11 M&A Tips To Consider (From Channel Execs Who've Been Through It All)6:36 PM EST Thu. Aug. 26, 2010
As the economy improves, the amount of solution provider consolidation through mergers and acquisitions appears to be increasing too. But jumping into M&A requires a lot of due diligence, risk and vision. Take it from some VARs and other channel executives who have been through the process. Here’s the thoughts of 10 executives, both buyers and sellers, on what to expect when you’re looking at an acquisition.
"The key things from a positioning of the company are, first, getting the company operating at its peak financially. That’s where you’re worth the most. With a strong balance sheet and a profitable company, you’re a much more attractive acquisition target and you’ll command a higher multiple."
"Second, have your financials in top order, with no questions of the integrity of financial statements or issues on balance sheets. That makes due diligence go so much quicker and that’s where things get intense. You may find some business owner that is being a little bit lax on some of that and they’ll find going into closing that the value of the company is not what thought it was. It’s important to know where stand on that."
Wald sold his company, Riata Technologies, to White Glove in August 2010 and took the reins at the new company in a minority-ownership stake.
"Determine if you want to leave the business. Why do you want to do M&A? Be clear on why you want to sell. Second, I’d be very cautious about the prospective buyer and the structure of the transaction. How are they going to pay for it? If you get bought by IBM, it’s different than if it’s by Company ABC doing a roll-up. Another thing is what your role is going to be when the deal is over and how will you realize all of your cash from the deal? The real value of a reseller is in the ongoing cash you generate. Most of the deals are structured as earnouts over time."
"When the deal’s done, you could be working for someone else. Can you accept that kind of role? Most guys who got into this business did so because they didn’t want to work for somebody else."
Joyce was president and CEO of Roundstone Systems, an Alameda, Calif.-based solution provider that was sold in 2007.
"Make sure you have a realistic expectation of what your company is worth, and a clear understanding of the metrics and components that drive valuation. If it’s your first time going though the process as a principal, I would suggest that you seek advice from an outside advisory firm, and find an experienced M&A attorney to represent you."
"If you plan on staying on board, or have a deal that is comprised of significant equity as opposed to cash -- make sure you understand the strategic goals of the acquiring firm, such as eventual exit strategy and the timeframe around it."
Gilden was partner and COO of Acuity Solutions, which was sold to FishNet in 2009.
"At NWN, we approach this process looking for good companies that have a strong cultural fit. We want owners to remain and become part of NWN. We look for like minded people that share our values. They also must be able to work as part of the NWN team and be able to ‘check’ their egos at the door."
"Their business must be congruent with the NWN business strategy around market segments, vendors, technologies and a high interest in services. We want people that are looking to expand their success and continue to build, not ‘punch out.’
"Don’t make it only about the money in the transaction. Closing a deal is only the beginning. Focus on how the business will be impacted post-acquisition. Think about what you will gain and what you will lose after the transaction. Make sure you know the acquirer. Don’t assume anything."
Waltham, Mass.-based NWN has made several acquisitions, most recently purchasing Western Blue, a Sacramento, Calif.-based public sector VAR at the end of 2009.
"We bought a company, we purchased their customer list basically. And the way paying it out -- this is where you have to be careful -- is payments based on revenue from that list as it pertains to service." "Talk to some of the friends who have been through it before, your peers. Ask what kind of agreement to look at and what’s a fair price to pay. And also don’t go out and just buy the company. You don’t know if those customers will stick with you." "When I went into it, I wasn’t sure. I’m not one to whip the checkbook out. Earnouts worked for buying [a customer list because] they’re not physical assets. A customer list is business that is not guaranteed. We still have to perform."
In January 2010, BPI acquired a small services company that Ellis would not identify due to a non-disclosure agreement.
"We’ve bought a couple small VARs. It’s been a win-win for us. It’s under the model that you pay a percentage of client-base revenue for a period of time. There’s not much of a downside. The owners did not come with the acquisition. They just collected checks. That [model] has worked real well with small guys. Basically you’re buying customer lists and a customer base that’s actively using your services."
"If your end game is to be attractive someone to acquire you, build as much recurring revenue as you possibly can. At the end of the day, that’s what [buyers] are most interested in." "It was an important criteria for us, but just getting the active customer base into our services base then going to upsell recurring a managed service model is what attracted us. When you pay a percentage of revenue, your downside is pretty limited."
Noordyke’s company, Remex, was purchased by Trivalent Group in 2003.
"[Rory Sanchez, SL Powers CEO and President] said on the phone one day, 'Let's just combine our businesses. I said, 'OK, we exposed our books to each other,' and six weeks later it was done."
"Make sure you're doing it for the right reasons. If you sell, you're not in charge anymore. There's no going back. I'm a very ethical person. I signed a non-compete. And all I know is IT."
"You need a real good attorney. And a real good financial consultant who can help you dive into the financials. You need a good business valuation, the numbers and the structure of the deal."
Atchison sold her former company, Guardian Angel Computer Services, to SL Powers in August 2009.
"One, don’t buy a company that has a messy office. If their offices are messy and/or their workspaces are messy, there a real good chance that their books will also be a mess and years later you’ll still be trying to figure it out."
"Two, the day you buy a company, the previous owner needs to move out of his big, fancy corner office. Even if he or she is staying on-board, even if the big, fancy office will be empty, they need to move to a smaller office or a cubicle. The employees need to understand that this person is no longer the boss."
"Three, watch out for culture clash. Make sure your engineers have comparable skill levels and that you have comparable customers. Don’t take things at face value. Interview your soon-to-be new employees and test their skills."
Powers bought Guardian Angel Computer Services in August 2009.
"If you’re looking to acquire, try to acquire businesses that don’t represent a lot of overlap to what you do today. Add different skills, different vendors, different customers, not someone doing exactly what you’re doing."
"At the VAR level, what you’re acquiring is human capital. People with relationships with vendors, distributors and customers. Make sure there’s a process to keep the human capital you’re buying."
"If you’re selling, don’t be greedy. Figure out what your company is really worth and be realistic about the value of the business. Otherwise you’ll go through a lot of diligence but never close the deal. A smart buyer is not going to overpay. They’ll pay the right value, but not overpay."
Tech Data has made numerous acquisitions, most recently agreeing to acquire Portuguese distributor DLI in July.
"No. 1, make sure that it’s consistent with your long-term plan and that you can expand either your marketplace or your penetration within your customer base."
"No. 2 would be make sure you can get the appropriate synergies you need so the acquisition can stay profitable for your business. Make sure you understand the investment requirements you may need if it is a linecard expansion, so don’t get into a cash flow problem in the future."
"Make sure there’s a cultural fit between the company you’re acquiring and yours, that you do proper diligence on how they operate vs. how you operate. Do those things and you’ll end up with a good partnership that causes your executives and your sales team to help drive going forward for you."
Distributor Arrow Electronics agreed to acquire Shared Technologies, No. 158 on the CRN’s VAR 500 list, in August.
"By general rule, when there is disruption in macroeconomic or industry conditions, growth through acquisition is more favorable than expecting to grow through organic means. Specific to the communications industry, the recent acquisition of Nortel’s Enterprise business unit by Avaya is a major catalyst for M&A activity. This transaction creates a challenge for VARs when considering reinvesting in their business to accommodate the two technologies merging. Many of these VARs may choose to participate in consolidation to lower their risks of investment." "Additionally, when considering growth through acquisition, VARs might benefit from having a dedicated M&A team that focuses strictly on due diligence for acquisition targets. Having an M&A team expedites the entire process and makes your company more agile during the small window of opportunity."
Xeta Technologies has made several acquisitions, including Pyramid Communication Services, Lorica Solutions and Data-Com Telecommunications in 2010.