Enhancing the Value of a Distribution Business
Converting a distributor or reseller into a high-value enterprise might appear to be a formidable undertaking. Distributors typically don’t command substantial valuations, as potential buyers often perceive them as susceptible to price wars without a distinct competitive edge. Instead of outright acquisition, astute prospective acquirers of distributors might opt to briefly reduce their prices for the distributed products, luring away a significant portion of the target company’s customer base without actually purchasing the company.
However, the key to this transformation lies in setting oneself apart through innovation and the cultivation of intellectual property (IP).
Unlocking Value Through Intellectual Property Development
Consider the journey of Miles Faulkner, the founder of Blended Perspectives, a reseller specializing in Atlassian products, which provide software solutions for large teams. Faulkner’s story offers a blueprint for excelling in the sale of a business involved in the distribution or resale of other companies’ products.
In pursuit of creating a more valuable reseller business, Faulkner set his sights on crafting a proprietary product: the Marketplace Analytic Research Service, or MARS. This tool is tailored to assist Atlassian users in selecting the most suitable aftermarket apps to complement their Atlassian software.
Although Blended Perspectives continued to generate the majority of its revenue through the resale of Jira and Confluence licenses, MARS afforded the company a unique selling proposition, setting it apart from the multitude of other Atlassian resellers. In the process, this enhanced its appeal to prospective clients and made it an attractive acquisition target for Contegix, a larger reseller of Atlassian products.
At the time of Contegix’s acquisition of Blended Perspectives, some may have questioned why the larger firm didn’t simply lower its prices temporarily to attract Blended Perspectives’ customers. However, for Contegix, the acquisition wasn’t solely about expanding market share; Blended Perspectives brought a distinguishing element to the table.
Through ownership of MARS, an intellectual property, Blended Perspectives had evolved beyond being a mere distributor in the Atlassian ecosystem. This unique feature provided Contegix with a compelling rationale for acquiring the company at a premium, highlighting the significance of creating distinctive products and services in a fiercely competitive marketplace.
From Parts Distributor to High-Value Enterprise
Another instance of a transformation from intermediary to an eight-figure enterprise is the journey of Mahul Sheth. Sheth founded VMS Aircraft in 1995 as an airline parts distributor, offering a comprehensive solution for airlines and their maintenance teams to procure parts and accessories.
VMS initially operated as a local distributor, sustaining itself with gross margins of 22-23%. Sheth was determined to elevate the company’s value. He opted to transition from merely serving as a local warehouse for distributing others’ products to becoming a sophisticated provider of advanced materials, with a focus on the meticulous handling of materials critical for airline safety.
Sheth made strategic investments, including a clean room to minimize dust at his facility and dry ice containers to store materials in optimal conditions. He also repackaged materials into smaller containers, enabling airlines to purchase only the amount they needed.
This evolution from a basic reseller to a value-added provider significantly boosted VMS’s gross margins to 60-70%. Along the way, Sheth attracted the interest of a French company seeking entry into the U.S. market. Recognizing VMS’s unique offerings and value-added services that were challenging to replicate, they decided to acquire VMS at a valuation of 7.4 times EBITDA.
In Conclusion
For business owners operating in fiercely competitive sectors like distribution, it is imperative to identify a unique selling proposition and allocate resources to develop proprietary intellectual property. These strategies not only enhance the value of your business but also strategically position it for potential acquisition opportunities in the future.
