The wholesale trade and distributor sectors consist of businesses that act as intermediaries between manufacturers and retailers. These companies typically have business to business models and generate revenue through procurement of materials or products at low costs that are marked up for profit when sold and distributed. As these businesses offer convenience and eliminate the need to deal with multiple suppliers, they are popular among retailers.
Depending on the products distributed, businesses may be in a growth or mature life-cycle stage. The sector faces light regulation and is easy to enter. Competitive pricing, product selection, and service excellence are key factors that sector players compete on when attempting to acquire new business. Companies within this sector achieve competitive advantages through exclusive product offerings, or through outstanding supplier relations and distribution channels.
Specific factors of growth for sector players highly depend on the specific industry each distributor competes in. Players in the healthcare and consumer staples industry for example are more defensive and less volatile, while other industries face cyclicality in correlation to business cycles. Overall, given this sector’s centralized position within the economy, the factors that drive sector players are those that drive overall trade and commerce, namely the level of consumer confidence, the level of e-commerce activity, the industrial product index, and the level of corporate profits.
Consumer Confidence – Consumer confidence is an indicator of the future spending and saving patterns of individuals within the economy. When consumer confidence is higher, consumer spending typically rises, as individuals have more confidence to spend on non-discretionary items. Higher trade would necessitate higher usage of the distribution and whole trade sector services, thus leading to growth.
E-Commerce – The e-commerce industry heavily relies on the wholesale trade and distribution sector not only for fulfillment of sales, but also for procurement of product. As a result, increases in e-commerce activity such as the boom seen during the pandemic, directly positively impact sector players, resulting in higher demand and revenues.
Industrial Production – The industrial production index measures the real output of the manufacturing, mining, electric, and gas industries. As these industries rely heavily on the transportation of finished or partially completed products, a rise in this index would indicate higher demand for the wholesale trade and distribution sector services.
Corporate Profits – With higher corporate profits, corporations would not only rely more on sector players not only for fulfillment of increased sales, but as well for potential expansion of serviceable areas that excess profit may be used for. Higher corporate profits would thus indicate higher demand in both the short and long term for industry participants.
Recent Wholesale & Distribution Advisory Mandates
Selling a Wholesale & Distribution Company
The wholesale & distribution industry has seen strong growth over the last decade, supported by a global e-commerce boom and developments in online business. The pandemic further accelerated a shift to online business, acting as a catalyst for distributors and wholesalers. Wholesale and distribution businesses are important to the economy due to their ability to connect manufacturers to a wide market. As Canada’s leading private market M&A Advisory firm Beacon understands that selling a business is an important decision. A dedicated business owner not only seeks to extract maximum value from the sale of a business but also seeks to sell the business to a competent buyer who can continue the company’s legacy. Beacon has worked on over 100 valuation and M&A advisory mandates in the wholesale & distribution sector, bringing extensive experience in deal negotiation to the table. Our experienced advisory team will assist your business in navigating the entire sell-side M&A process.
As an entrepreneur or business owner who is exploring a potential sale, it is important to understand some key factors specific to the manufacturing sector that might impact the likelihood of a potential sale. These are factors that determine business attractiveness for potential buyers and investors.
Exclusive Contracts – For a wholesale and distribution company, having exclusive contracts and multi-year service agreements with key suppliers and reputable clients can exponentially improve the likelihood of a successful sale. Having exclusive territory and contracts not only creates an economic moat and a defense against competition, but also allows a company to exploit higher margins. Contracts and agreements also make it easier for buyers to forecast the company’s future cash flows and reduce dependence on owner’s existing relationships with key stakeholders.
Supply Chain – The most important factor influencing the success of a wholesale & distribution business is its network of suppliers and ability to procure raw material for its customers. Companies that have invested in optimizing their supply chain are better able to fulfill orders at a faster rate while reducing delivery overhead. Companies with well thought out supply chains that have no bottlenecks or sole source suppliers are generally less risky and considered more desirable to potential buyers.
Location and Facility – As a distribution & warehousing business, it is important to have a strategic location which is easily accessible. Having a location in close proximity to suppliers and customers can significantly reduce delivery costs and times, thus improving a company’s profitability. In addition, having a facility that has capacity for expansion is important. If a distribution company requires significant capital expenditure to grow, the valuation of the company will be impacted negatively.
Inventory – Distribution & wholesale companies often carry a large amount of inventory to ensure a high fulfillment rate, however at the time of sale this can pose two challenges. Firstly, the book value of inventory can be higher than the enterprise value of the business based on an earnings multiple. The situation gets worse if some of this inventory is obsolete and cannot be sold to a buyer. Secondly, carrying a large amount of inventory requires higher storage and warehousing costs. Having a lean inventory management system and efficient supply chain can make the business scalable and reduce facility overhead, boosting profitability.
With 40 years of combined experience serving businesses within Toronto, Ontario, and abroad, the Beacon transaction team has extensive knowledge and experience successfully working for several wholesale and distribution companies from a variety of industries. Whether it be a valuation or sale, our team can provide expertise and resources found only at larger corporations, paired with the personalized touch of our M&A Advisory team. Contact us today to get in touch with one of our advisors.