Acquiring a specialty industrial distribution business

The Setup

The operator was 31, traditional search fund backed by a syndicate that had backed two prior search funds in industrial distribution categories. She targeted distribution specifically because the category combined three attractive characteristics: high working capital intensity (which keeps competitive intensity from PE moderate), customer relationships built over decades (high switching costs), and operational levers (procurement, working capital, fulfillment) that are well-understood and not glamorous.

The deal was found through a competitive process run by an investment banker, but the operator's industrial distribution experience and the credibility of her search fund investors won the deal at a slightly lower price than a traditional PE bidder.

The Deal

$9M EV (3.2x EBITDA on $2.8M trailing). Structure: - $5.5M SBA 7(a) loan - $1.5M seller note, 5 percent, 5-year term - $2.0M equity from the search fund

The seller (a 68-year-old founder) stayed on as a senior advisor for 12 months focused exclusively on customer relationship transition.

The Operating Moves

- SKU rationalization. The business carried 12,000 SKUs across its product catalog. Analysis of the trailing 24 months showed that 6,800 SKUs had not turned in over a year, and 3,200 had turned 2 or fewer times. The operator worked with the inventory manager to discontinue 4,500 dead SKUs over 9 months, freeing $1.2M of working capital that was redirected to faster-turning inventory. Customer impact: minimal, because the dead SKUs were genuinely not being purchased. - Supplier renegotiation. The business had relationships with 80 suppliers, many of which had not been re-priced in years. The operator hired a procurement consultant for a 90-day engagement to systematically renegotiate the top 25 supplier relationships. Average price reduction across renegotiated suppliers was 6.5 percent. On $7M of cost of goods, this translated to $450K of annual gross margin. -