How To Purchase A Wholesale Distribution Business
Purchasing a wholesale distribution business takes a comprehensive understanding
of the associated industry, the processes required to make this particular business "flow" and an in depth understanding of the primary income drivers. Such an entity is quite a bit different to a traditional service business and it's often far more complicated than it might initially seem at the beginning. In brief, it's much more than just a question of developing a volume of repetition.There are many considerations, as often a complex matrix of individual elements must be in place to ensure that this type of distribution company functions correctly. 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 due diligence will require you to analyze each of these individually and ensure that they will not only continue to function post sale, but will allow you to post realistic goals for expansion.
A wholesale business for sale can be seen as a "middleman" operation and you will need to be particularly aware of your suppliers. Make sure that you meet with them all prior to making any decisions and try to read between the lines to ensure that there is no kind of perceived loyalty to the outgoing owner, which may be under threat after the deal is closed. 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.
Finally, 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!
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