Selling a 3PL? Small changes can improve your operations and business value

Originally published in the May 2014 issue of Distribution Center Management

The rebounding economy means a more active market for acquisitions of 3PLs.

In recent months, Endeavor Capital bought Port Logistics Group of Houston, Florida-based Tech Data acquired Specialist Distribution Group of Britain, and New Jersey's Northstar Services brought warehousing company J&E Transportation.

As an investment banker who specializes in mid-sized distribution businesses, Chris Rowe has a unique perspective on the industry.

He's the guy who scrutinizes a distribution operation's bottom line and credit-worthiness in an effort to land financing or to arrange a sale.

In one deal, Rowe helped arrange a $25 million capital facility for Greenscapes Home and Gardens Products, which distributes to Home Depot and Wal-Mart.

Rowe has worked with a variety of companies, ranging from a steel distributor to consumer-product suppliers.

He offers the following strategies for positioning a 3PL for sale. But even if a sale is not in your immediate future, his ideas can help strengthen the bottom line.

1. Give your financials a makeover.

Many companies' internal financial statements provide only high-level information -- what Rowe calls "a 30,000-foot view." If you hope to attract top-dollar bidders for your business, your finances need to speak the language of bidders and lenders.

First, itemize gross profit. Financial statements should do more than just state how much money you make. They should communicate how you make the money. Break down your numbers so buyers can assess what's really driving profit.

This more detailed look at the finances also lets you examine the metrics that determine profitability.

2. Address customer concentration issues.

If your company earns more than 20 percent of its revenue from one customer, you have a concentration concern. The risk of relying too heavily on one revenue stream is that if something happens to that customer, your bottom line takes a hit.

A lack of diversification isn't a killer. Many companies survive with just a few customers, and Rowe once found a buyer for a company that pulled in 80 percent of its revenue from a single source.

The good news for small, independently owned logistics services companies is that you need not be CH Robinson, Schneider Logistics or Menlo Worldwide to survive. Finding a niche and staying nimble can work just fine.

"There's always going to be an opportunity," Rowe says. "We call it finding the hole in the market."

One approach: Provide value-added services. For example, for an apparel customer, this may include embroidery, display building, point-of-purchase units, kitting, special labeling, etc. Rowe even worked with a steel distributor that kept customers happy by cutting pieces of metal into the sizes they preferred.

3. Beef up the management team.

In many mid-sized businesses, the owner is also the executive in charge of operations. This is fine so long as the owner is alive and healthy.

But, Rowe says, "If he gets hit by a truck, then the company is dead."

Assemble a solid management team, including a CFO or controller, and empower management to make decisions and systematize day-to-day business processes.

4. Be willing to invest in technology.

While companies with large, sophisticated supply chains invest heavily in warehouse management systems, transportation management systems, and labor management systems, many smaller companies look at technology as an expense they'd rather avoid.

If this describes your mindset, Rowe suggests a change in thinking. Take a hard look at both the cost and the potential return from an investment in technology.

"While it's painful in the short run, it can be beneficial in the long run," Rowe says.

After all, a more efficient company grows more profitable and more valuable. So, Rowe says, you should look at a technology project not as an expense but as an opportunity to sacrifice some cash now for a fatter bottom line.