How strong and transferrable is the relationship with the suppliers? How long have they been in this space for? What's their reputation and expertise like? How much is recurring revenues? And I see 2 types of recurring revenues: consumables, stuff that needs to be replaced on a regular basis, but also customer retention. How many of these customers just call you when they need more of what you sell and don't bother calling competition? I.e. you sell some type of equipment and having multiple brands would complicate procurement, maintenance, training and whatnot. So you basically create a small monopoly every time you sell to one of your customers.
* I want to sell something important enough to them so that they'll be willing to pay extra for quality and service, but something that is a small percentage of their budget so they don't want to cut us out or shop around when they fall on rough times.
* How's relationships with the different partners? A strong relationship that can be transferred over to the new owner is better than an exclusivity agreement and a bad relationship IMO. Do you have leverage? That's Porter 5 forces, supplier power. If you decided to stop carrying their product, would they come back begging or they would just move on not thinking twice about you? I see lots of smaller companies in Europe getting their products distributed to North America through a smaller distributor. Losing that distributor would basically mean losing the north american market, that's leverage. Representing a large part of their revenues, that's leverage. Knowledge of the local culture, language, etc. All that can play an important role.
* I personally pay attention to cash cycle. Do I need to keep a lot of inventory on hand or can I basically dropship most of the time and be paid before I have to pay my supplier? I worked for a business that imported screws from Germany and sold them to US and Canada. This stuff is heavy, so we needed to import containers and stock high quantities of many different screws lengths and diameters. Lots of our cash flow would just go straight back into our inventory. That kind of business needs quite a bit of cash to grow compared to one that mainly dropships.
* Then there's the general stuff. Is this in a good growing industry? Our niche grew at 15%+/year with the screws, so even if we were sucking our thumbs, we'd grow at more or less that rate.
* Do I have a strategy to grow this company and increase sales sustainably? It can be low hanging fruits like consistently upselling and cross-selling to existing customers, developing a professional sales force, but ideally do I see an opportunity to grow my market share that the current owner has not tried.
That's what I can think of right now. I'd be happy to jump on a call if you'd like to discuss this further. Always a pleasure to bounce ideas with fellow searchers.
from Duke University in Alpharetta, GA, USA