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Supplier Concentration And Business Value
Concentration in the acquisition world is a bad word. Businesses with high supplier concentration attract fewer buyers, which lowers the price. What's too high? Having a supplier with 40% of your business is too high. Diversify if at all possible.
When buyers look at a company for sale, they look at risk. Supplier concentration is one of the top risk factors that are examined.
Why? Because if customers push the throttle, the suppliers furnish the gas. A company cannot sell its products to customers if it cannot secure what it needs from suppliers. Any adverse change in a company's relationships with its key suppliers, or loss of the supply of one of the company's key products, could have an adverse effect on the business. Therefore, the nature and stability of suppliers is an important consideration in identifying a company's risk.
There's a tendency for small business owners to find a good supplier to rely on for the bulk of their material or product needs. If you find someone reliable, why not make your life easier and stick with a trusted entity, right? Not so much when you're trying to sell your business. Buyers buy to grow the business, not to keep the status quo. So, as a business grows, the importance of the supplier factor becomes even more critical. Growth can be significantly hindered or halted altogether for lack of available resources.
So, what would you do if your main supplier went out of business or had some kind of disaster that strangled output? What if the supplier requests a large cost increase that you cannot mitigate? What if they sold to one of your competitors? How fast could you get new products and materials? And, at what cost? These are questions buyers would ask. So, if you are considering the sale of your business, you can either develop additional supplier relationships in preparation of selling your business later, or sell now and accept a lower price.
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Bulk Material Equipment
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| | Pictured left to right: Nicholas Comardo (Seller), Doug Ashby (CBB Broker), Ranit Windlass (Buyer) |
This metal fabrication company primarily serves the oil and gas manufacturing sector. It holds several patents related to materials handling equipment which results in the fabrication of proprietary equipment for use in refineries. These patents continue to generate revenue and were included in the sale. The firm's history dates back to the 1970's with the same owner. In addition to the energy sectors, the firm also does some work in architectural metal fabrication. The 23,000 SF Houston manufacturing facility and 100,000SF land area were part of the sale.
The Buyer, Ranit Windlass of Windlass Oil Equipment, is part of a family with fabrication and distribution operations in Houston, Atlanta, and India. The buyer plans to relocate their existing Houston distribution operation to the new facility for growth and expansion purposes. The site is well located to accommodate the buyer's current and future plans. Also attractive to the buyer, was that the seller was willing to consider a sizable amount of seller financing. The seller knew that financing a portion of the deal was a good investment. He felt it was advantageous for tax purposes to receive a major piece of the proceeds over time with interest.
The business was sold within six months of going to market.
Doug Ashby listed the business and sold the business.
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Greek Tony's Pizza
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| | Pictured left to right: Barbara & Ryan D'Avignon (Sellers), Aaron Fekadu (Buyer), Marcia Bowron (CBB Broker) |
For over 30 years this very well-known family-run pizza restaurant in The Woodlands has been the favorite eatery for the locals and area sports teams. The restaurant has a beer/wine license and has had consistent revenue growth over the last four years. With Exxon Corp HQ coming in close by, future growth for this location is huge!
The Sellers, Barbara D'Avignon and her son, Ryan, found it emotionally difficult to let go of the business. Barbara's Husband, who started the business over 30 years ago, died 3 years ago. Ryan grew up in the business. She may work part time at her church after taking some time off. The son is considering a number of different career change possibilities, but looking forward to some time off also.
The buyer, Aaron Fekadu, moved to Houston from Maryland about one year ago. He still owns a 7/11 Store in Maryland and has been looking for another business to buy in Houston. He has a Master's degree in computer science and has also owned a Little Caesars Pizza Shop in the past, so he was well-qualified for the transition and his experience made it easier to get the landlord approval to assume the lease.
The business was sold within four months of going to market.
Marcia Bowron listed and sold the business.
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Huntington Learning Center
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| | Pictured left to right: Chris & Teresa Lin (Buyers), Meg & Mike McClure (Sellers), Marcia Bowron (CBB Broker) |
This learning center is the largest protected territory by this franchisor. It has high profit margins and has a 25-year history as the first of this franchise in the State of Texas.
Buyer, Teresa Lin, was an attorney and had previous business ownership experience. The Lins had been looking for over two years for the right business they could own and she could jump into and at the same time spend time raising her children. Huntington was a good fit because it has a center Director, which would free Teresa from having to be at the center full time. SBA loan approval, landlord approval, and due diligence processes went extremely well thanks to the very tenacious buyers.
The sellers, the McClures have two young children with whom Meg wanted to spend most of her time. Mike, Meg's husband, who handles the financial side of the business, was one of the most organized sellers. Even in QuickBooks he kept track of the personal expenses we'd need to add back to the earnings. So doing the recasting of the financials was very easy. Such organization and attention to detail made all the dealings with the landlord and the franchisor run smoothly.
The business sold within three months of going to market.
Marcia Bowron listed and sold the business.
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Ask The Experts
Question:
Why do businesses fail to sell after going to market?
Answer:
- No leadership in place to run the business post-sale
- High customer concentration
- Cyclical industry with volatile sales
- Unreliable financials and supporting documentation
- Too much debt on the balance sheet
- Too little growth ahead at the company and/or in the industry
- Disappointing valuation
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Texas Economic News
