Value a Distribution Business

There are three main methods for valuing a wholesale business, but we’ve identified the multiples of cash flow/revenue method as the most accurate and effective one for wholesale distribution businesses in the lower middle market segment.

The Best Business Valuation Method: The Revenue Multiple Valuation Approach 

A business valuation determines the current worth of a business through an objective lens. When selling your distribution company in California, the best valuation approach is the revenue multiples valuation method. 

This valuation approach looks at the expected revenue (or cash flow) of the wholesale distribution business per year. We then multiply that revenue amount by the number of years the company will stay in business.

How long your company will stay in business will depend on market factors, your economic factors, and other factors in the market environment. Each industry is different, but a professional M&A advisor will use the multiplier that is standard in your industry. 

We base the revenue multiple valuation approach on actual revenue your business has generated over the past few years. 

For example, let's say your wholesale distribution business in the lower middle market is earning $10,000,000 a year in revenue, and you will probably stay in business for ten years (based on wholesale distribution industry trends and averages in the lower middle market category). Your distribution business value will have a value of $100 million.

So, why is the revenue multiples approach the best method for valuing a wholesale distribution business? Here are three reasons to use this method. 

1. One: It’s accurate: You might think that looking at the assets of a wholesale distribution business in the lower middle market segment is the best way to determine its value, but that isn’t always the case. After all, nobody wants to buy your company for its warehouse or office space and equipment — they want the revenue they can generate. 
2. Two: It can provide a range: You might want a range of what your distribution business might be worth or valued. That starts with a floor — the lowest you’ll accept — and a ceiling — the highest anyone would probably pay. A revenue multiples approach helps you come up with a range. 
3. Three: It’s straightforward: It’s a quick and easy-to-understand method. 

An asset-based approach might be better for manufacturing businesses. There is more of a need to understand its manufacturing assets and capabilities. For a wholesale distribution business, on the other hand, a revenue-based approach is better.

Using the EBITDA multiple valuation approaches is very common too. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. By looking at EBITDA instead of gross revenue, you can come to a more accurate conclusion of a company's value. 

The revenue of the two companies might be the same. However, if one company pays more in taxes, it won’t be worth as much as the other company. Multipliers will again vary by industry. 

Factors to Consider When Getting a Business Valuation

When getting a business appraisal, a valuation advisor will consider these factors, as well as others. 

1. The correct business valuation method: Many methods are available, such as the discounted cash flow method or the market valuation method. Each business is different, and you must use the correct business valuation technique. 
2. How new the business is: If the business is brand new and does not have any current established revenue, it will be harder to use the revenue multiples method, as forecasted revenue will have to be used instead. 
3. Is the business or industry expecting growth: If the business or industry is expecting explosive growth over the next few years, which will significantly alter revenue, that must be considered. 
4. Liabilities: Liabilities matter, as a business with too many liabilities, such as loans to pay back, maybe worthless. 
5. Customer loyalty: If a company has a solid and loyal customer base, that can also affect its value. Customer loyalty is just one of many intangible assets, such as reputation, that can come into play. 
6. Owner dependency: Does the business need you — and you specifically — to run smoothly? Or is it a turnkey business that the new owner can operate or hire people to manage?

How Much Is My Wholesale Distribution Business Worth? 

Fortunately, there are ways to get more out of your business. That’s why hiring an advisor is so important — they can help you get an accurate appraisal and prepare for the sale. Here are some ways to prepare. 

• Decrease liabilities: If you have liabilities, focus on getting rid of them. 
• Improve cash flow: Having steady, reliable cash flow can greatly improve the worth of your business. 
• Get your finances in order: To properly determine your company’s value, you need to get your finances in order. Reliable accounting will help you get accurate EBITDA, earnings, revenue, and other metrics. 
• Improve customer loyalty: Always work on improving customer retention rates, customer loyalty, your reputation, and other intangible assets. 
• Update your technology: Technology is vital to running any business smoothly and effectively. Buyers will be more interested in your business if they know they will not have to spend time and money on updates. 

How to Value a Distribution Business — How an M&A Advisor Can Help

So, how can an M&A advisor help before the selling process or lower mid-market mergers & acquisitions? Here are the top areas in which a wholesale distribution M&A advisor can help when selling and valuing a distribution business. 

• Accurately appraise your business: You need an accurate valuation to sell a distribution company, which can be hard to do by yourself. You don’t want to undervalue or overvalue your business, as both ends up being bad for you. 
• Create a professional report: Buyers will want to see clear data and statistics to back up your business valuation, which is why a professional appraisal report is so important. 
• Market to buyers: You need to market and promote the business you are selling, just like any other product. 
• Help you set financial and marketing goals: If you are not ready to sell your business, but you are thinking about doing so in the future, getting a valuation will help you set financial goals to work on so that you can sell your business later for a higher price. 

Summary — Selling A Distribution Company

Have you been wondering, “How to sell my distribution business?” 

Valuing a distribution business by yourself is pretty difficult. There are just so many factors to consider, and it’s easy to overlook a few factors that can drastically alter the value of your business. 

A Certified M&A Advisor can help California distribution companies use the best method (cash flow/revenue multiples) to properly value a business and help them figure out how to increase its value before selling. We’re experts in the wholesale and distribution industry, so get in touch with us for more information. 

If you are a retiring business owner looking to exit your lower middle market distribution company in California, here are six tips to get you started:

1. Don't wait until the last minute to start planning your exit. The process of selling a lower middle market wholesale distribution business can take a long time, so it's important to start early.

2. Have a clear idea of what you want to get out of the sale. Know your goals and what you're willing to negotiate.

3.  Know what's your company's worth. This is an essential step to take when planning to sell your distribution business in California.

4. Choose the right type of buyer. Not all buyers are created equal, so do your research and find the right one for your business.

5. Be prepared for a lot of due diligence. M&A buy-side due diligence is when buyers will want to know everything about your business, so be ready to provide documentation and answer questions.

6. Be flexible with the terms and conditions of the deal. It's important to be open to  negotiation to get the best possible deal for your business.

Rogerson Business Services, also known as, California's lower middle market business broker is a sell-side M&A advisory firm that has closed hundreds of lower middle-market deals in California. We are dedicated to helping our clients maximize value and achieve their desired outcomes. 

We have a deep understanding of the Californian market and an extensive network of buyers, which allows us to get the best possible price for our clients. We also provide comprehensive support throughout the entire process, from initial valuation to post-closing integration. 

Our hands-on approach and commitment to our client's success set us apart from other firms in the industry. If you consider selling your lower middle market distribution business, we would be honored to help you navigate the process and realize your goals.

If you have decided to value and then sell your lower middle market wholesale distribution company or still not ready, get started here, or call toll-free 1-844-414-9600 and leave a voice message with your question and get it answered within 24 hours. The deal team is spearheaded by Andrew Rogerson, Certified M&A Advisor, he will personally review and understand your pain point/s and prioritize your inquiry with Rogerson Business Services, RBS Advisor

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