6 Key Value Drivers for Pump Distribution Companies During M&A

Authored by Matthew Everett | Principal, SC&H Capital

M&A activity is on the rise in the pump distribution sector. Buyers hope to capitalize on favorable market demand dynamics, while sellers look to benefit from recent industry growth and favorable valuations. Before outlining the key value drivers, let’s first explore the factors influencing the current boom of industry consolidation.

Increasing Demand in Key End-User Segments

Pump distributors catering to both industrial and municipal sectors are benefiting from a surge in demand.

  • Industrial sector: Approximately 40% of American CEOs plan to relocate manufacturing operations within the next three years, following the post-COVID trend of bringing manufacturing back to the U.S. This leads to the construction of new facilities that require industrial pumps and related equipment.
  • Municipal sector: Years of inadequate investment and deferred capital expenditures, combined with recently tightened wastewater regulations, spurred an increase in projects funded by the federal infrastructure bill. Municipal facility operators have also used the bill funding to support increased maintenance spending. This generates steady revenue while driving high-margin parts and service work for many distributors.

Multiple Private Equity-Backed Platforms

Many large, private equity-backed pump distributors are aggressively pursuing roll-up acquisitions as a growth strategy, including Flow Control Group (backed by KKR), United Flow Technologies (HIG Capital), Tencarva Machinery (Bessemer Partners), Motion and Control Enterprises (Frontenac), and Floworks (Wynnchurch Capital). These firms are actively competing with one another in M&A processes to drive growth and create larger, more diversified platforms that offer a wide range of products and services to various end markets. These competitive dynamics lead to higher valuations for potential sellers.

Scalability

The distribution business model is highly scalable and provides buyers the opportunity to achieve meaningful synergies post-acquisition, such as OEM line card expansion, cross-selling, and share of wallet growth. For OEM relationships with geographic exclusivity constraints, growth via acquisition can be the only way to expand geographic reach and spread existing corporate infrastructure investment across a larger sales base.

Value Drivers: What are Buyers Looking for in a Pump Distribution Business?

These are the six value drivers that should be on the radar of any seller to grab the attention of potential buyers:

#1 Quality Line Cards: Building relationships with top OEMs is critical to attract buyers. Companies with geographic exclusivity with segment-leading OEMs will command premium valuations.

#2 Stable Revenue Composition: Buyers place a higher value on recurring MRO (maintenance, repair, and operations) revenue than CapEx (capital expenditure) revenue from large, one-time projects. MRO revenue typically provides a higher margin and more reliable income compared to CapEx revenue, which can fluctuate materially from year to year.

#3 End Market and Customer Diversification: Buyers always prefer acquisition targets with a diverse customer base across multiple growing industries over those with a concentrated customer base within a single sector.

#4 Desirable Size and Growth Trajectory: Pump distribution businesses with a proven track record of sustainable growth through both organic and inorganic initiatives are viewed as attractive and scalable, leading to higher valuations.

#5 Strong Margin Profile: Cash flow is one of the most significant factors that impact investors’ decisions, so a company’s capacity to maintain strong profit margins is crucial.

#6 Talented Personnel: Given the relationship-centric nature of the pump distribution industry, buyers prefer businesses with skilled personnel who have strong relationships with key customers and suppliers.

Questions Pump Distribution Owners Need to Ask Themselves

As a business owner in an industry with multiple active buyers, you will likely receive inbound inquiries about your interest in being acquired (if you haven’t already). When considering a sale, you should try to answer these basic questions before engaging in serious discussions:

  • How much is my business worth based on recent industry transactions?
  • Which of the active buyers in the industry are the best potential fit for my business, based on my strategic objectives?
  • How many potential buyers should I consider and how do I position the company in the market to receive a premium valuation?
  • What common diligence issues arise for pump distribution companies during the sale process, and what can I do now to address those?
  • What can I do now to increase my business’s valuation before a sale process?

Answering these questions will enable you to confidently select and execute an exit strategy.

Not sure how to get started? Our team of experienced M&A advisors would be happy to discuss what factors you should consider for your business before selecting an exit strategy. Contact us to get started.