When considering a business for sale, purchasing a wholesale distribution company requires a comprehensive understanding of the industry, the processes required to keep this particular kind of business “ticking over” and a detailed knowledge of the primary income drivers. Such an entity is very different to a traditional service business and can be far more complicated than it may seem from the outset. To sum it up, with this kind of business, it’s far more than simply a question of finding a rhythm and maintaining a continuous volume of repetition.
There are a variety of considerations to keep in mind, as in most cases, a fairly complex system of individual parts must be well established to ensure that this kind of operation functions smoothly. As a buyer you must understand that these businesses often operate on very thin margins and rely on a number of logistical elements to even function, let alone turn a profit. Your own due diligence process will require that you carefully analyze every one of these aspects individually and ensure that they’ll not only keep functioning after the sale, but will let you set achievable goals for continued expansion in the future too.
A wholesale business for sale can be seen as a “middleman” operation and you will need to be particularly aware of your suppliers. Always make a point of meeting with them – all of them, prior to making any major decisions, and make an effort to read between the lines to find out if there’s any kind of loyalty to the outgoing owner, which might place some of your business relationships in jeopardy after the deal is finalized. Look for long-term contracts, which should be of course transferable, or get a really good feel for the terms and conditions of renewal otherwise.
In a very competitive environment, if this prospect has any kind of exclusivity this could be a definite bonus. Try and analyze the entire market and see where you could sell additional products or services through the established distribution channel already in place.
Also, common issues are customer concentration problems whereby a few clients may represent a disproportionate volume of the revenue. Protect yourself with performance based deal terms.
As mentioned, wholesale businesses generally operate on thin margins. Due to this setup, financial arrangements and agreements are of primary importance. Review whatever kind of working capital needs you will require and be especially critical of cash flow analysis. How many days of grace do your suppliers afford you and what are the payment histories of your principal clients?
As with any business for sale, make sure that the assets purchased have a realistic value. Generally speaking, you may expect to inherit a fairly large inventory and you should get an independent valuation to ensure that this stock is not outdated and is saleable at the values claimed in the short run. Likewise, when you purchase wholesale distribution business assets, they must be fairly valued, especially with regard to transportation. The distribution fleet should not be in need of potentially costly repairs or replacement.
If the entire operation is housed within leased premises, one of your first ports of call should be the rental or leasing company. Whether we like it or not, the property owner or management company can have a significant say over the business transfer process and you must be happy that you can attain a solid, long-term lease within your financial parameters.
As a final buy business tip, always be wary if the business owner, as an individual or in concert with other partners such as family members, has a particularly visible “face.” Sometimes an entire business can be driven by personalities or the crafty marketing skills of the owner or his advisors. These may not be transferable assets!
Richard Parker is the President and founder of the prestigious Diomo Corporation – The Business Buyer Resource Center. His celebrated materials, seminars and consulting have encouraged thousands of aspiring business buyers from around the World to pursue their dream to buy a business.
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