Part two in a series of articles to help distributors who are thinking about selling their companies

by Jane E. Baynard and Scott Benfield

Every privately held business will ultimately either be sold, transferred or go out of business at some time in the future. 

Owners can create substantially more wealth by planning their exit strategy than by letting that ultimate transfer of their wholesale distribution business sneak up on them. Unlike the market for publicly held companies (i.e. the stock market), the market for privately held businesses is grossly inefficient. Why? In short, a lack of liquidity. In order to enjoy liquidity, a critical mass of participants engaging in actual transactions is required. In the market for privately held businesses, this is by definition impossible. However, it is possible and increasingly important to get as much out of your business as you can despite the inefficiency inherent in the value determination process for private companies.

Selling your wholesale distribution business will probably be the largest and most important transaction you are ever involved with. Owners can spend a lifetime building a company, then lose a large measure of its value by making mistakes through inexperience during a one-time event — selling the firm. 

There are no second chances when selling your company. Education on the planning and selling process is essential. You owe it to yourself, your family and others impacted by the future of your enterprise to plan the exit so that everyone exits with optimum value.

As a result, we’ve developed this series of articles to assist wholesale distributors in assessing the decisions involved in the process and to help distributors execute an effective divestiture strategy which maximizes the value of their business in the current market environment. In this segment of our article series, we overview the process of selling your wholesale distribution company. (Click here to read the first article in the series, To sell or not to sell? Making the decision.)

Getting the business ready to sell
Selling the company is the final and, usually, most important move in a distributor’s career. Selling at the right time is critical to maximizing the value of the sale. The first step in the sales process is to prepare your distribution business to attract top-quality buyers. The wholesaler who views his business as a lifestyle “consumption vehicle” is not thinking ahead for the long term. 

Using business revenues as a source to support personal spending undermines the long-term value and growth of the business. When selling suddenly becomes an option, these owners often find themselves in “behind-the-eight-ball” situations. 

If there is a buyer with capital and reasonable sophistication, he will exploit you. In short, savvy buyers look for personal excesses in private enterprises and pursue their identification/eradication in valuation with vigor. As a result, successful sellers typically start readying the company for sale three to five years before they actually sell it. So, when the right time comes, they are ready.

The disposition of a wholesale company business, particularly if family-owned or closely held by a small business interest, is a multi-faceted endeavor, presenting far too many issues to explore in one short article. But here are some of the basics that we will look at in more detail throughout our series:

The scrub
Nearly all privately held businesses are operated to minimize the seller’s tax liability. Unfortunately, the same operating principles and accounting methodology that minimize tax liability also minimize the overall business valuation. 

As a result, there is often a conflict between running a business the way an owner wants and preparing it for sale. Although it is possible to reconstruct financial statements to reflect the actual operating performance of the business, this process may also put the owner in a position of having to pay back income taxes and penalties. 

Therefore, plans to sell a business should be made years in advance of the actual sale. This will permit the time required to make necessary changes in accounting practices that demonstrate a three- to five-year track record of maximum profits. 

The skinny is, to sell your business for the maximum amount, you should be prepared to drive earnings for several years before you put out the For Sale sign. If you are not sure how to do this, we recommend you grab the best outside advice you can and develop a solid plan for growing net cash flow. If you have ignored the areas of pricing, outside sales force deployment, and non-headcount expense management, then we suggest you carefully consider these areas where earnings can be improved.

Assembling the team
To properly handle the sale of your distribution operation, you should assemble a team of competent, experienced professionals. Your team should include a mergers and acquisitions (M&A) advisor, an accountant and an attorney. The M&A specialist will manage the process, locate and qualify buyers as well as provide guidance on determining the sales price, and keep the sale on track to close. The attorney and the accountant will assist in reviewing the transaction structure to ensure the most favorable tax treatment, and review the deal documents for your protection. 

The memorandum
To successfully sell your business, your team will need to convince buyers that your wholesale distribution operation is worth investing in even though you want to divest. 

Before identifying acquirer candidates, a memorandum must be developed that succinctly describes all positive aspects of your business, which in addition to assisting buyers in distinguishing your business from others they might be considering, will also support the asking price.

Valuation
An accurate valuation performed by your M&A advisor provides an estimated current market value range of your business based on cash flow and other factors. There’s always skepticism about a private company’s reported results, but three to four years of audited financial statements can alleviate most concerns. 

The valuation is determined from the financial statements and is based on owner benefits, cash flow, trends and the amount of debt that can be serviced. It follows the same format that banks use when making loans. 

Should you choose not to work with a transaction advisor, you might consider at least having the business “appraised”; appraisals provide an opinion of value from a third party. Remember, you can’t get the most for your business if you don’t know what it’s worth.

Locating potential buyers
Third-party buyers for wholesale distributors can come from anywhere — customers, suppliers, the community, industry competition or investor groups. Unrelated buyers who may be unearthed during the selling process can usually be divided into two groups: financial buyers and strategic buyers. A third group of potential buyers is composed of people you already know well: your family, managers or employees. 

Screening potential buyers
As the old adage points out: Time kills deals. So you don’t want to waste time with prospective buyers who either have no realistic ability to buy or operate your business or who are just tire kicking. If a group expresses serious interest in your business, your team needs to investigate their past and present business experience and their financial wherewithal. 

Just as due diligence will most assuredly be done on your company, you should likewise ask for potential buyers’ financial statements and tax returns and any other information that your team needs to determine the legitimacy of their candidacy as a buyer.

Due diligence
Due diligence is like a marathon, not a sprint. The key is to focus on the long-term objective, otherwise the process will wear you out. It has several tiers, including a general review, detailed investigation and continuing evaluation. 

The purpose of the general review is to determine whether the transaction makes sense from both a buyer and seller perspective. 

The detailed review is clearly the most time-consuming phase and begins after acceptance of a letter of intent. It requires a thorough examination of not only the details of the memorandum but all referenced corporate papers, financials, etc. 

Most often, the evaluation process continues until the closing documents are signed with the buyer monitoring industry trends, assessing press releases and economic variables which may affect the purchase.

Completing the sale
If you’re working with a good M&A advisor and all goes well, the sale of your distributorship will occur according to your timeline. The result: You receive a nice, large check and/or agreement for other consideration. This final step, like in real estate, is called the closing. Most often, closings take place in a meeting that your team and the buyer’s team attend. You exchange documents and the money or other consideration changes hands.

By closing, you will have endured a long, arduous process. However, you’ll feel great, relieved because of financial reward but also because of the anticipation of the next stage or your personal and business career.

We’ve prepared a brief overview of the most frequently encountered potholes on the road to successfully selling a wholesale distributor firm. If you’d like to receive a copy, just let us know. In the third installment of our series we’ll look at how to build your selling team, who should be on it and why. 

Jane E. Baynard is an investment banker and Scott Benfield is a consultant for distribution. They have co-authored two books on wholesale distribution, including Pricing Management: Capturing Value for Distributors, and can be reached at their respective e-mail addresses: Jane  E. Baynard at jb@baymengroup.com and Scott  Benfield at bnfldgp@aol.com.

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