Step For Smooth Transition From Old Bookkeeper To New Bookkeeper How To Sell Your Distribution Business

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How To Sell Your Distribution Business

A 10-step plan to exit a middle-market business

“He who fails to plan, plans to fail” – Old Proverb

You have worked hard for many years to build your distribution business. It has brought you profit, satisfaction, prestige and purpose. It’s time to close your last business deal and leave your business, making sure you get what you deserve.

A mid-level distribution business, the type of business you have, is typically characterized by strong customer relationships, good logistics and materials management systems, moderate amounts of equipment, and sometimes large amounts of inventory. This mix of assets creates a unique set of challenges when it comes time to sell.

Here’s a 10-step plan to maximize your profits from the sale of your middle market business.

1. Keep in mind that financing from the Small Business Administration is not possible for a distribution company with a valuation in the $3 million to $100 million range, and very few individual buyers are able to finance this type of deal with a personal loan. The most likely buyer is another private company, a public company, or a PEG (see Is Private Equity Right for Your Business ). These are professional buyers who have experience in many transactions. Hire a competent M&A consultant or investment banker to gain experience in closing deals. When it comes to valuation, acquirers rely on EBITDA multiples for comparable companies. A good M&A professional will help increase EBITDA, increase multiples and unlock strategic business value to get more for your business. An M&A advisor will also be intimately familiar with the trade-offs necessary to maximize your after-tax returns.

2. Check if your corporate structure is suitable for the sale of the business. Are you a C-Corp? S-Corp? LLC? Do you have multiple properties with different purposes? Regardless of the type of corporation you are, if your distribution company has a large amount of depreciable assets, depreciating the depreciation can be a big problem for you. For distribution companies with a significant number of assets, the emergence of a C-Corp can be a serious tax disadvantage, since most buyers prefer the sale of assets to the sale of stock. When you sell C-Corp assets, you are taxed twice – once at the company level and once at the individual level! For most distribution company owners, it’s a good idea to contact your M&A advisor to fight for a stock sale.

3. Make sure your books are in order and that your financial statements are prepared, reviewed or audited according to your business. Your current accounting practices and tax structure may be designed to keep your taxes low on an operating basis, but they may not be suitable for exiting your business (see What Every Business Owner Should Know About Taxes and Valuation “). If your CPA firm does not have transaction experience, consider working with a firm that does. In mid-market transactions, good tax advice can cost hundreds of thousands, if not millions, of dollars.

4. Hire the right attorney for the transaction. An attorney with transactional experience, rather than litigation experience, is more likely to help craft a successful deal. Many deals fall apart because of lawyers who are unfamiliar with deal negotiations.

5. Understand how your competitors are doing and how you rate them. How good are your returns? What about inventory turnover? Is your equipment outdated? Do you have a lot of dead stock on the books? Some of the deal’s value comes from the buyer’s assessment of your valuation within a peer group. Great companies get great reviews, mediocre companies get mediocre reviews. A competent M&A advisor can also help package your company to get the best possible deal out of it.

6. Reducing risk by diversifying the customer and supplier base. What percentage of your business is tied to one customer? How dependent are you on one supplier? What can you do to ensure that customers and suppliers stay in business after the sale? Are your contracts drafted so they can stay in business regardless of ownership changes?

7. Understand and have a documented plan for your growth. How do you plan to grow? Broader product lines? More services? Expanding geographic reach? How much of your business is online? How good is your site? Do you do business outside of your immediate geographic area? How do you stand out in other markets? A good growth plan makes sales forecasts more reliable.

8. Take steps to ensure that your distribution business transitions smoothly to the buyer. What percentage of your business is contracted? Are they long term? How much of your business is recurring? Do you have maintenance contracts? Do any of the supplier contracts provide significant exclusivity? Do you have a strong sales team, or do customer relationships start and end with you?

9. Do you have any known hidden liabilities? Legal action? Problems with staffing? Problems with ESOP? Do you have reasonable insurance coverage, or have you been exposed to one load or warehouse catching fire and taking you down with it? If possible, address these and other similar issues before listing your business for sale. If not, discuss them with your M&A advisor to make sure they don’t impede valuation or become deal killers. Addressing these questions is especially important if you are looking for a tax-advantaged stock sale.

10. Be aware of the fact that a business valuation is not written in stone and there is huge variability in what you can get for your business (see The Myth of Fair Business Valuation). The more you want to get for your business, the more planning and work your deal team must do, and the more time it will take. Plan early if you want to get the most bang for your buck.

Good luck selling your business and let us know if we can help you.

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