There’s an industry shaping deal activity and it’s likely not one that comes to mind.
A client once told me, “when it comes to transactions, sometimes you’re the windshield and sometimes you’re the bug.” Nowhere does this ring true more than in Canada’s distribution sector, where consolidation is being driven by private equity and larger industry players looking for growth. Valuations are climbing as acquirers with cash target a narrowing list of quality sellers.
The distribution sector accounted for approximately 7% of deals in Canada over the last 3 years*, however, that statistic is deceiving. “Distribution” has always been a catch-all description covering numerous companies and industries, and deal statistics tend to categorize by more specific labels – like home and building products, food or technology. When viewed through a more basic lens, a distribution company is simply any organization that sells products they don’t manufacture, and these companies make up a significantly larger portion of North America’s transaction activity with some unique elements worth understanding.
A complex industry for deal-making
The global transaction market has been strong in recent years. In fact, cheap capital, a lack of organic growth and excess cash available to both corporations and private equity has driven the strongest M&A market in Canada in the last decade.*
But transactions remain a difficult, time-consuming process. For sellers of distribution businesses, the process is compounded by unique factors that narrow the list of potential buyers:
- Original Equipment Manufacturers (OEMs) may hold the hammer. The brands a distributor represents often have the right to approve a deal or a specific buyer. Absent that approval, the distributor risks losing the right to sell the OEM’s products. Depending on the industry, some manufacturers dislike consolidation or the concentration of power in their distribution network. In other sectors, such as equipment dealerships, traditional private equity is discouraged, eliminating an entire category of potential suitors.
- Brand conflicts. The inability for buyer and seller to sell competing OEM brands can eliminate industry players that might otherwise seem like logical purchasers.
- Geographic restrictions. Distributors often have territorial exclusivity to sell a manufacturer’s products – one of the reasons purchasers like distribution businesses. However, this benefit can be offset by potential growth restrictions when there are no smaller consolidation opportunities or geographies to expand into.
- Narrow margins and high inventory. Significant capital requirements or the sale of commodity products at lower margins can eliminate a large portion of private equity buyers who generally target higher margin, less capital intensive businesses.
While these factors create complexity, they can be overcome through proper planning and strategy. Through recent experience, we’ve compiled a list of the top six ways to maximize value when transacting in the distribution space (see sidebar). These tips, paired with guidance from a trusted advisor, can ensure your company is on the right path to a successful exit.
*Sources: S&P Capital IQ; Sequeira Partners Analysis, Crosbie & Company
Partner, Sequeira Partners