When You Are the Middleman, How Not to Get Cut Out
Being a middleman is not what it used to be. Before the Internet and overnight shipping made the world smaller and flatter, having a physical territory in which to distribute a product was valuable.
Today, being a distributor is a tough way to make a living and a difficult business to sell.
Recently someone with the North American distribution rights for a German pump company—let's call him Rupert—sought my opinion on the value of his business. I was blunt: not much. The problem was, even though his business was profitable, Rupert distributes a single product to a group of customers who think of the Germans as their supplier and Rupert as a middleman.
The reasons a simple one-product distribution company is of little value in the eyes of an acquirer may also provide warning signs for your business:
1. Risk. Buyers are allergic to risk. In the case of Rupert's business, the Germans could decide to build a North American sales force, and unless his distribution agreement had protection (it doesn't), his business would be erased or compromised overnight.
2. Going direct. Manufacturers are constantly evaluating the pros and cons of eliminating their sales channel and selling directly to their customers. In 1984, Michael Dell shook up the cozy world of computer distribution by selling computers directly to customers. IBM and HP started to lose market share, and they too started to sell some products directly to customers. Value-added resellers (VARs)—the jargon label computer companies give their distributors—started to suffer. The ones who survived had deep and loyal relationships they'd earned by providing technical support to their customers on a wide range of gear. The ones who died were glorified salespeople for a single product line.
So What's a Middleman to Do?
My advice to Rupert—and to you if you find yourself in a similar spot—involves two steps:
1. Own the customer. The most important thing distributors can do is to ensure the customer wants to buy from them, not the manufacturer. Therefore, the distributor needs to add a comprehensive pre- and post-sale service experience and invest in customer relationship management (CRM) software to keep track of buyers' information. Your customers' loyalty to you, not to the manufacturer, gives you leverage to execute step 2 below.
2. Become Switzerland. Once you truly own the customer, you need to start selling other products. If you sell one product line, most acquirers will be turned off, realizing that you can be put out of business overnight if your supplier decides to hire its own sales force, go direct or sign other distributors. By diversifying your product offerings, you start to become the "go to" person for your customers in a certain product category, and your suppliers will have to start competing for your attention. Your customers' loyalty is the leverage you need to drive better terms—including a non-exclusive relationship—with your suppliers.
Henry Schein, an example of a distributor that has become a valuable business, sells more than 190,000 different products to 700,000 dentists and doctors. When a dentist in St. Louis needs new carbide burs, that dentist calls his Henry Schein sales rep. When the same dentist needs a label maker for his files, he doesn't go to Staples or call Avery; he calls his Henry Schein rep. Henry Schein has become the dentist's one-stop shop for supplies.
Most importantly, dentists think of Henry Schein—not the various manufacturers—as their supplier.
Investors value Henry Schein at around $6 billion because it owns the relationship with its customers and could put a dental supplies manufacturer out of business—not the other way around.
John Warrillow is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released by Portfolio/Penguin on April 28, 2011.
JOHN WARRILLOW | Columnist | Sellability
John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.