Case Study – Distribution Company
This case study outlines the steps taken in the acquisition, restructuring, expansion and sale of a distribution company. While the company name, location and most financial information are not included; this case study gives a good indication as to how we operate during a transaction.
Company A was a small public distribution company bought in a management buyout by two senior managers – the managing director and the sales and marketing director. The two directors had contrasting approaches to the business itself, and different views on how the company should move forward.
The company didn’t develop as expected during the early stages of new ownership and did not break even. Having decided they could no longer work together, the owners decided to sell the company.
Plena was a supervisory board member; we were interested in acquiring Company A. Our first challenge during the acquisition process was to ensure the co-owners understood that they couldn’t stay involved in the company, either as shareholders or managers.
While this step was an unusual one for us, it was clear that they should no longer be involved if we were to improve the organisational structure and functioning of the company. The co-owners eventually agreed and we were able to continue with our due diligence. The following questions were asked:
a) What is the principle aim of the company?
b) Who is the best person to run this venture?
c) How can profitability be improved in such a competitive market?
To find solutions to all three problems, we decided to buy 100% of the company to afford us the flexibility to implement our plans, and so ensure we had complete control over the cash position. We then took the following steps.
a) We’re a long-term investor. A well thought through growth strategy was the chosen route, rather than a short-term plan.
b) We considered the characteristics and qualities needed for the incoming CEO. We installed a candidate who was already known to us, with experience in implementing growth strategies, as well as trading company experience.
c) We engaged a strategy group to look at the company’s various possibilities. It immediately became clear the company’s position was weak both in terms of market position, and product range. In order to put the company on the path to achieving growth, we took the following steps:
o Overhead costs were slashed: Sales per sales employee ratio was lower than industry average and administration costs were unusually high.
o The product range was reduced in the short-term, and non-moving ad hoc products – which took inventory space but were not part of an overall product range programme – were discontinued.
o We introduced a new inventory system and implemented a just-in-time stock holding policy. Previously the company had low inventory turnover, which reduced margins and limited the company’s growth. The new inventory system meant that the company didn’t need more (costly space, but instead could manage its inventory more efficiently.
o Over time, we then increased the product range to make it a one-stop-shop for customers.
o Introduced a variable pricing system, to ensure that products sold to important customers in Long-term contracts were priced more favourably than products purchased on an ad hoc basis.
All the changes brought about the desired results and transformed the company into a very profitable market leader. Over the 12 years that Plena Group owned the company, it increased revenue six times – and went from a very small gross profit margin, to a 25% net profit margin on revenue.
Finally, the company was sold to a large financial investor.