Darren Metz loves a good story. The CEO of Nashville, TN-based Novatech has heard many tales of companies he’s vetted as potential acquisitions for the 20-year-old dealership, which is set to soon eclipse the $100 million barrier for annual sales.
M&A has become a brisk business in the office technology dealer space and a bona fide agent of growth in a sector that is somewhat challenged to prosper organically. There are a number of large roll-up consolidators, most of which have been profiled within these pages, who are as much known for their annexation proclivities as they are for their M&A modus operandi.
Novatech’s top executives (from left): Joe White, president; Darren Metz, CEO; and Andrew Heggem, director of mergers & acquisitions
Then there’s Novatech, which has largely flourished through organic growth and adding companies within the southeastern region of the United States (Tennessee, Missouri, Arkansas, Mississippi and Texas). Its recent growth has helped garner a stronghold in the Atlanta region, but the long-range forecast is to transition into a national consolidator.
What really separates the dealership, which counts Konica Minolta and Canon as its primary MFP partners, are the stories behind the acquisitions. Metz doesn’t have a hard set of rules governing the types of acquisition prospects Novatech will pursue. Sure, well-performing companies with strong client lists, double-digit earnings and solid service-based business—particularly managed IT—are attractive to Metz.
But as he observes, business is complicated. Companies can struggle for any number of reasons and various stakeholders can have conflicting preferences, but these same companies possess loyal customers and valued employees. Reclamation and workout projects do not scare him away; in some cases, Metz seems drawn to them, driven by his success in delivering optimal outcomes to all parties.
We sat down with the CEO, who provided a sampling of the challenging scenarios that he has woven into the successful fabric of Novatech. Metz also outlined how managed IT and 3D printing are two of the fastest-growing segments that are fostering organic growth and contributing to a world of possibilities for Novatech.
How was business in 2018?
Metz: We had an unbelievable year, during which we finished around $94 million. It was our strongest year ever in terms of revenue and profitability. The challenge is, as you get bigger and bigger, it’s harder to grow at the same percentage rate. But we’re still managing double-digit growth, even at a larger scale.
What does Novatech pride itself on?
Metz: Our mission is to flourish as a team by delivering caring, efficient service and support to our customers and each other. I think that says a lot, but how we conduct ourselves says more. As many dealers know, customer service is critical to their survival. As we’ve gotten larger, we’ve focused on caring for each other inside of the company in addition to caring about the customer. The sales people care about what the technicians have to deal with, and technicians care about what admins have to endure. Everyone wants better pay, benefits and working conditions. We keep trying to connect the dots in the minds of our team members about how that caring contributes toward the ability to pay those desired wages and benefits. We focus on living our mission.
A service van decked out in Novatech branding
An important element in Novatech’s strategic plan is growth by acquisition. What distinguishes Novatech from the core of consolidation models within the dealer channel?
Metz: With Novatech, there is no model. Many of the other companies that are doing roll-ups have a “by the book” plan, but it might not always fit the in-field realities. Some say they’re looking to buy big dealers and then leave them alone, keeping the brand intact. Others dissolve the dealership’s brand quickly, folding them under one logo. Depending on the situation and the local market, we will either maintain or dissolve the selling dealer’s brand.
Some consolidators require the seller to reinvest a portion of their sale proceeds into the combined entity, often inflating the purchase price but requiring the dealer to put a huge chunk of proceeds back into the business. Other consolidators do not offer the acquired owners an equity position at all. We invite sellers to reinvest solely at their choosing, and do not let their preferences affect our valuation. We don’t inflate the sale price with strings attached to “roll over.” It’s the seller’s choice.
Some buyers seek to consolidate facilities, while others will lease the facility back from the owner. We are the only roll up I know that will actually buy the real estate from the seller. Most of my competitors will do a five-year lease from the dealer principal at best, often leaving the seller with a big question mark about the future of their second-most valuable asset, the building that housed the dealership.
The key word for us is flexibility. We look at important parameters from the viewpoint of the seller, including reinvesting, branding, employment and facilities, and find a way to meet their needs. We believe that a one-size-fits-all approach is not always best. For most people who are selling their businesses, it’s the most important decision in their life. Rather than come at them with a “here’s what we’re going to do to your company” philosophy, we assess the situation and determine what is the optimal outcome, with complete flexibility on all topics including ownership, branding and facilities.
Recently, your company announced the acquisition of Consolidated Copier Services? How long had that deal been in the works, and what does that organization bring to the table?
Metz: Being a fellow Konica Minolta dealer in the southeast, I’ve been familiar with (Owner) Pat Nunnally and Consolidated Copier Services for many years. We had casual conversations dating back a year or so, but the process began in earnest about six months ago. On the surface it was a standard deal about their people, the existing sales, service and admin staff, along with their strong client list. There’s an interesting story behind the deal where the owner’s son, Lincoln—who had spent a lifetime in the business—left the business several years ago and decided he wanted to spread his wings. Now, Pat Nunnally is retired and Lincoln came back simultaneous with our acquisition to become a new owner at Novatech. It was an interesting and effective business combination that might not have resulted with a cookie-cutter approach.
What do you look for in a potential acquisition?
Metz: We’re looking for optimal outcomes. We are very opportunistic. Like any buyer, we seek large, well-run businesses in good-sized cities with double-digit EBITDA, growing revenue, little customer concentration and all the usual suspects. We’ll also look at the tuck-in of small dealerships in our area that can be folded into existing operations. We’re now seeking larger companies in new geographies that enable us to expand our focus beyond the southeast. While some consolidators are only looking for high-performing companies, we’re willing to evaluate companies that may now be in a decline or hit other speed bumps. Every company has a story. Perhaps the owner’s health had been an issue, or maybe they lost a big account. We don’t limit ourselves to the premier dealerships that we, and all the other rollups, want to buy. We’ll evaluate opportunities where what we offer fits into a succession plan for the owners and stakeholders.
For example, one of our Atlanta-based takeovers, Service Technology, was struggling due to some lease company accounting issues. They had a lot of service baked into leases, buyouts that weren’t processed, substitution of collateral issues and equipment they couldn’t deliver. It was a challenging situation with more than 100 lease “irregularities.” Rather than turn our nose up at it, we dove in and found the best outcome possible for all the stakeholders. We sorted through the troubled-lease portfolio and worked with customers and leasing companies to find win-win situations on a deal-by-deal basis. We were subsequently able to combine several acquisitions in Atlanta, and after two years we are now one of the top dealers in the market.
Naturally, we prefer solid companies with intact management teams and profitable businesses, because we’ve got the ability to operate them and basically just keep on keeping on, which is not that hard because we have the capital. But we’re also looking for any deal that involves an established customer base, both MPS- and MIT-oriented companies, and are service based. Primarily, we are focused on recurring service revenue. One thing we’re not looking for is a computer VAR that’s primarily selling hardware and software as a commodity at single-digit profit margins.
Can you provide other examples of different acquisition scenarios?
Metz: Business is complicated. Right now, we have a situation where there are two partners—one wants to sell and the other doesn’t. Some people in my position might walk away from that situation, but we’re in there playing a peacemaker role with partners who haven’t spoken to each other in five years. We’re working on another situation where the owner is going through a divorce. One dealer in Florida lost his largest customer, which represented 30 percent of his business, and he needs a liquidity plan now due to his health and family issues. We’re willing to dive in there and create possibilities for people to achieve their goals and establish the way forward for themselves and their business.
Most of Novatech’s acquisitions have been concentrated in the southeast. What is your vision for eventual national expansion?
Metz: During the first 18 ½ years of our 20-year existence, all funding for acquisitions had to come out of my pocket and our ability to obtain limited amounts of loans from local banks. Since our partnership with Trivest, a multi-billion dollar private-equity firm, we no longer have those capital constraints. It clearly gives us the ability to aim higher and farther. We will even buy dealerships larger than ours. We are looking at deals across the country. We will consider dealerships in rural areas where we have nearby operations and will look at medium and large operations in tier one and tier two cities nationwide, due to their ability to operate autonomously. For example, we currently have an offer out to a company in Michigan. As time goes by, we’ll establish outposts throughout the U.S. For companies that are located farther away, it’s more important to have a stable, intact company. As soon as we are active in any region, we will be prepared to handle the more complicated situations due to the availability of important resources from nearby Novatech locations.
Members of the purchasing department (from left): Will Strickland, Ron Moe, Consuela Covington, Lincoln McKinley, Tyler Pederson, Roy Person
Last year, Novatech was recognized on the Inc. 5000 list for the 12th time. Aside from M&A growth, what has enabled your company to prosper and grow at such an impressive clip?
Metz: I don’t know if anyone in our industry has made the list that many times. Only a small percentage of companies of any type can sustain that type of growth year over year, which is really hard in a flat industry like office printers. Inc. informed us that only one-tenth of one percent of all companies have ever made the list 12 times. That is out of hundreds of thousands of companies that have applied. You’ve got to have high double-digit growth compounded annually to make the grade. We have our work cut out for us to make it a 13th time.
Novatech team members highlight the company’s showroom (from left): Ryan Shelton, Jon Janis, Keith Eisenzimmer, Abbey Anderson, Emily Hefta
Also in 2018, the company’s name was changed from NovaCopy to better reflect its strategic focus. How has managed IT and 3D printing, to name two, sparked that transition?
Metz: The brand Novatech honors our legacy as NovaCopy and casts a wide net for current and future product offerings. Even in the traditional copier/MFP world, there’s been a shift in decision-making patterns among clients away from purchasing and office managers to the IT director. Even if we weren’t adding 3D printing and managed IT, the brand Novatech makes sense for the copier/printer business. But it is also well received by IT directors. When they’re vetting an MFP vendor, IT directors want a partner that’s skilled in connectivity, network security, email and scanning. The name Novatech better fits the IT director’s perception of an IT vendor.
There are unlimited possibilities for producing metal 3D pieces for a wide range of applications
The Novatech brand change rationale also reflected our growing managed IT business, which is close to $10 million a year now, and north of 10 percent of our total business. We have tremendous organic growth amongst our SMB customers for managed network services, and we have some exciting pending acquisitions I hope to announce soon to expand our capabilities and IT revenue.
Our growth in 3D printing further led us to rebrand the company, as 3D buyers are the most technical of all the customers we serve. We felt 3D buyers were most likely to frown on doing business with “just a copier company.” So the brand refresh to Novatech aligns with our ongoing expansion in the nascent 3D printer business.
What do you look for in your employees, and how do you recruit and retain good ones?
Metz: The good news is we have a booming economy, but we also have tight labor markets, so attracting and retaining good employees is more challenging and important than ever. Employees play a considerable role in our recruiting efforts. Every employee is eligible for a $1,000 bonus for helping us land a new hire. We’ve got tools to enable our employees to post our help-wanted ads in their social media feeds, and as a result, employees are bringing in their friends, acquaintances and family members into our organization.
With retention, we’re on the leading edge of benefits, workforce and workplace development. Not only do we offer paid maternity leave, we offer two weeks of paid paternity leave in addition to their standard three weeks of PTO. Our new mothers and fathers are delighted that we go beyond most companies and actually pay them while they are bonding with their new baby at home without using up all of their vacation time or docking their check. We utilize the mentor/apprentice approach for both sales and service positions, and have a career ladder promotion program that has proven effective. We offer a unique program called the Novatech Family Beach House. We bought a beach house on the Gulf Coast that we provide at no charge to our top technicians and administrative staff. Innovative, forward-thinking, generous benefits are very much needed in today’s highly-competitive HR environment.
What was your dealership’s biggest win in 2018?
Metz: While we’re under an NDA, I can say that it’s the world’s largest medical application of 3D printing for prosthesis devices. The customer is transforming a particular medical field using 3D printing for a health care need that used to be accomplished through expensive injection molding. Their business is exploding and they’ve ordered dozens of top grade 3 printers from us. They’ve given us a spend forecast of $8 million more in 3D printers alone in the next 12 months, and the consumable revenue makes desktop printer cartridges seem like peanuts. It’s truly a transformative health care application, which is indicative of the bright future for 3D.
What was the biggest challenge you faced in the past year?
Metz: When we recapitalized the company with Trivest, my CFO and service manager—two of our founding partners—both retired after cashing in their stock. It was a great experience seeing my lifelong friends exit with tremendous liquidity, but their departure definitely left a void. Fortunately, we’d been executing our Team 2020 leadership development program and promoted from within. It was in 2018 that the rubber really met the road, and the new management team took over. There was a challenging period of adjustment, one that was well phased, and we emerged victorious from it.
What are your goals for the next 12-18 months?
Metz: Our budget this year is $110 million, so that’s going to be a stretch. We’ve got a pure-play managed IT company that we expect to close on soon. This managed IT company is more advanced than we are with world-class services, so we plan on a full integration of their IT services across our expanded footprint. This will enable us to realize our end goal of becoming a fully-integrated MIT/MPS-type company.
How do you view the industry changing in the future and what are you doing to adapt?
Metz: If you define the “industry” as the A3 MFP copier space, I think we’re on the downhill side of the bell curve. We’re seeing a shift to A4, a continued decline in the average selling price per unit and a reduction in office printing volume. We see huge opportunities in production print, serving commercial printing/packaging printing and printing on vinyl for vehicle wraps. We definitely see fantastic opportunities in managed IT and 3D, along with dark clouds from the decline in office printing.
Five years ago, you could sell a 50-page-per-minute machine for $15,000, with $4,000 profit in it. The customer was doing 8,000 pages per month. You go back to that same situation and the volume’s dropped in half to 4,000 pages, so now you sell them a $3,000 A4 machine to meet these requirements. It’s just tough when you’ve got a declining average selling price per unit and dwindling volume in the core business, which for a lot of dealers is the office print space. The paradigm is just contributing to the ongoing change in our industry. There are new revenue streams coming online, but it’s definitely a challenge to adapt. It’s a sequel to the typewriter, fax machine and PC movie we have all seen, but there are some new plot twists, and survival is not guaranteed.
What do you enjoy most about your job? What are your least favorite aspects of it?
Metz: Our philosophy is hiring people into the biggest job that they’ve had. We’re definitely giving a lot of people in the early stages of their careers the opportunity to participate at higher levels of management. I enjoy seeing people blossom into their new careers, growing personally, financially and professionally. On the flip side, it would have to be turnover. When we provide those opportunities and our employees exceed, they also burnish their resume. There’s a lot of competition out there for talent, including from high-profile companies like Google and Amazon, and there’s a group of premiere companies that recruit from our staff. It’s painful when we put a lot of time and effort into an individual, only to see that talent walk out the door after a few years.
Outside of work, what do you do for fun?
Metz: I love anything that involves adrenalin and a board. My current favorite is a newer sport called wake surfing, which involves specialized boats loaded with ballast that create six-foot waves that you can surf as if you are on the ocean. It’s a good old man’s sport, because it doesn’t hurt when you fall. I came over to it from wake boarding, where you’re going faster and doing a lot of jumping, and the falls are fast and painful. With wake surfing, you’re only going about 10 miles an hour, with the focus on surfing and not jumping. So when you fall, you just kind of sink slowly into the water—usually pain and injury free. When you’re wake surfing, you don’t have the ropes yanking your elbows out of socket. It’s popular here in Tennessee, where we’re so far away from the ocean. I’ve been involved with all board sports like skateboarding, snowboarding, snow skiing, surfing and water skiing for about 45 years. For any activity that involves a board and adrenalin, you can sign me up.
