Employees of multifamily MRO distributor AZP were stunned on Wednesday morning to wake up to an email announcing the company was ceasing operations. I talked with multiple sources at AZP over the past 48 hours and have pieced together a basic description of what is likely to have happened.

Keep in mind that this is a time of great emotion and confusion for AZP employees and executives and not everyone agrees on the causes. Additionally, there’s some speculation inherent in the information I gathered, and I am only sharing part of what I learned, in part to protect sources.

AZP was reported to have more than $155 million in annual sales, with a goal of more than $200 million this year. That was up from $66 million at the end of 2020. It had 13 distribution centers in nine states.

During my discussions, employees identified several factors that contributed to bringing down the company. Probably none of these would have been fatal individually, but combined, they led to a line-of-credit covenant violation that left the company without operating cash.

Overly aggressive expansion

AZP simply tried to grow too fast. I heard stories such as branch openings stretching the company resources too thin. One person told me: “We were opening a new branch and before we even had inventory in it, we were opening another one.”

Keep in mind that all distributors were wrestling with unpredictable supply chain delays at this point. AZP wasn’t the only company with relatively empty warehouses.

Poor acquisitions/integrations

In 2020, AZP acquired MRO supplier Murray Supply Company, which extended the company’s geographic reach into the Carolinas. We heard this was a good deal in terms of value, but the acquisition presented some challenges that may have uncovered a lack of internal competencies in integration.

More recently, AZP acquired CASK, formerly a division of property management giant Cortland Partners that described itself as a “full-service manufacturer and wholesale supplier of high-quality, luxury products at a remarkable price point to large-scale developers.” Employees told me that CASK was losing money before the acquisition, and AZP was not able to stop the losses, despite taking major steps to turn it around, including moving cabinet production from Asia to Mexico.

Potentially contentious investor/customer relationship

More than one former AZP employee told me they are not a fan of Cortland Partners. Cortland was apparently a significant investor in AZP but also a customer – and one that had tremendous leverage due to the importance of their role in the company’s capital structure.

“Back-of-the-house” issues

One individual described AZP as having “fantastic front-of-the-house performance and poor back-of-the-house performance.” When I asked what that meant, the person said that the sales and customer service teams, order processing and delivery operations were sound. AZP implemented CRM, improved price-management processes, upgraded its customer service technology and improved its ecommerce technologies. These investments resulted in rapid sales growth and consistent gross margin improvements.

Employees said that weak areas included accounts receivable and supplier management. The implication was that DSO stretched out farther than necessary, and suppliers extended lines of credit too small for the fast-growing company.

Cash crunch

It’s not hard to see how these factors may have added up to a cash crisis. Fast-growing distributors like AZP need an ever-increasing line of credit. AZP’s line of credit was secured by its on-hand inventory and current accounts receivable. The company was arguably too successful in growing demand because its need for cash outstripped its ability to get it. And, of course, if your ability to order from suppliers is constrained, you’ll have less inventory, which will hurt your sales and thus AR.

Lenders put a priority on ensuring they can collect outstanding loans such as lines of credit. That’s why covenants exist – borrowers must be able to prove on an ongoing basis that they represent an acceptable credit risk to the lender. Banks, of course, want their customers to remain in business, but that’s secondary compared to collecting the money they lend.

When AZP’s AR and inventory declined below the conservative amounts required by one of the covenants in its line-of-credit agreement, the bank decided the best way to get its money back was to force the company into receivership and sell off inventory and other assets.

That’s the story as I heard it. I’m publishing this in part because after we broke the news that AZP was going out of business, I was contacted by multiple, distraught employees asking us if I knew what had happened. There’s often precious little information available to employees in situations such as these. I hope this helps fill in some gaps.

Important Note for Other Distributors

I keynoted a large AZP company meeting a couple of years ago. My wife and I spent quite a bit of time with a large group of employees, which is probably why some of them felt comfortable turning to me for an explanation after we published Wednesday’s news.

I want other distributors to know that I was very impressed with the individuals I met during that event. I think the market is now flooded with talented ex-AZP employees and it would be smart to get them on your radar before someone else does.

Ian Heller

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Ian Heller is the Founder and Chief Strategist for Distribution Strategy Group. He has more than 30 years of experience executing marketing and e-business strategy in the wholesale distribution industry, starting as a truck unloader at a Grainger branch while in college. He’s since held executive roles at GE Capital, Corporate Express, Newark Electronics and HD Supply. Ian has written and spoken extensively on the impact of digital disruption on distributors, and would love to start that conversation with you, your team or group. Reach out today at iheller@distributionstrategy.com.