Knowing how to value a distributorship is essential whether you are buying one, selling yours, or deciding whether an offer from a supplier is worth the price. A distributorship is not valued like a typical shop, because much of its worth depends on a contract you do not fully control.
Why it is different to value a distributorship
In most small businesses, a buyer pays for earnings, assets, and customers. With a distributorship, you are also paying for the right to sell certain products, and that right comes from a supplier agreement that may have limited length, conditions, and termination options.
If the supplier can end the relationship on short notice, the distributorship may be worth far less than its recent profits suggest. Always read the agreement before you discuss price.
Start with earnings and cash flow
As with other businesses, the starting point is verified financial performance. Review at least three years of profit and loss statements, tax returns, and recent monthly results. Adjust for the owner’s pay and personal expenses to find what a new owner could realistically earn.
Valuation professionals often apply a multiple to those adjusted earnings, and the multiple depends on stability, growth, and risk. Our guide to valuing a business before you buy explains these terms in more detail.
Factors unique to a distributorship
Several issues affect how much a distributorship is worth, and each one deserves careful questions.
- Length and renewal terms of the supplier agreement
- Whether the territory is exclusive and how it is defined
- Concentration of sales in a few products or customers
- Inventory levels, age, and condition
- Whether the agreement allows transfer to a new owner
- Supplier financial health and brand strength
Check whether the supplier will approve a sale
Many distribution agreements require the supplier’s consent before they can be transferred. A buyer should ask for written confirmation that the supplier will accept the new owner on the same terms. Without it, the buyer may be purchasing inventory and equipment but not the right that made the business valuable.
Sellers should raise this early. A supplier who is reluctant to approve a transfer is a warning sign for any buyer.
Value the inventory and receivables separately
Inventory is often priced separately from the business, at cost or a negotiated value, and may need a physical count and review of slow-moving stock. Accounts receivable should be checked for age and collectability. These items can change the real price by a substantial amount.
Get professional help to value a distributorship
An accountant or valuation specialist with distribution experience, along with an attorney who reviews the supplier agreement, can give you a defensible figure. If you plan to work with a broker, ask about their experience with distributors. With the right advice, you can value a distributorship with confidence rather than guesswork.
More guidance to value a distributorship and related businesses
- How to Value a Business Before You Buy: Multiples and Seller’s Discretionary Earnings
- Working With a Business Broker: How to Find One and What It Costs
- How to Buy an Existing Business: A Due Diligence Guide
- SCORE free business mentoring
- Distributorship Agreement: Key Terms to Review Before You Sign
- Working Capital Adjustment in a Business Sale Explained
- How to Sell a Distributorship: Prepare, Price, and Transfer
Helpful outside resources: Knowledge at Wharton.
Keep reading
If this topic is useful to you, these related guides on SmartBizOpps are a good next step.
