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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.