How do I check if a steel distribution business is profitable?

A steel distributor can look very strong in a year when metal prices rise and very weak when they fall, without the business having changed at all. Stock bought earlier gets sold at a new level, and that effect can swamp the real day-to-day result. Your job as a buyer is to pull the two apart. Ask the seller for the statements and the detail behind them, then work through them with your accountant.

Look across the cycle, not at one year

Metal demand follows construction, manufacturing and energy work, and it moves up and down. Ask for as many years as the seller can supply, including a slow one. Compare how sales, gross results and staffing changed in each. If only the best years are on offer, ask why. Compare how the business did in a quiet year with how it did in a strong one.

Separate metal price effects from operations

Ask how inventory is carried in the books and whether the statements show gains or losses from holding stock. Ask for sales by product and by month. Your accountant can help adjust for the effect, so you see what the business earns from buying, cutting and delivering. See also how to check supplier relationships.

Processing, resale and customers

Ask how much revenue comes from cutting, shearing and delivering, and how much from straight resale of full lengths. Ask how sales divide between the two. Then ask how much of the business comes from a few customers, and what would happen if one left. A business that depends on one buyer carries a different risk from one with many.