I left my first stint in investment banking for the less glamorous world of automotive equipment distribution. Going from suits and boardrooms to jeans and paint booth pits was quite a transition, but it helped me realize what more and more people are finding out: the path to wealth is often found in owning a blue collar, service-oriented business, and then eventually selling that business. But if you’re reading this, there’s a good chance you already know that.
In my case, the catalyst to leave investment banking was to join my family’s 30-year-old automotive equipment company following a strategic buyer’s interest in purchasing the business. I loved the idea of working with my family, and it was a truly great experience. At the time, I felt my banking experience would be helpful in the sales process and that I would like to experience it firsthand, which is also how I got back into banking. But until that initial acquisition interest, my family had not fully realized how valuable our company would appear to outside buyers. In fact, it was such a niche business that selling had never become a serious discussion. After all, who would buy a business in an industry that 99% of the country has never thought about? Spoiler alert: There was a ton of interest from all sorts of potential buyers.
Distribution is sometimes overlooked as the key cog in the automotive aftermarket ecosystem it is.
Whether you sell coatings and parts, paint booths and frame machines, or alignment equipment and compressors, you’re vital to the success of your customers. They rely on you to help them make money, plain and simple. Now, with massive levels of consolidation among your customers—be they collision repair centers, tire stores, or car dealerships—you’re at a bit of a crossroads yourself. As your customers get bigger and more sophisticated, they expect you to do the same—or exit the industry.
This “grow or go” conundrum is leading to significant M&A activity among the distribution companies that service those customers. Consolidation is underway, and valuations are high. In short, despite all the challenges you face in the business world right now, it’s a good time to be an owner—and potential seller—of a distribution company in the automotive space.
So, if you’re open to selling your distribution business but not sure where to start, here are some things to think about from someone who’s been involved as both a seller and a banker. The first order of business is to make sure your organization is ready for a transaction. Here are some steps to do just that:
Consult an investment bank or M&A advisor
Find the right team to market your business and have your back throughout the M&A process. Your investment bank is an extension of you and your company in the marketplace, so make sure you are well represented.
Look for investment banks that specialize in your space and market. It certainly helps when they’re familiar with your industry, its valuation trends, and its buyers. Some key things my family and I considered when selecting our investment bank included industry experience and expertise, a high-quality team, FINRA licensing, and a good cultural fit.
The right investment bank will help you focus on the right metrics to get you where you want to go, even if you’re not there yet. They will also help guide you through some of the less obvious potential pitfalls that come with selling a distribution business, such as informing your suppliers beforehand and working with them to ensure a smooth transition. That’s what my family did, and it ended up opening a whole new world of potential buyers, allowing us to maximize the business’s value and find the right partners for long-term growth and success.
Get your finances in order
One of the biggest factors hampering transactions from taking place is less-than-stellar financial records. If that sounds familiar, don’t fret! When we sold our family business, we recognized our financials were lacking in sophistication and brought in an ace CPA firm to help. It made a significant impact and changed the entire selling process for the better. In our case, we were introduced to our accounting firm by our investment bank. If you don’t have an accountant, ask your investment banker to refer you to one.
Stay focused on growth
When a sale is looming, it is easy for owners to focus on that sale as much or more than the daily operations of the business itself. This is a major trap. Keep pushing the growth! Doing this will ensure you get the best valuation possible and avoid any cold feet from buyers at the finish line. Stability within the business throughout the M&A process is key.
Map out the future
Some owners want to be done with their business entirely and ride off into the sunset that is retirement. And that’s perfectly OK. Others don’t want to get out entirely, but they’d like to take some money off the table and find the right partners to fuel growth within the business. Both cases attract two entirely different types of buyers. Based on what you want your business to look like after the sale, your investment bank or M&A advisor will help you find the right partner. In our case, we wanted to keep some skin in the game and play a major role in the company’s future growth.
What kind of buyers are out there?
Let’s say you’ve decided it is time to sell. Great! But what kind of buyers align with your vision for the future of the company and of your desired level of involvement down the road, if any?
Strategic buyers are companies currently operating within your industry. They might be competitors, suppliers, or industry allies in a different geographic area. Depending on the size of your company and the size of the strategic buyer, there likely won’t be much opportunity to maintain equity. That’s because strategic buyers generally purchase 100% of a business and integrate it fully into their existing operation. If you’re looking to exit the business completely, perhaps after your employment agreement is up, finding the right strategic buyer might be the perfect option for you.
Your own employees
Would someone on your team—or even your entire team—be interested in buying you out? Maybe! Under the right conditions, this is not uncommon. Some unique structures such as ESOPs can make this type of transaction a win-win, depending on the type, size, and industry of your business.
A private equity firm typically buys the majority of a company, sometimes purchasing the firm outright or leaving a significant portion of the equity to the seller. The level of involvement a private equity firm takes in the day-to-day management of their portfolio companies varies significantly by firm, which highlights the importance of finding the right PE partner. This type of transaction allows the seller to stay involved and maintain ownership and benefit from another sale in the future. This is the route my family chose, and for the right business, it can be a great option. In our case, it was. The influx of capital and the knowledge of our PE partners fueled and expedited our growth significantly.
Selling your distribution business is an exciting proposition, but there are many moving parts and roadblocks that can make the process daunting. You’ve dedicated blood, sweat, tears, and—perhaps most importantly—a lot of time to your business. Nailing the transaction to ensure all that hard work is rewarded properly is paramount. After all, you don’t want to fumble at the goal line following a beautiful 99-yard return, right?
Selling your business can often be a once-in-a-lifetime opportunity, so when that opportunity comes, make sure it’s executed properly. Find yourself the right partners and maximize your valuation. You’ve worked hard to get here, now finish strong!