

discounted because of the dominance of one
or more substantial key accounts.
Forget about any large, one-time orders.
By definition, a one-time order isn’t going to
repeat. Even if the customer suggests that a
huge order will repeat, there isn’t any guaran-
tee that the company will get it. As such,
large, one-time orders are ignored for valua-
tion purposes.
Diversification in the customer base
increases value. In a perfect world, no single
customer would account for more than five
percent of total company sales. That reduces
the risk of losing individual customers.
Customers who have done business with the
company for 20 years are a good indication
of customer satisfaction, but it is also impor-
tant to acquire new customers every year.
New customers reduce the risk of losing
large customers, often through no fault of
the company.
To the extent the seller can demonstrate
a competitive advantage in a niche industry
such as health care, it may reflect positively
on the total value of the company. However,
it may be a risk if too much revenue is con-
centrated in one industry.
Salespeople
There are a number of significant issues
relating to salespeople as they affect a com-
pany’s value. First, consider if the salespeo-
ple are employees or independent contrac-
tors. Without a doubt, employees are, by
definition, easier to direct day-to-day. They
are also restricted on what information or
customers they can take with them should
they leave for whatever reason. They do
carry higher payroll costs, however.
Theoretically, independent salespeople
require less management attention and fewer
fixed costs. Both models have proven to be
successful in the promotional products
industry but, generally speaking, employees
provide more stability and less risk to future
revenues.
The second, most critical issue regarding
salespeople is the same as the customer base:
diversification. That is, does one salesperson
“control” 70 percent of the company’s total
sales? If so, the revenues would be severely
challenged should that salesperson step in
front of a bus or otherwise leave the company.
Again, in a perfect world, no salesperson
would account for more than 10 percent of
the company’s total sales.
Another important issue relating to sales-
people is to consider if they have contracts
with noncompetition clauses. (Yes, non-com-
pete clauses are enforceable depending upon
the state in which your business resides and
how restrictive the terms are.) However,
regardless of the state, a well-written, non-
compete clause is still a deterrent and better
than not having a clause at all.
Management
It is valuable to have a customer service
team that works directly with customers. This
helps to mitigate the risk of individual sales-
people leaving your company. Many times
customers establish a positive working rela-
tionship with their CSR who handles all the
details on orders. This can perpetuate the
relationship even if the salesperson or owner
leaves the company. This also provides sales-
people more time to sell, and allows owners
to enjoy more time away from the business
without worrying whether customers will be
properly served.
Valuing A Distributorship
To figure the actual worth of your dis-
tributorship, here’s what to expect if you work
with a company like ours to make the valua-
tion. You would complete a valuation ques-
tionnaire and provide three years of financial
statements plus your most recent monthly
statements. We will build the valuation model
and normalize earnings for discretionary
expenses such as country club dues and travel
expenses, excess owner’s compensation and
benefits, and any unnecessary and non-recur-
ring expenses and revenues. Then we will
perform several valuation techniques such as
discounted future cash flow and capitalization
of earnings. We will also apply multiples from
our proprietary database of actual transac-
tions we facilitated. The multiple will depend
upon the qualities discussed above.
The biggest mistake owners make is pro-
crastinating. Too often we get calls from
owners who want to retire soon or have expe-
rienced health issues or other life-changing
events. At that point, there isn’t much we can
do to increase the value of the company.
Your company is probably the biggest
asset you will ever have. Take the steps now
to maximize its worth.
Jeffry Meyer, MAS, CPA, is CEO of Huntertown, Indiana-based Certified
Marketing Consultants, Ltd., a PPAI business services member. He has been
active in the promotional products industry for 35 years. He and his two
partners serve companies exclusively in the promotional products industry
with services including mergers and acquisitions, business valuations, strate-
gic planning, business plans, marketing plans and general consulting.
Qualities That Most Affect A
Distributor Company’s Value
1. Gross margin dollars and
percentage
2. Annual revenue trends
3. Customer concentration
4. Salesperson concentration
5. Salesperson classification:
employee or independent
contractor
6. Non-competition agreements
in place
APRIL 2015 •
PPB
• 23
The biggest mistake owners make is procrastinating. Too often we get calls
from owners who want to retire soon or have experienced health issues or
other life-changing events. At that point, there isn’t much we can do to
maximize the value of the company.
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