Regardless of the motivation of the seller, the selling advisor performs fairly similar tasks in almost every transaction: evaluating business financials, enacting cost reduction strategies to drive down unnecessary expense; performing extensive due diligence reviews identifying management and operational synergies, developing confidential offering memos, and developing the legion of paperwork for the business review.
As advisors to a wide variety of sellers, our team at Keiter Stephens still sees most owners dividing themselves into five general categories:
The Time Is Now: The Natural Retirement Point
Many successful distributors with healthy balance sheets plan to sell today or some time over the coming year. A lifelong interest or dream of the golfing retirement in Florida can be even more appealing to folks at the natural exit point in their careers (especially now that real estate prices are appealingly low in southern climes). And if these want-to-be retirees have diminished appetite for being in the distribution business, it may make more sense to retire as planned, rather than run the business with less than their usual enthusiasm – before it shows in their revenues and damages their take-home valuation. In addition, some acquirers will want management to stay on for a transition period after the sale is completed – to aid a smooth transition and help retain the customer base. This potential time allocation should be factored in by the advisor and owner during the hunt for an appropriate acquirer as it may accelerate sales efforts.
It behooves advisors to these sellers to make sure that the quality of their business – and its ability to weather or even thrive during economic adversity – is clearly demonstrated during the process of matching the seller with the right kind of buyer, establishing the valuation and negotiating the deal. This is no bargain basement scenario, and we match these sellers with buyers who want proven quality – buyers who are making judicious growth decisions and who value these types of sellers more than ever before.
We Have a Price – We’re Waiting for the Right Time to Get It
Next, we see the sellers whose businesses are doing well, and the owners may not be at the definitive age or time of life where they feel the business has to be sold – but the number they get at the end of the deal is more important to them than the timing. Those with their price in mind are watching and waiting to see if now or next year is the right time to sell.
For these sellers, an advisor has to be extremely realistic and pragmatic in forecasting what their business valuation is today, in six months and next year. To avoid costly mistakes, this takes an advisor with proven experience both in foodservice distribution and M&A; one who knows the players and the valuations for similar types of businesses.
In this scenario, during the time leading up to the sale, the advisor can provide financial and strategic support or oversight to maximize the ultimate valuation – in our experience, time spent on sales preparation clearly pays off in the end.
Family Leadership Transition
The third bucket of sellers we see are the families who want to transition ownership to other family members. These are the same types of sellers we’ve always seen in an industry that boasts family-run distributors as its heart and soul. Today, though, the economic and emotional complexities involved in navigating family business issues of a closely held distributor can be more challenging. The tasks of the advisor include managing these issues while orchestrating a successful exit for the soon-to-be retired owners (including proper estate and tax planning) and developing a well-set-up strategic plan for the new management team to lead the business with today’s economic challenges.
We Want to Sell Just a Piece of Our Business
The fourth type of foodservice distributor sellers are those who may find that, for ordinary business or economic reasons, they don’t have the competitive scale to run a specialty business or under-capacity warehouse that a larger distributor has. Still others may be recouping losses from low margin business segments, customer departures or last year’s fuel crisis, and seek to sell off a piece of their business to generate cash flow to restore their financial health so that they can begin to grow their business again on more solid footing. These sellers may eventually find themselves becoming buyers once their fiscal health is restored with a cash infusion, but with a more informed eye toward their future geographic footprint and customer profitability.
Our Business is Bottoming Out – We Need to Get Out Fast
Our last example is the all-too-often trumpeted scenario of the distressed business. The owners feel like they are bailing water as fast as they can to keep their heads above the water line. The most dire cases we see in this group are sellers who try to bail for too long; they then find that the only remaining option is to liquidate the company’s assets.
When the early serious warning signs appear, we urge companies to consider their selling path immediately, while planning a parallel track of carefully planned cost-cutting and business growth initiatives. We are often asked “Why should we spend scarce resources preparing a parallel selling track instead of just working to restore sales growth and cut costs?” If you have enough time, and listen to good advice, you can often mitigate potential value loss by making the necessary adjustments early. Most buyers do not want to purchase a business that is in extreme distress with a lot of repair work to do. Even if the price is right for a distressed entity, the buyer may quickly turn towards other deals that are more expensive but have less “hair” on them. By preparing a selling plan as much in advance as you can, you are in the driver’s seat to avoid liquidation. If that advance time is one month, the advisor can still do something to help – if it’s 3 to 6 months, even greater efficiency measures can be achieved – if it’s longer, all the better to drive costs down and revenues upward. Advance preparation will equip you so that if Plan A doesn’t pan out despite best efforts, Plan B, the selling path, will already be mapped out to help prevent a fire sale scenario. This preserves customer and inventory value for the seller, and buyer, and in most cases, preserves jobs. An ounce of prevention is truly worth a pound of cure.
Today’s seller market is a medley of “the time is right”, “the family is ready”, “value needs to be nurtured and captured” – and for every part of that mix, preparation is key to making sure that decisions are made to maximize, instead of fritter away, value. For the buyers out there, these buckets of different types of sellers mean that there are a wide variety of opportunities available. There certainly are bargains, as the media shouts out, who may be natural additions, culturally, geographically, and financially to your business. And there are many, many quality distributors who are run as well as you are, and it just happens to be their natural time to exit.
For buyers and sellers, as always, prepare your paths and plan for the future – you are the one in the driver’s seat. As always, please give me a call to discuss your situation to see if we may be of assistance.
Bill Beattie is a co-founder and managing director of Keiter Stephens Advisors, the foodservice distribution finance and consulting subsidiary of Keiter, Stephens, Hurst, Gary & Shreaves. They have worked with over 50 privately-held distributors across the country: improving their bottom line performance, facilitating mergers and acquisitions, planning management succession, advising on incentive compensation plans, and coaching owners through their most difficult decisions. KSA finance and operations specialists have proven track records of creating value in the industry.