Unlike most manufacturing businesses, distribution companies enjoy a real competitive advantage over international competition. Generally, distributing to Canadian retailers requires a presence in Canada and the existence of a long established distribution network of retailers. International companies lack the distribution network and the relationships. In addition, international distributors don't have deep understanding of the Canadian consumer and retailers. As a result, they rarely compete with Canadian distributors. For this reason, distribution companies offer a very stable income stream and are more resilient to competition.
Furthermore, distribution businesses are much more flexible than manufacturing companies. It's generally easier to introduce new products to distribute or discontinue an old product line for a distributor than for a manufactures simply because manufactures need new product development new equipment, new marketing strategy etc. As a business buyer, this flexibility reduces your investment risk dramatically.
For these reasons, distribution companies are in high demand in the business for sale market and they generally sell for higher multiples of profits.This type of businesses involves however some challenges
- Distribution success is built on customer service and relationships with retailers. Owners and key employees build personal relationships and trust with retailers. Some retailers might not be happy with a buyer taking over the business and might leave.
- Purchasing the right products is often key to success. The new buyer might not have the right skills in understanding market needs and purchasing the right mix of products.
- Salespeople employed by the business have build over time personal relationships with retailers. These salespeople might leave after the purchase and take key customers with them.
Despite these challenges, purchasing a profitable distributor with healthy growth prospects is generally a good investment offering high return with reasonable risk. Its is however advisable that the buyer has some industry knowledge and a passion for distribution. Keeping the previous owner for a reasonable period during the transition is also necessary to minimize the disruption in customer relationships and avoid any loss of customers.