Nike president and CEO Mark Parker reveals their latest innovative sports products during an event in New York on March 16, 2016. Nike revealed a series of products highlighted by the groundbreaking adaptive lacing platform, as well as a pioneering technology that separates mud from cleats and transformations in the celebrated innovations of Nike Air and Nike Flyknit. / AFP / Jewel SAMAD (Photo Credit: JEWEL SAMAD/AFP/Getty Images)

A distribution company can be relatively easy to scale up, but very tough to sell. When you’re peddling other people’s stuff, you don’t control the product and often can’t do much about the brand. You’re essentially a middleman who can be plucked out of the way if your supplier decides to change their distribution strategy.

Before Phil Knight started NIKE, he sold Tiger shoes made by a Japanese company called Onitsuka. Knight had the exclusive rights to sell Onitsuka’s running shoes in the U.S. market yet despite their agreement, Onitsuka started to court other dealers. Knight’s company was tiny at the time and so deeply reliant on Onitsuka for supply, he could do virtually nothing to enforce their agreement.

At The Value Builder System we’ve analyzed some 25,000 business owners who have completed the Value Builder questionnaire. Knight’s company would have scored a zero out of 100 on what we call The Switzerland Structure, a measure of your company’s reliance on a supplier, employee or customer. The Switzerland Structure is only one of eight value drivers we measure, but abysmal performance on any one factor can mean you have a worthless business (you can get your score here).

Onitsuka’s snub became Knight’s impetus to start his own brand, which gave him control of his marketing, supply and product development. NIKE became one of the world’s most valuable companies, one that regularly trades north of 20 times earnings. By contrast, a typical distribution company would be lucky to sell for 50% of one year’s revenue.

The Veto

The value of your distribution company can be further discounted if your supplier restricts you from selling your company.

That’s the predicament Seth Buechley found himself in when he tried to sell his company, Reach Holdings, which conducted business as SOLiD USA.

SOLiD is a South Korean company that offers technology, which allows building owners to get wireless service into difficult areas such as subway tunnels and stadiums.

Buechley and his two partners negotiated the exclusive rights to the U.S. market and started SOLiD USA. The partners grew U.S. domestic sales to nearly $60 million in just six years. When they decided to sell the business and received a buyout offer from their supplier, they couldn’t really refuse. As part of their distribution agreement, Buechley had effectively given SOLiD a veto right to stop the sale of SOLiD USA to any other party, which ensured there would never be a competitive bidding process for the company.  Buechley and his partners eventually accepted the offer SOLiD was willing to pay for their business.

Recently I interviewed Buechley on Built to Sell Radio and I asked him what he might do differently if he could start SOLiD USA all over again. He said he would try and push for a pre-agreed valuation formula for his company when signing an exclusive distribution agreement, thereby guaranteeing a fair price for his business.

Distribution companies can be relatively easy to scale up fast, but unless you follow Phil Knight’s playbook and get control of your brand and product, don’t expect your impressive sales numbers to translate into a remarkable exit.