I’ve sold many wholesale/distribution businesses and there are some particular things that you should considering when making the decision to purchase this type of business.
Evaluating this type of business takes on the same method and considerations as any other type of business with a few unique factors that we must consider. When I evaluate a business the first factor I take into consideration is how long the business has been in business. I use a weighed multiplier method since there is no exact science for valuing a business. There is a range of justification, a scale of high to low based on facts of the business. For instance, how long the business has been in business falls under the category of income risk. A start up would be a 0 and a well established business over 5 years old would be 3. Many considerations go into this method, I.E. historical data, financing terms, industry, financial documentation available, difficulty of transfer, location, growth factor, competition, industry trend, etc. Based on my findings I’m able to provide a justifiable SDE (seller’s discretionary earnings) multiple and thus a reasonable asking price for the business. Wholesale/distribution businesses usually come with an established office, computers, warehouse equipment and trucks for delivery. The fact that this type of business does come with certain expected amount of assets is a plus for the multiplier.
Wholesale/distribution has the added factor of including the inventory and the receivables. You don’t have to sell the receivables with the business but I can tell you that it certainly makes life easier for everyone. The reason, most customers don’t send 1 check for every invoice. It’s the practice of many companies to have a pay schedule and send out checks once a month or bimonthly. They see what outstanding invoices are going to get paid and they just cut 1 check that covers multiple invoices, so if you haven’t sold/bought the invoices then every check needs to be scrutinized. If 1 check covers 5 invoices and 3 are from the previous owner and 2 are from the buyer’s time, then the buyer has to write a check to seller for the difference. If you times that by a large customer base, you see the issue, it can cause a great deal of confusion. In addition, if you’re planning on getting an SBA loan to purchase a wholesale/distribution business, the bank likes the receivables to be purchased because the buyer has instant income verses a rather long, cash draining wait time for a check to be applied to current invoices.
One important factor when considering purchasing a wholesale business is how the distribution of income is spread out over the client base. Any one account that represents more than 10% of the gross income warrants investigation. It’s important to look at that particular accounts longevity with the business and the relationship that’s currently in place. In the case of wholesale businesses I’m a fan of a long exit strategy. If the seller is willing to stick around for a while after the sale it will really help transition the accounts and give time for new relationships to form with the clients. I always recommend to retain as much of the staff as possible in any sale of a business for at least 6 months. It takes that long to get to know the ins and outs of the business. It’s likely that they’re several people who are the most important to keep after the sale beyond the obvious sales people, they would include the accounts receivables person and the delivery people that interact with the clients every day.
A wholesale business is an exciting and interesting business to run with typically large sales and B2B interactions. The key is to be adequately funded. You will have to be the bridge between the invoice for the materials and the receivables from the clients. Typically most wholesale businesses have an array of clients that pay on different time tables, it would be great if they kept it at 30 days but it’s not realistic. If you are underfunded you will undoubtedly struggle not only in maintaining the sales but most definitely in achieving any growth.
Overall the most attractive aspect of owning this type of business is the opportunity to make large sales quickly verses a retail business that demands many low end transactions to survive. However, that said each and every account is important and must be maintained. If you would like more information about purchasing or selling a wholesale/distribution business please don’t hesitate to contact me directly.
Christina Lazuric CBB,CBI
California Business Brokers