Enhancing the Value of Your Distribution Business
Posted on 17th August 2023 at 12:33
The task of elevating a distributor or reseller into a valuable enterprise may initially appear challenging. Distributors often face undervaluation, as potential acquirers perceive them as susceptible to price wars without a clear differentiation. Instead of outright acquisition, a perceptive potential acquirer might opt to temporarily lower prices, luring the target company's customers without the need for acquisition.
However, the key to this transformation lies in setting your business apart through innovation and the cultivation of intellectual property (IP).
Significance of Developing Proprietary IP
Consider the journey of Miles Faulkner, the visionary behind Blended Perspectives, a specialized reseller of Atlassian products catering to expansive teams. Faulkner's story offers a roadmap for achieving a stronger foothold when selling a distribution or reselling business.
Motivated to establish a more valuable reselling enterprise, Faulkner embarked on creating his own product: the Marketplace Analytic Research Service (MARS). This tool aids Atlassian users in selecting aftermarket apps to complement their Atlassian software.
Despite Blended Perspectives' primary revenue source remaining the reselling of Jira and Confluence licenses, MARS bestowed upon them a unique selling proposition, distinguishing them from the sea of other Atlassian resellers. This unique offering not only attracted potential clients but also made Blended Perspectives an enticing acquisition target for Contegix, a prominent Atlassian product reseller.
Contegix's decision to acquire Blended Perspectives went beyond mere market expansion. The ownership of MARS, an intellectual property, positioned Blended Perspectives as more than a conventional distributor within the Atlassian ecosystem. This differentiation provided Contegix with a compelling reason to pay a premium for the acquisition, surpassing the usual valuation for a distributor. This underscores the importance of creating distinct products and services within a fiercely competitive market.
Transformation of a Parts Distributor into a High-Value Entity
Another illustration of transitioning from intermediary to a multi-million-dollar venture is demonstrated by Mahul Sheth. Sheth initiated VMS Aircraft in 1995 as an airline parts distributor, offering a comprehensive hub for airlines and maintenance crews to access parts and accessories.
Originally surviving on modest gross margins of 22-23%, Sheth was resolute in crafting a more valuable enterprise. He pivoted his value proposition from a local warehouse for others' products to a sophisticated provider of advanced materials. Focusing on meticulously stored materials vital for airline operations, Sheth's venture soared.
Investments in a dust-minimizing clean room, temperature-controlled storage for specific materials, and repackaging options for smaller quantities transformed VMS into a value-added provider. Sheth's evolution propelled gross margins to an impressive 60-70%. This transformation caught the attention of a French company aiming to penetrate the U.S. market. Acknowledging VMS's unique offering and value-added services, the French company acquired VMS at 7.4 times EBITDA.
For business owners operating in competitive sectors like distribution, honing a distinctive selling proposition and directing efforts towards proprietary intellectual property is imperative. These strategies not only enhance business value but strategically position it for potential future acquisitions.
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