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General, Mergers and Acquisitions, Mirus Capital Advisors, Industrial

Specialty Chemical Distribution M&A

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The specialty chemical distribution sector has seen a wave of acquisitions as financial and strategic acquirers look to build out sizeable platforms. What drives buyer interest in this market?  What can potential sellers do to help maximize value and acquirer interest in their business?  We’ve worked with two specialty chemical distributors recently and have developed insight into buyer strategies in this market.

The immediate assumption sellers make is that size determines outcome.  But that’s not all that influences a successful specialty chemical distribution exit.  While it is certainly true there is an expected increase in EBITDA multiples as the business grows in scale, size is not the only focus for buyers in the industry.  In order to drive a highly competitive process with multiple bidders, and drive a higher multiple on the exit, it is essential that the seller consider other aspects of the business that will drive buyer interest.

  1. Proven team. A well-developed market facing team that includes technical sales resources and knowledgeable product managers with demonstrated vertical market expertise and customer relationships that go beyond the procurement team is key to buyers.
  2. Sticky customer relationships. Relationships with customers that result in insight into a product development pipeline and/or the ability to deliver differentiated products (through formulation, packaging, particle size and/or composition) that solves a customer production problem can differentiate a distribution business. This insight can drive the sale of products that are a part of a customer’s specifications and result in highly valuable recurring sales.
  3. Strong supplier relationships. Buyers place more value in supplier relationships that have multiple touchpoints across the organization, even if they originated as long-term relationships with a business founder or owner.  In addition, a seller needs to understand how their supplier relationships match up with those of a potential acquirer, particularly if the two organizations are focused on the same end user market. While supplier terms such as exclusive distribution agreements for products, industries or geographies can significantly enhance value to a buyer they can also represent a potential conflict if the buyer has a key relationship with a competing supplier.

There are other financial and operational aspects of your business that will ultimately factor into the valuation.  However, the thoughtful consideration of the aforementioned attributes can influence buyer perception of a trading business vs. a value-add specialty chemical distribution business regardless of scale.  For these reasons all financial and operational aspects of the business need to be considered and discussed when determining how to structure a process that is going to yield the optimal exit outcome for your business.

Please contact me if you would like to schedule time to discuss our recent experience working with AIC in its sale to LBB Specialties or Amsyn in its sale to Maroon Group.