Transforming a distribution business into a valuable company may seem like a daunting task. Distributors are usually not worth very much. Acquirers often reason that without a point of differentiation, a distributor is vulnerable to a price war. The key to increasing your distribution business’s value is in setting yourself apart through innovation and the development of intellectual property (IP).
The Value of Developing Your Own IP
Look at the story of Miles Faulkner, the founder of Blended Perspectives, a reseller specializing in Atlassian products. Faulkner’s story provides a blueprint for how to punch above your weight when selling a business that distributes or resells other companies’ products.
Driven to create a more valuable reseller, Faulkner set his sights on creating a product of his own: the Marketplace Analytic Research Service, or MARS. This tool is designed to guide Atlassian users in selecting the most appropriate aftermarket apps to supplement their Atlassian software.
While Blended Perspectives still made a bulk of their money reselling Jira and Confluence licenses, MARS provided Blended Perspectives with a unique selling proposition, separating it from the multitude of other Atlassian resellers and, in the process, enhancing its appeal to prospective clients. MARS also rendered Blended Perspectives an attractive acquisition target for Contegix, a larger reseller of Atlassian products.
When Contegix acquired Blended Perspectives, observers might’ve wondered why the firm didn’t simply lower prices to attract Blended Perspectives’ customers. However, for Contegix, the acquisition was not just about growing market share; Blended Perspectives brought a differentiating element to the table.
By owning MARS, their intellectual property, Blended Perspectives was more than just a distributor in the Atlassian ecosystem. This point of differentiation gave Contegix a compelling reason to acquire the firm far above what would typically be paid for a distributor, underlining the value of creating unique products and services in a highly competitive marketplace.
How a Parts Distribution Business Became a Valuable Company
Another example of someone who went from middleman to eight-figure business is Mahul Sheth. Sheth started VMS Aircraft in 1995 as a distributor of airline parts. He offered a “one-stop shop” for airlines and their maintenance crews to find parts and accessories.
VMS was the local distributor and survived on gross margins of 22–23%. It was a subsistence living, and Sheth was determined to build a more valuable company. He decided to evolve from just being the local distribution warehouse to a sophisticated provider of advanced materials. Sheth chose to focus on the materials that airlines need to be stored and handled meticulously. If the safety of your metal tube flying 300 people 40,000 feet in the air is determined by the quality of a seam of metal, you want that steel to be handled carefully. You also want the sealant that joins the sheet of metal kept at a temperature that maximizes its adhesiveness. You may also want your rivets stored with the same care a surgeon uses to put away her scalpel after performing life-saving surgery.
Adapting to Thrive
Sheth invested in a clean room that minimized dust at his facility. He bought dry ice containers so certain materials could be stored in a cold environment, maximizing their effectiveness. He also repackaged materials into smaller containers for airlines with lower demand.
Sheth’s evolution from simple reseller to value-added provider fueled his gross margins to 60–70%. Along the way, Sheth attracted a French company that wanted to enter the U.S. market. Instead of competing with Sheth, they realized VMS had created a unique offering with a layer of value-added services that would be difficult to imitate. They decided to acquire VMS for 7.4 times EBITDA.
In Conclusion
If you’re a business owner operating in a highly competitive field like distribution, it’s crucial to pinpoint your unique selling proposition. Then, you can dedicate resources to developing your own intellectual property. These strategies not only augment your business’s value but also strategically position it for potential acquisition down the line.
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