By Scott Costa, Publisher, tED magazine
On Wednesday, November 5, tED magazine reported another merger, as Chicago-area based Brook Electrical Supply announced that it had acquired Platinum Electrical Supply. My very unofficial count makes this the 15th electrical distributor merger/acquisition in 2014.
It also reminded me of a series of blogs I have been reading from New York Times Business Blogger Josh Patrick over the past few days. Patrick owns and operates a wealth management business in New York City called Stage 2 Planning, which is a strategic planner for owners of private businesses.
His recent blogs are focusing on the sale of an electrical distributor that privately announced that it would be interested in being purchased. Without naming any specific names, the distributor had more than $73 million in revenue in 2012 and more than $4 million in earnings before taxes and interest.
There were some issues that made this a smart time to sell the distributorship. According to Patrick, despite the fact that the distributor has a stronghold on the market where it exists, and the fact that it had maintained a strong relationship with both large and small contractors, there was no potential replacement for the chief executive, who was nearing retirement age, and the distributor’s board of directors believed this was the right time to sell.
Based on this alone, Patrick was able to find out that the distributor hired an investment banker to find potential buyers, and that investment banker was able to track down more than 100 potential buyers who would be willing to pay between $16 million and $20 million, which was four to five times more than the 2012 earnings.
But then something crazy happened. Patrick points out that three offers – actual offers – came in significantly higher than that $16-$20 million dollar mark. That led to a substantial shift in the entire process. Buying this particular distributorship was no longer about price. Now it was about protecting all of its employees. And Patrick points out that the distributor was willing to call off the whole sale, at any price, if there was no guarantee that all employees would be retained after the sale was completed. In the end, the company that bought the distributorship was part of an employee stock ownership plan, or ESOP, which is not uncommon for electrical distributors. All 150 employees would be vested into the ESOP, and all would become part-owners in the new deal.
This is where the sale gets interesting. While the original plan was for the sale to be four to five times the yearly earnings, when it was completed, that figure ballooned to nearly 11 times, closing at around $43 million.
The blogs provide great insight into the real value of a distributorship that has a stronghold on its marketplace, great relationships with all of its customers, a solid business model, and a competitive strategy.
If you would like to read the entire New York Times blogs, you can find them here:
http://boss.blogs.nytimes.com/2014/10/22/what-would-you-pay-for-this-wholesale-distributor/
http://boss.blogs.nytimes.com/2014/10/27/selling-a-business-for-an-outrageous-price/#more-89533