Selling a distribution business

Read your supplier and distribution agreements before you list, not after an offer arrives. Exclusive territory rights, minimum purchase commitments and pricing tiers are often written with change-of-control language that either requires the supplier's consent to assign, or terminates the arrangement outright. Losing an exclusive line mid-transaction can change the value of the business materially, so this gets confirmed early rather than assumed.

Inventory turnover is one of the first numbers a buyer will calculate, because slow-turning inventory ties up cash and signals either overbuying or a product line losing relevance. Before going to market, it is worth identifying dead and obsolete stock honestly and separating it from active, sellable inventory, because buyers will do this anyway during diligence and a seller who has already done it looks credible.

The purchase agreement should specify how inventory is counted and valued at closing — typically a physical count, at cost, with obsolete goods excluded or valued at a fraction of cost. Agreeing to the method well before closing day avoids a dispute when the count actually happens.

Location matters in distribution in a way it does not in every industry, because your warehouse's position relative to your customer base drives delivery cost and route efficiency. A lender will want to see enough term remaining on the lease to cover the financing period, with renewal options and landlord consent to assignment.

Route density — how tightly your delivery stops cluster geographically — is worth documenting, since a business with efficient, dense routes is a more attractive and more defensible operation than one with the same revenue spread thin across a wide territory. Your delivery fleet gets valued the same way any rolling equipment does, on age, condition and remaining useful life.

Some distribution customers are relationships that renew informally year after year; others sit under a signed supply contract with defined terms. Contracted revenue is worth more to a buyer because it survives the transition on paper, not just on goodwill. It is also worth breaking out gross margin by product line rather than reporting a single blended number, since buyers want to know whether the profitable part of the business is the core or a smaller piece propping up a thinner-margin bulk of sales.

Customer concentration is examined the same way it would be in a manufacturing business, though the remedy is often different: broadening a customer base in distribution can happen faster because the product does not need to change, only who you sell it to.

Because a distribution business needs inventory and receivables on hand simply to keep operating, most purchase agreements set a required working capital target the seller must deliver at closing, with a post-closing adjustment if the actual number comes in higher or lower. Understanding this mechanism before you are in the middle of a negotiation avoids an unpleasant surprise at the closing table. Your CPA should review this section of any letter of intent with you directly, since the mechanics affect your net proceeds as much as the headline price does.

For the broader process of getting a company ready for this kind of review, see preparing your business for sale and how buyers and lenders read your P&L.