If you’re looking to grow your promotional business through the acquisition of another distributor there are many items to review while doing your due diligence — financials, physical assets, employees, licenses, contracts, etc. One major component that can contribute to the value of the distributorship is its book of business i.e., the customers. A high-level look will tell you who they are and how much they purchase, but when you’re challenged to apply a price tag there are several factors to consider that go beyond purchase history. Here are five important questions you should be asking about a distributor’s book of business when doing your due diligence:
How likely is it that you will retain the current customers?
When answering this question it’s important to consider:
- The length of the customer relationship. In many cases, you’re actually purchasing the relationship with the customer. How long have they been a customer? A long-time client may be more valuable than one recently acquired.
- Whether or not you can provide a smooth transition from the previous owner. If it’s the relationship that’s valuable the customer needs to see that you’re in harmony with the current owner and the transition will not affect the service they receive.
- If customers have contracts in place. Does the current owner have contracts in place for their clients, and are they transferable? If there are contracts, when do they expire? Are the high-value customers still active? Don’t wait until after an acquisition to discover a valuable customer recently left.
- The cost to switch to another distributor. How invested is the customer with the current owner? Do they have company stores or inventory? How much will it cost them in terms of monetary expenses, effort, time, and uncertainty of moving to another distributor unfamiliar with their business? Will the effort it takes to switch distributors outweigh a price differential?
- If aspects of a customer account have materially changed. In the current climate this may affect a lot of businesses and drastically alter the value of a book of business. Are the current owner’s primary contacts still at the companies? Have the customers laid off staff? Have they closed locations or even filed bankruptcy? If customer relationships are no longer present or if current business conditions threaten sales, past purchase history is not an accurate indicator of future sales.
How profitable are their customers?
In this case think about both profit margins and what it will take you and your employees to deliver the same level of service as the previous owner. First, what are their margins? Are they significantly lower than your current customers? Second, what are their expectations in terms of service, and can you support that? Maybe, for example, they’re accustomed to getting a response to a quote request the same day but it will now take you two days to respond, or, the current owner spends several hours a week working on projects for this customer. Will it take extra resources for you to meet expectations and retain a customer?
How quickly do their customers pay their accounts?
It’s important for you to completely understand payment terms of the customer base. Will you go from 30 to 90 days on average? Will you have to invest in collections efforts to keep cash flow going? A group of late-paying customers can be costly and time consuming to deal with.
How concentrated/diverse is their customer base?
Are more than 50% of their sales coming from one customer or are all their sales concentrated in one vertical that’s been significantly affected in 2020 (e.g., travel or hospitality)? Finding out that 80% of sales came from one customer can drastically change the nature of your offer.
How desirable are their customers?
Are their customers in an industry/vertical that’s difficult to break into? Or are their customers in a vertical that’s booming right now (e.g., technology, groceries, construction)? Will acquiring their customers help you diversify your current base? These scenarios may make a book of business more valuable to you. On the flip side, if you’re unfamiliar with their markets and not comfortable selling to them, their customers may be less desirable to you.
Acquiring another distributor can be a smart strategy for growing your business, and doing your due diligence can help you avoid negative surprises. In an industry where relationships are paramount and a book of business holds real value, asking the right questions will help you to accurately evaluate the value of a business.
Thinking of selling or acquiring a promo business? At AIA, our team can actively assist in the scouting, financing, training, transition and sale of distributorships. Whether or not you’re looking to grow through acquisition, contact us and let’s talk about your promo business goals and how AIA can help you achieve them.