“The Sky Is Falling! The Sky Is Falling!”

For the past 20 years or more, I have heard all manner of industrial distribution “experts” predict the death of the small to mid-sized independent distributor and that the only survivors would be the very small, the very niche and the very large. I submit that there continue to be many very successful small to mid-sized independents.

Yes, over the last 20 years, many successful distributors in this size range have elected to cash out. It is also true that these liquidity events, in many cases, have spawned new distributors in the form of disenfranchised or disgruntled former employees of the seller.

This is particularly true in cases where the seller was a distributor with a heavy weighting toward metal fabrication. Why? The metal fabrication market continues to be extremely fragmented, characterized by one-location job shops with fewer than 50 employees that demand high levels of service and support. These metal fabricators are not national account targets.

Through the growth and increasing scope of buying groups, the small to mid-sized distributor has been able to somewhat neutralize the potentially beneficial scale economies of the large regional and national competitors. Combine competitive pricing with high levels of service and support, and the small to mid-size distributor has the opportunity to build real sustainable advantage.

It also appears to me that some of the major suppliers to our industry are growing weary of subsidizing the large regional and national distributors with aggressive pricing on their branded products, while at the same time the large regional and national players are converting to their own branded product as quickly as possible. This is not to mention the level of after-sale support that some larger players are laying at the feet of the suppliers.

I would also argue that the level of ownership and accountability (to the customer) is higher for the small to mid-sized distributor. When your employees become more concerned about disappointing their boss than they are about disappointing a customer, you open the door of opportunity to a competitor—regardless of size. Some big companies use words like empowerment and ownership. For small to mid-sized companies, empowerment and sense of ownership are a way of life and, in many cases, a core competency.

As long as a company is able to grow revenues and profits by providing more “real” value than its competitors, selling the business should be a business owner’s last option for maximizing enterprise value. One trend that I see growing is partnering between smaller and larger companies. In this scenario, the larger company provides resources to the smaller company, such as technical expertise, below-market-rate growth capital and/or scale economies. In return, the smaller company gives the larger partner an equity stake in the business with the option of buying the entire enterprise at a predetermined point in the future. The sale price is generally based on a formula that is set at the time of partnership (such as a multiple of EBITDA). The notion is that combining the resources of the larger company with the service, support and agility of the smaller company will allow the partnership to grow revenue and profits at a rate faster than either could achieve on their own.

The bottom line is that there continues to be plenty of opportunity in the market. The trick is deciding what you want to be, developing a plan to get there, communicating that plan to your team, turning them loose and holding everyone accountable.

Editor’s Note: This article was written in response to Welding & Gases Today’s recent On The Edge article, M&A Influx Hits Home For Small Distributors.

Gases and Welding Distributors Association
Meet the Author
Bill Visintainer is president at Atlas Welding Supply, located in Tuscaloosa, AL, and on the Web at www.atlaswsco.com.