Selling a piece at a time:
Going public the new-fashioned way

The last installment in this series deals with taking your company public in a non-traditional manner as opposed to the outright selling of a wholesale distribution business.

by Scott Benfield and Jane Baynard

If selling your wholesale distribution business is not the right move, what is? Article nine in our series dealt with four alternatives to a sale: ESOPs, Roll-ups, Recapitalizations and Reverse Mergers. 

You’ve heard of saving the best for last?

This article addresses a fifth alternative: an IPO on a brand new exchange, the Bulletin Board Exchange or BBX.

What is the BBX? What does it offer the wholesale distribution industry? What costs are associated with it? Who can help you decide if a public listing is right for your business?

This installment of our series addresses each of these questions in turn, assessing the viability of listing on the BBX as a business strategy.

Going public the new old-fashioned way – the BBX
Recently, the NASD Stock Market Inc. announced that its over-the-counter bulletin board (OTCBB) would be replaced in the first quarter of 2003 with the Bulletin Board Exchange (BBX), a shift that has major implications for the way in which small companies access and operate in the public markets.

Unlike the OTCBB, the BBX will be a listed marketplace, but because it will have no minimum share price, income or asset requirements, it affords a wide range of companies the opportunity to access public capital and freely trade. As an issuers marketplace, the BBX offers wholesalers substantial gains in liquidity, efficiency advantages and high visibility. Although, with new advantages come new responsibilities: qualitative and quantitative listing standards, new corporate governance regulations, as well as some costs associated with regulations and compliance.  

Why does listing on the BBX make 
sense for the wholesaler-distribution industry?
The wholesale distribution industry faces significant challenges in the coming years. These challenges can be broken down into four principal categories: fundamental industry shifts, the existence of a buyer’s market, a looming human resources crisis and capitalization issues.

But these issues are not insurmountable. The creation of the BBX offers a unique opportunity for companies to begin actively engaging with and solving problems they face.

A shifting industry
As discussed in our previous articles, the wholesale distribution industry is in the process of an unprecedented consolidation. This is largely due to new distribution channels, such as the Internet, connecting producers and businesses. But this implosion does not signify the obsolescence of the industry.

In his article “An Old Model Revisited,” Richard Vurva argues that the recent recession has confirmed the long-term efficacy of the wholesale distribution model. Wholesalers reduce the need for businesses to carry expensive inventory, they are able to aggregate market information to more quickly identify future industry trends. And, they are able to provide a variety of products from a single source, thus allowing businesses to bypass minimum purchase requirements.

The value inherent in such advantages is highlighted during periods of economic contraction as businesses seek to cut costs. 

Vurva argues that updating the wholesaler industry’s communication and technology infrastructure to deal with demand in a changing business environment is the key to remaining competitive.

The obvious problem is that the costs involved in such an undertaking are often prohibitive. The capital markets, through the BBX, offer a means by which the industry can access the capital necessary to update its infrastructure and remain functional.[i] 

The buyer’s market
Recent years witnessed a spate of business failures, mergers and acquisitions within the wholesale industry. The number of wholesalers dropped from 364,000 in 1987 to 250,000 by the late ‘90s. 

A sharp drop in the amount of business routed through wholesalers is both an underlying cause and compounding factor in the decline. These factors have created a growing buyer’s market. 

According to wholes distribution study Facing the Forces of Change 2000, wholesale distribution companies historically have been acquired at a valuation of approximately 150 percent of sales under ideal market conditions. Hence, a wholesale distribution company with revenues of $10 million would sell for approximately $15 million. After expenses and taxes, this amount would often be halved. But even this is no longer the case.[ii] 

Fragmentation, competition, market saturation and other contributing factors discussed in previous articles resulted in a market that is considerably less favorable to the seller than its historical performance would suggest. 

Moreover, because merger multiples are lower for private companies than they are for public companies, the situation is even less desirable for the average small business owner. Thus, going public is an alternative way to raise capital and build infrastructure to remain competitive, to increase company value, and to raise the merger multiple of one’s company, increasing its value and liquidity.

The human resources problem
According to several recent studies, including the 1994 NAW Annual Report, future trends in the distribution industry include a significant rise in non-family CEO succession.

However, 66 percent of wholesale distribution firms have no plan of succession, and there is a lack of depth in top management across the industry.

What's more, low executive compensation relative to other industries has deterred new management, while company founders have tended to invest in their own savings as opposed to updating company infrastructure. 

Compounding the problem, individually held distribution firms have historically tolerated lower returns on their investments than have comparable firms in other industries. 

Facing the Forces of Change argues that the single most significant strategic issue facing the wholesale distribution industry is that of attracting new and talented management to facilitate a successful industry-wide progression forward.[iii]

Having a liquid currency to attract, compensate and reward new managers can be a radical competitive advantage.

The BBX adds new legitimacy to small companies. Its standards ensure investor confidence while it provides visibility and efficiency to its listed companies. 

Capital markets are a strong avenue through which companies can finance the process of updating infrastructure. By doing this, they will increase profitability, long-term viability, executive salaries, industry efficiency and thereby attract new talent.

This is particularly true as executive compensation is increasingly composed of a mix of salary and incentives. If human capital is needed in order to facilitate the survival of the wholesale distribution industry in the future, then the BBX is a market uniquely qualified to help meet the conditions necessary for wholesale distribution companies to attract new and talented management.

Capitalization issues
In the late 1980s, wholesale distribution industry debt-levels were too high and the industry was unable to earn sufficient return on investment. In the early 1990s, long-term debt levels declined while companies attempted to pay off high debt loads. Although banks continue to be a leading source of capital, equity financing is increasingly important to wholesale distribution companies in the 21st century.

The BBX will further encourage this trend as companies seek effective ways to raise the capital necessary to update and adapt to the new business environment without becoming too highly leveraged.[iv]

But what does the creation of the BBX mean for wholesalers, regardless of size, looking for an alternative to full divestiture, roll-up, recap or reverse merger?

The shift to the BBX will offer several advantages over the existing system. Its electronic trading system will allow order negotiation and automatic execution that currently is unavailable on the OTCBB, which relies upon the telephone to negotiate and execute orders.

This shift will increase the speed, reliability and accuracy of the trading process, as well as improving overall market transparency.

New corporate governance regulations will further improve market transparency while ensuring investor confidence and issuer compliance. BBX-listed companies will be required to hold annual shareholder meetings, appoint a minimum of one independent director and adopt an audit committee composed of a majority of independent directors. The regulations ensure shareholder voting rights and shareholder approval for major transactions such as acquisitions and the issuance of shares to directors. BBX-listed companies must also use auditors who are subject to peer review, and they must provide annual and quarterly reports.

Nasdaq will provide BBX-listed companies the services of a corporate communications director, who can answer questions and provide information on trading activity. It will also provide a newsletter, an informational Web site, and various seminars and training materials.

The prestige and heightened visibility of trading on a listed exchange, along with new corporate governance regulations and electronic transaction mechanisms will increase investor confidence and market transparency thereby providing liquidity and visibility to companies previously lacking in both.

An increase in the capacity of small companies to raise capital means that wholesalers trading on the BBX will be more likely to raise the capital necessary to invest in the technology and communications infrastructure that will ensure their ability to remain competitive.

The nuts and bolts: costs and timelines
Listing on the BBX does have associated costs. First of all, you’ll need a firm to assist with getting your company through the process. Professional fees for that service typically run anywhere from $75,000 to, well, there really is no upper bound.

As mentioned above, the corporate governance regulations involve certain minimum costs incurred by regulated actions such as the maintenance of an independent director. Additionally, there are annual fees and listing costs which are projected to be about $5,000. However, special regulatory efforts have been made to minimize costs in order to facilitate the inclusion of small companies on the BBX.

The best way to determine the total costs involved in a listing on the BBX is to talk to an investment professional. They can help you determine the particulars of your public offering and guide you through the process in a way that compliments your individual needs.

Is it right for me?
Going public on the BBX provides a unique opportunity for you to solve many of the complex problems facing your wholesaler business. A public listing on a recognized and regulated exchange can help provide liquidity and a higher valuation, can attract new management, and provide access to fresh capital.

A listing on the BBX can also be part of a successful retirement strategy by taking a family business and attracting new management without losing control or losing access to the value stream.

Ultimately, you determine what steps your distributorship must take in order to remain viable into the future. However, oftentimes seemingly overwhelming or complex problems are less daunting than they first appear once you sit down with a professional and outline alternatives.

At the end of the day, the decision is yours.

Nevertheless, making a decision and making an informed decision are not necessarily the same thing. We suggest you educate yourself about the challenges facing your business in the future as well as assessing your long-term goals for the company. 

Once you understand what needs to be done and what the end goal is, then you are prepared to make choices from a position of strength. 

As a service to Progressive Distributor readers, we will provide an analysis of the feasibility of your wholesale distribution business becoming a publicly traded company as well as a projection of the involved. 

For a free analysis, more information about selling your business or any of the alternatives in this article series, send us an e-mail or give us a call.

[i] Vurva, Richard. “An Old Model Revisited,” Progressive Distributor, Jan/Feb 2002.

[ii] Author? Facing the Forces of Change: The New Realities in Wholesale Distribution. The Distribution and Research Foundation: 1993, page 181.

[iii] Ibid., page 92; and 1994 NAW Annual Report highlight a DREF sponsored survey (page not identified in the secondary source, nor is there enough info to cite the 2ndary source, but it is derived from footnote #2 in the DREF book review).

[iv]Author, Forces of Change. Pages 92-216.

Jane E. Baynard is an investment banker and Scott Benfield is a consultant for distribution. They have co-authored three books on wholesale distribution, including Pricing Management: Capturing Value for Distributors, and Marketing Plans for Growing Sales: A Guide for Wholesaler-Distributors Each can be reached at their respective e-mail addresses: Jane E. Baynard at and Scott Benfield at . Research analyst for this article was Emily Miller.

back to top                                          back to online exclusives