There’s an oft-repeated adage in the dealership community, as well as in general business, that the best time to sell is only when your company is ready to do so. There’s credence to that philosophy to be sure. But from a market perspective, the time to engage in merger and acquisition (M&A) activity is now.
The document imaging industry has been experiencing a bull run the past few years, with industry consolidators, dealerships, private equity firms, and OEMs snapping up dealers at an impressive pace. At least two major influencers are indicating the time is nigh for companies seeking an exit strategy. A number of active buyers we canvassed indicated they are paying EBITDA (earnings before interest, taxes, depreciation, and amortization) multiples in the 3-6x range, which is extremely encouraging. More than one executive we surveyed characterized the current M&A landscape as a “seller’s market.”
The second factor is timing. Annual GDP growth since the last recession ended has been in the 2 percent range. Most economists point out that in a recovery period there is usually a swell in the 3-7 percent range that generally leads to overconfidence in consumer spending and business investments, which can be triggers for another recession.
Still, it bears noting that since 1900, there has not be a recessional recover period lasting longer than 10 years. The Great Recession ended sometime during the second half of 2009. That puts us at about eight years in recovery mode. History, it stands to reason, is our most accurate crystal ball for the future.
Dealership owners are looking to exit for a number of reasons; most commonly, a lack of a succession plan and the desire to cash in on the rewards of, in some cases, decades of service. A common thread among the smaller performers is the inability to keep pace with larger competitors who have diversified into managed print and IT services.
We surveyed a number of the industry’s most active M&A players to gauge where the market stands, examine their strategies, and provide insight as to what makes a prospective acquisition candidate ideal—or conversely, what types of dealers they seek to avoid.
DEX Imaging, Tampa, Florida
One of the largest independent dealerships in the country is DEX Imaging of Tampa, Florida, with annual revenue of $270 million. It is also one of the most active players on the M&A market. The dealer is coming off a 2016 in which it acquired six companies with revenues ranging from $2.5 million to $30 million. While it has added only one copier dealer in 2017 (Enoch Office of suburban Baltimore), DEX Imaging President Dan Doyle Jr. forecasted an active second half of the year, which he noted will carry into 2018.
Dan Doyle Jr., DEX Imaging
DEX Imaging focuses on the southeastern region, with Enoch being its northernmost holding. Doyle’s goal is to attain 30 percent market share in their existing markets. The company has had much success in realigning sales and management assets from acquisitions to help bolster various dealerships throughout the chain.
“Now that we’ve established our own branches and our own culture, it’s a great time to do acquisitions and roll them into our existing branches,” noted Doyle, who benefits from the vast experience his father, Dan Sr., amassed while making deals for Danka 20 years ago.
Customers are looking for a local presence but want to know that there’s someone strong behind them that’s going to back up the product and handle their service needs—not only in the market that you’re in, but perhaps in a market where you don’t have presence.
Dan Doyle Jr., DEX Imaging
When evaluating a prospective buy, Doyle likes to get a strong feel for that company’s sales process. A strong service reputation is key, and DEX Imaging prefers to onboard quality sales reps and management. While Doyle likes to have the previous owner remain on board (depending on the deal) about half of them stay at least through the transition phase.
Many of the dealers DEX Imaging negotiates with come to them via brokers, but Doyle also has a robust development staff that will perform “hot knocks” to solicit interest. Doyle points out that smaller dealers are under intense pressure from fellow dealers and manufacturer competition.
“Smaller dealers realize it’s tough to compete in the industry today if you don’t have the size,” he said. “Customers are looking for a local presence but want to know that there’s someone strong behind them that’s going to back up the product and handle their service needs—not only in the market that you’re in, but perhaps in a market where you don’t have presence. You need to have some clout in order to do that.”
DEX Imaging boasts a due diligence checklist that helps simplify the process and weed out companies that are not a fit. For example, IT services is not one of its targets, which eliminates prospects that are heavily into that specialty. Companies that have a high hardware margin through used equipment sales are also generally avoided, as it impacts margins on the service end. Doyle also likes to avoid uneven distribution in customer accounts and sales reps: too much reliance on a single customer or sales that emanate primarily from one or two reps can spell trouble down the road.
DEX Imaging primarily relies on cash for its transactions, but it also has a sizeable credit facility when needed. Doyle utilizes a number of different formulas to create valuations that are cross-checked against each other to determine a fair market value.
With all of the competition for available dealers, Doyle feels his company’s edge lies in the fact that it is not just fixated on the bottom line. “We’re the local guy doing the acquisitions, and we care about relationships and supporting the community,” he said, adding that DEX hopes to close the deal on at least half of the eight dealerships it is currently negotiating with before the end of the year.
Marco, St. Cloud, Minnesota
Private equity investments have added another wrinkle to the M&A landscape, particularly in the past five years. One jaw-dropping transaction saw Marco, the St. Cloud, Minnesota-based firm that has acquired 33 companies since 2005, obtained by Norwest Equity Partners (NEP) in the fall of 2015. While it may appear ironic to see an industry roll-up specialist sitting on the seller side of the M&A table, the NEP investment augmented Marco’s ability to continue its growth strategy.
Jeff Gau,
Marco
According to Jeff Gau, CEO of Marco, the company uses a combined strategy of acquired and organic growth, obtaining an average of five Midwest dealerships in the $5 million to $20 million range per year. Marco generally targets copier companies that lack IT services, as well as IT-based performers. Gau will also give consideration to larger dealers, as well as firms outside of its geographic scope.
In general, Marco shies away from prospects with business overly concentrated on a small cadre of customers. A severe chasm in the valuations between buyer and seller will put a quick end to negotiations, and Gau also distances himself from dealers whose primary base is segment 1 and 2 copiers.
We’ve come to learn that everyone is going to have their best year next year, they have great customer service but can’t prove it, they have a great culture but can’t validate it, they have a building they want to lease to us for more than their current rent, and they usually have too many technicians to support the revenue.
Jeff Gau, Marco
Cash flow is the primary mode of financing for Marco, which also uses traditional financing methods when necessary. Having NEP in its corner supporting the company’s assertive growth strategy has been critical to its success.
In determining a prospects’ value, Marco evaluates contracted service revenue and EBITDA multiples. Targets with a viable managed services practice, such as IT, tend to improve their valuation.
With such a rich history of closing deals under its belt, Marco’s M&A team has honed its ability to read between the lines when hearing prospect pitches. “We’ve come to learn that everyone is going to have their best year next year, they have great customer service but can’t prove it, they have a great culture but can’t validate it, they have a building they want to lease to us for more than their current rent, and they usually have too many technicians to support the revenue,” Gau said. “They also have sales challenges—they usually have one or two good sales people and several ‘up and comers,’ which is code for underperformers.”
DPOE, Elk Grove Village, Illinois
Chip Miceli, DPOE
One dealer that has experienced an uptick in activity is Des Plaines Office Equipment (DPOE) of Elk Grove Village, Illinois. DPOE had been obtaining new companies every two to three years before enjoying a rush of five completed transactions in 2016, many of which transpired after DPOE ventured into Indiana on an opportunity that came out of nowhere, according to President and Owner Chip Miceli. Now, the company has expanded its reach into specialty items and even magazine printing.
“As long as it has to do with putting ink on paper, I’m probably involved,” Miceli joked.
Miceli is wary of dealers that offer customers zero percent financing while putting their services up front in the deals, which is a costly liability. In those cases where he will move forward with the negotiations, Miceli will factor that into his offer. Buys contingent on real estate are also a huge turnoff.
It’s a sellers’ market and it all depends on how badly you want somebody.
Chip Miceli, DPOE
DPOE generally finances its deals with three-year loans via a rolling line of credit. Miceli uses EBITDA to establish a value on prospects, with 4x being the sweet spot, though he would consider 5x on the right deal. “It’s a sellers’ market and it all depends on how badly you want somebody,” he said.
The string of five acquisitions has gone extremely well for DPOE. Several of the companies did not offer managed print services: when MPS was extended across those customer bases, DPOE was able to accelerate profits at those respective branches. But there have been bumps along the M&A trail. One hard lesson involved keeping several key employees as part of the agreement, but they did not mesh well with DPOE. Miceli will now only keep people who clear the one-on-one interview.
“I couldn’t wait to get rid of them,” Miceli admitted.
Following DPOE’s April acquisition of Diversified Marketing, Miceli envisions his company doing one or two more deals before the close of 2017. The ability to bring managed network services to his acquisitions will be critical, and obtaining more qualified IT experts will only fortify the company’s efforts. An office supplies company was among the core of five additions, but while Miceli notes that customers are buying less supplies, DPOE is in talks to obtain another supplies firm that would double DPOE’s supply revenue and enable Miceli to get better discounts from manufacturers.
Kelley Imaging Systems, Kent, Washington
One of the leading M&A players of the Pacific Northwest is Kelley Imaging Systems of Kent, Washington, which has annexed four companies since January of 2016. The most recent addition was Superior Business Equipment of Great Falls, Montana, a Canon dealership, which joined the fold in March. During 2016, Kelley onboarded Cascade Architectural & Engineering Supplies Co., a wide format and reprographics firm serving Portland and Seattle; Empire Office Machines, a Kyocera dealership in Spokane, Washington; and Imagine Solutions for Business, a Toshiba and Samsung provider in Portland and Eugene, Oregon.
Aric Manion,
Kelley Imaging Systems
Aric Manion, president of Kelley Imaging Systems, is always on the hunt for companies that boast a good reputation, and where the owners are looking to start the next chapter of their careers. “If the company has a poor reputation, the customer base is probably at great risk of leaving even before any acquisition,” he said. “We also have geographic strategy to cover Washington, Oregon, and Montana. In the beginning, we looked at smaller deals due to financing limitations, but now we have more capital options to go after larger prospects.”
Aside from a prospect’s reputation, Manion is wary of companies that do not wish to furnish information regarding their financials, customer base, or contracts. That can indicate a lack of trust or, it stands to reason, provide grounds to suspect that an underlying issue may exist.
I see a lot of opportunities available in the traditional copiers’ dealer space, but eventually this will evolve into the IT companies needing to merge to stay competitive
Aric Manion, Kelley Imaging Systems
From a financing standpoint, Manion pointed out that Kelley Imaging Systems enjoys solid relationships with its lenders, and owners are asked to carry some portion of the deal. When it comes to placing a price tag on prospects, Manion’s main valuations are based on machines in field (MIF) and recurring revenue.
Kelley Imaging Systems has experienced “incredible growth and geographic expansion” from its Northwest expansion initiative, according to its president. Like his M&A contemporaries, Manion expects to see activity continue at a brisk pace during the course of the next two years.
“I see a lot of opportunities available in the traditional copiers’ dealer space, but eventually this will evolve into the IT companies needing to merge to stay competitive,” he said.
Visual Edge Technology, Canton, Ohio
A little farther east is Canton, Ohio-based Visual Edge Technology, a holding company that seeks out high-performing dealers across a wide geographic range. Visual Edge has acquired six companies since the tail end of 2015. The most recent additions are TLC Office Systems of Houston and Netwise Resources of Indianapolis (check out this month’s Dealer Spotlight feature on Visual Edge).
David Ramos,
Visual Edge Technology
David Ramos, vice president of business planning, points out that Visual Edge differs from many of its competitors in that it does not traffic in distressed assets. It allows companies to operate independently, with the former owners remaining to manage their respective operations. But Ramos admits that his company keeps a watchful eye on the estimated 2,300 companies in the document imaging industry.
So what does it take to make the grade with Visual Edge? Service operations are first and foremost. If a high percentage of a company’s operating income comes from service operations, underperformance in this area is sure to raise a red flag.
“Every company has its weaknesses, they all have their peccadilloes,” Ramos said. “But that’s one area we have a very low threshold for tolerance on variations from benchmarks.”
If you sell through distribution, there’s a hope and a prayer strategy there, whereas with us, we have direct interaction and a high success rate with the customer, and that provides a base of business that’s really attractive.
David Ramos, Visual Edge Technology
Visual Edge also uses a multiple of EBITDA when determining value, and Ramos points out that many of the companies the firm acquires are on the high end of the 3-6x range. A majority of those firms have sales ranging from $10 million to $99 million.
Ramos forecasts an aggressive M&A landscape during the next two years, fueled by “aggressive groups with high appetites.” Visual Edge plans on being in the mix.
“If you’re in private equity or venture capital and see an industry that runs at a 14-20 percent bottom line, and you’re in an industry—from a banking/lending perspective—you see all of these variations of companies, they see the stability and the cash that these companies throw off, and it’s very attractive to them,” Ramos noted. “With IT reseller hardware, there’s a lot of volatility and very low margin. If you sell through distribution, there’s a hope and a prayer strategy there, whereas with us, we have direct interaction and a high success rate with the customer, and that provides a base of business that’s really attractive. Our industry is consistent and cash rich.”
Oval Partners, San Francisco
Frank Gaspari, Flexprint
A unique private equity/consolidation model within the industry has been launched by Oval Partners, located in San Francisco. The holding company—which started by partnering with Frank Gaspari, the owner of Flexprint, and has added Laser Options, Pro Copy, and Cannon IV—differs from most PE models in that owners who join the strategy reinvest a substantial portion of the sales proceeds back into the holding company, according to Dan Ruhl, partner. That gives the seller, who remains at the helm of his or her individual company, an equity interest in the holding company, which includes all businesses involved. All owners are in it together and have a complete alignment of interests.
Dan Ruhl,
Oval Partners
“As the owner of the holding company, you will see equity enhancement through synergies, purchasing leverage, and higher valuations as a larger company,” Ruhl explained. “In our model, the business owners share in the equity enhancement that is usually only seen by the private equity firm through consolidation. We enter the market giving owners a different alternative than staying on their own or selling. With us, the owner can take some chips off the table, keep their company name, continue to work with the people they have been working with, and have better exit options as a larger business.”
Oval Partners values businesses as a multiple of proforma EBITDA, with adjustments to the 12-month trailing performance to pinpoint the proper value. If an owner is interested in better understanding the value of their business, Oval will provide quick feedback, Ruhl explained.
We offer a different solution. Owners that want liquidity, but also want to reinvest and stay with the business have the unique opportunity to do that with us.
Dan Ruhl, Oval Partners
“When the business is for sale, the biggest hurdle is valuation,” he said. “Many business owners see valuations of businesses that are much bigger than theirs and try to apply that valuation to their business. If both sides share similar goals and the culture fits, once you get beyond valuation, the transaction usually closes.”
In the Oval model, the value matters for the sale of shares, as well as the reinvestment. “You are really negotiating two transactions,” Ruhl explained.
Beyond valuation, it is critical that the private equity partner and dealer share the same vision for the business. It is also important that the individuals naturally get along and look forward to working together. Life is too short, Ruhl said, to partner with firms where the business or personal alignment does not exist.
“It is a good time to think about liquidity if you are a dealer,” Ruhl said of the M&A landscape offered by PE, OEMs, and dealership roll-up models. “We offer a different solution. Owners that want liquidity, but also want to reinvest and stay with the business have the unique opportunity to do that with us.”
Previously, the owner had the decision to stay in the business or sell. But now the owner has a third option, Ruhl noted. Stay in the business, take some chips off the table, and benefit from multiple liquidity events down the road as part-owner of a larger business.
