{mosimage}This column addresses many of the key points a potential seller should consider. Please note that every company is different, so a tailored analysis of your business is required to assure that your decision makes sense for you and your family.
A SALE CAN TAKE DIFFERENT FORMS
There are several basic scenarios related to the sale of a foodservice distribution company. Here are some of the most common ones:
The Stand Alone: The buyer acquires your company and continues to run it as an ongoing business at your current location. If you own your facility, it may also be purchased or leased by the acquirer.
The Fold-In: The buyer purchases “selected assets”– usually your customer list, inventory, accounts receivable and trucks, and hires a portion of your employees – generally the sales staff and others who can impact customer retention. In this scenario, the buyer generally folds your operation into its existing facility.
The Specialist: The company being acquired fills out the acquirer’s “product portfolio.” These situations could include distributors such as a produce specialist, a meat-cutting operation, or a supplier to niche markets. How these are integrated varies widely.
The Partial Sale: The acquirer purchases less than 100% of the business, and the existing owners retain an equity stake in the business. The sellers would generally continue in a day-to-day management role.
This column focuses on the first option, the Stand Alone acquisition. Future columns will address other scenarios.
HOW ARE FOODSERVICE DISTRIBUTORSHIPS TRADITIONALLY VALUED?
Companies in our industry are generally valued on a multiple of normalized EBITDA (which means Earnings Before Interest, Taxes, Depreciation, and Amortization). The term normalized (or adjusted) EBITDA, refers to excluding those expenses that are either one-time expenses or those operating expenses that the buyer would not continue to incur after the sale. The later group generally consists of perks or benefit related items.
Buyers traditionally pay a “multiple” of the normalized EBITDA figure. Selling multiples for privately held companies in this industry have been ranging from four to seven times EBITDA –sometimes higher depending on the profitability and desirability of the business. If real estate is purchased, that price is negotiated separate from the price for the business. Traditionally, sellers must pay off long-term debt from the proceeds of the sale.
Owners who have expectations significantly beyond that range may be setting unrealistic expectations. To help make the most of your potential value, please consider the following recommendations.
12 THINGS OWNERS NEED TO CONSIDER, THE EARLIER, THE BETTER
Many of the points below apply to owners who are considering a near-term decision. Others require longer implementation and work best for those who are looking out 18 months or longer to implement a sale initiative.
1. Do you want to have an active role in the business after the sale?
Now is the time for honest soul-searching. This decision should be handled thoughtfully and with a clear understanding of your age, personal goals, financial needs and overall desire to continue working. Most acquirers will ask the owner to stay on for six to 18 months to maximize customer retention and ensure a smooth transition.
2. Where in the life cycle is your business? Is your business on the rise, stalled, or on the decline?
Ideally, an informed owner will time the sale of the business for a period when the company’s sales and profits are on the rise, but have not yet peaked. However, perfect timing may not always be an option. Companies that are not growing, but can weather a challenging economic period, may be best served by developing a plan that will focus on things that will have the greatest positive impact on profitability. Sometimes a period as short as 12 months can make the difference, however, taking 24-36 months is more common. The trick is to get started immediately with a well-designed approach.
Securing a fair price for declining or cash-strapped businesses can be more difficult – but it can be accomplished by identifying the right buyer. Securing the best price traditionally requires experienced advisors. Owners in this situation should consider professional assistance immediately before more drastic measures are forced upon them.
Potential buyers will want to see at least three or more years of financial performance, plus the most recent quarter. Either you, or an advisor knowledgeable with industry benchmarks, should be completely familiar with your financial performance so that your company can be presented in the best light.
3. Have a realistic expectation of what your business is worth.
Understand and be prepared to deal with industry norms. If your expectations are well above the high end of the scale, you will most likely become frustrated with the process and will not find a willing buyer. There are, however, instances when an amount above the market rate can be realized, but these are normally tied to an “earn out” provision where you achieve set goals during the first several years after the sale.
Caution: As a seller, you will need to separate the business reality from your emotional attachment to your business. The potential buyer will view the transaction as an investment and will be calculating his expected return on that investment.
4. Do things now that have a direct impact on profitability. Work on key initiatives that can improve your financial performance, including:
Conduct a customer profitability initiative (see our maiden column in April 11 edition of ID Report.
Consolidate item count and vendor count with the goals of reducing buyer and warehouse activity and significantly improving your vendor marketing income.
Closely examine delivery routes to improve cube efficiency; sell customers on adjustments to delivery schedules.
5. Tighten up your collection practices; clean up your receivables.
Having a quality customer agreement, signed by each of your customers, with personal guarantees on questionable accounts, can significantly improve the value of your business and the relative value you can secure for your accounts receivables. Getting your DSO in line and reducing your write offs can take time, so address this issue early in your process.
6. Clean up your inventory.
Like most of the other items on our list, this is always a good general business practice. However in a sale, a knowledgeable buyer will try to avoid paying for excess, old or slow moving inventory. They often ask the seller to remove it from the warehouse or offer to pay you less than landed cost. Get the jump on this reality by trimming your slow moving products on hand; sell old items even if you sell it at a discount. Once you get control of these items, maintain it.
7. Determine the appropriate level of working capital.
An acquirer will generally require that an adequate amount of working capital (current assets less current liabilities) remain in the business at closing. If working capital is too low, the selling price may be negatively impacted; too high, and a seller may not be able to retain the excess.
Your accountant or your advisor can help you analyze your working capital. He, or she, will review the most current 12-month (or longer) period and take into account any seasonal variations or growth in the business. Based on this review, you will be able to establish an amount sufficient to run the business. Then you can work to reduce any surplus or make up any shortfall in that number.
8. Capital expenditures and return on investment timeframe.
When considering a sale, owners may be well served by holding off on capital expenditures that will take a long time to pay off. On the other hand, expenditures that will have a near-term positive impact on earnings by immediately reducing expenses, will generally benefit an owner at the time of a sale.
9. Have all key employees sign a confidentiality/non solicitation agreement now.
A potential acquirer will view the retention of your senior managers, plus the sales force and the customer relationships they influence, as critical. Confidentiality / Non-Compete agreements are your insurance to solidify that asset. While state courts look at the “non-compete” aspects of these agreements differently, most courts do allow for the enforcement of confidentiality provisions. Consult an attorney familiar with your state’s law. I highly recommend that every distributor do this – regardless of whether or not they are planning to sell.
10. Keep the people who know about what you are considering to a minimum.
In spite of questions, excitement, nerves, need for information – this is the time to keep it buttoned up. Limit the number of people you bring into your confidence to a bare minimum and have each sign a tight Non-Disclosure Agreement (NDA). They won’t be insulted and it gives them a legitimate reason why they can’t tell others.
11. Find an acquirer whose company’s culture matches yours.
When creating a list of potential acquirers, consider the importance of a common / compatible culture. This is important even if you decide to retire rather than stay on under new ownership. Potential acquirers look at this factor too – because compatible cultures lead to faster transitions with fewer problems.
12. Should you engage an advisor or negotiate your own sale?
My best recommendation is to talk to people who have sold their foodservice distribution companies. If possible, pick companies that have recently completed a sale – their memories will be fresher and they can speak to current market conditions. This is a close industry; find someone you trust who can make the introduction. Find out if they used an outside company, and if not, would they hire one if they could start over again.
Develop a short list of potential advisors that have completed multiple transactions within the past 18-24 months. Insist on a minimum of three to five references; check them all. If you do decide to hire an advisor, bring one in to talk under a non-disclosure agreement but get them involved early. Any advisor experienced in this industry will be able to tell you in short order whether you’re selling at the right time, or if you should complete a series of activities to build up your business value first.
DEVELOP A PLAN AND A TIMEFRAME
As you go through the list above, develop a punch list of the things you need to accomplish and assign each item a rating based on the impact it can have on your selling price. Implement your changes on a schedule that improves the business without disrupting it or sending signals about an impending sale to your staff or your competitors.
Again, the ideas presented above are meant to help you think about a very important decision. . Should you have questions on selling your company, buying another one, or general profitability improvement, I’m always happy to answer questions or provide a confidential sounding board. These are tough decisions to make, and educating yourself about how to approach them is the most important part of the battle.
Reader comments on previous column: Good stuff. I’ve used gross margin dollar contribution per stop and the spread between stop costs as my main metric for years. As I get time, I will pass some strategies that have worked for me on “getting them up or out.” – Mike Murphy, Adams Produce
William G. Beattie, who is well known to foodservice distribution executives, is managing director of Keiter Stephens Advisors, the foodservice distribution finance and consulting subsidiary of Keiter, Stephens, Hurst, Gary & Shreaves. This is the launch of his maiden monthly column, which will be linked to website of Keiter Stephens Advisors. 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. Beattie can be contacted at bbeattie@ksadvisorsllc.com.
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