Are you mentally ready to sell your company? Marc Strandquist asked National Fastener Distributors Association members.

Some owners have started “hot” to sell and went “cool” upon realizing their lives would change to “counting dollars and clipping coupons” after leaving the distributorships they built, Strandquist recalled.

Are you ready to relinquish control of your company?

Strandquist put together five acquisitions for Würth Industries North America and has been involved in fastener company acquisitions since 1993 when he was with RB&W.

The same “are you ready” question applies to shareholders too, Strandquist added.

The next question is “do you want to stay with the company?” He advised making the decision early. Some CEOs can make the jump from being ‘King of the Road’ to reporting to someone,” Strandquist said.

Würth has a high retention rate of owners staying with the company, he noted.

Strandquist, who was the 2016-17 NFDA president, also has watched owners with plans to stay active in the company change their minds. 

“Your head is in a different place no matter how noble your intentions,” Strandquist observed. 

After receiving the cash, some newly-former owners have a lot of options and are enjoying “donuts with sprinkles.”

About half the owners share part of the sale with employees. Strandquist has been startled at how much a few of the owners gave in some form of bonus.

Years or months in advance, owners should prepare to sell by answering other questions:

•  Is your distributorship profitable? Most buyers are interested in turnarounds, Strandquist noted.

•  Do you have a stable management team? Strandquist has seen key people leave half way through the due diligence process. 

•  Do you have tax and estate plans? “Do that ahead of time,” he advised. Moving the corporate location to another state ahead of time may have tax advantages, he explained.

• Do you want an immediate payout or an earn out? Earn outs can make both sellers and buyers nervous, he noted. 

• Do you own the real estate? You may want to reduce the rent paid to increase the EBITA, he suggested.

• You will need a support team for legal and financial issues. Use an attorney with acquisition experience rather than the one you have been using on issues such as taxes.

• Prepare a company marketing plan. “What is special about your company?” Strandquist asked. For example, do you have a high gross profit, exceptional customer relations or sourcing expertise? Company history such as the founder starting selling out of his garage is “building a story to add sizzle” can help in selling, Strandquist said.  “Otherwise it is just numbers.”

Owners need to prepare their companies for the selling process by “cleaning up” such issues as dead inventory. Strandquist has seen inventory held since 1986 that the distributor was certain is “gonna sell someday.” You may value your inventory at $2 million, but there is only $1.2 million of interest to potential buyers. Buyers don’t want to start with dead inventory, he said.

They want to know about inventory that “is going to generate cash.”

Sellers need lists of parts numbers and information such as imported or domestic sourcing. Is it an eight-week inventory or 16?

Prepare information on accounts receivables, customer returns and product claims, any lawsuits or U.S. Customs and duties.

Strandquist emphasized being honest with the potential buyer. “Are your fork lifts all 20 years old? Bring it up vs. hiding it. Do you need new air conditioning?”

The due diligence process eventually leads to buyers meeting with key staff, top customers and key suppliers.

If a distributor has one customer totaling 30% or more of sales it “gives everyone the heebie-jebbies.”

Buyers may want credit checks on customers in addition to payment history.

Strandquist finds the buyer and seller negotiating the essentials of the transaction before going to their lawyers can save money. Lawyers see the negotiation process as a “money machine.”

On the need for an investment banker as a consultant, Strandquist said “most fastener owners are frugal and don’t want to pay a financial institution $500,000.” 

Strandquist emphasized the importance of the purchase agreement to both buyers and sellers. “It protects you as much as the buyer.”

He has seen problems with issues such as outgoing ownership giving raises or bonuses in the final days. A customer contract may have a “change of control clause” that buyers need to check on.

Because the due diligence process is generally confidential, the onsite and customer visits are among the last steps.

Despite the number of North American distributorships dropping from 3,000 to 1,000 over the past few decades, “there are still a lot of companies out there to acquire,” Strandquist said.