Gone are the days when consultants, pundits and industry observers needed to inform the masses that now is an optimal timeframe for interested office technology dealerships to explore cashing in on the asset they have (in some cases) spent a lifetime developing. That point has been driven home ad nauseam.
However, even without the benefit of hindsight, it is reasonable to surmise that industry consolidation may have reached its apex, or is fast approaching it.
Still, one may reasonably argue that the Staples acquisition of DEX Imaging represented a transition point in the M&A landscape. It added a new player (office supplies industry) to an already-active theater that includes dealers buying dealers, manufacturer directs buying dealers and OEMs obtaining software and ancillary product/service providers that further deepen their holdings.
Two years ago, we warned/argued that conditions could be ripe for a shifting in the political, economic and industry-related conditions that have made the transactional market an active playground. It proved to be premature speculation, and the M&A market swelled. The economy appears to be mired in its happy place (2.9% GDP in 2018 versus 2.2% in 2017), with 3.2 percent growth in Q1 2019 over the same quarter in 2018.
At 10 years, we are in the longest economic expansion stretch in U.S. history, per Forbes. The magazine cited the New York Fed’s recession probability model, which warned that there is a 30% chance of a recession in the next 12 months. The last time the odds were that great was July 2007, five months before the kickoff of the Great Recession. The New York Fed has tended to err on the conservative side in its model; in December 2007, it gave just a 39% probability, and the recession had already began.
Attempting to sum up the current economy and where it is heading in a single paragraph can be dangerous (if not irresponsible), so we’ll leave you to research the triggers and factors that may be skewing the numbers one way or another. The impact of a recession is tough to gauge, as each has its own personality. But from an M&A standpoint, it is safe to assess that the conditions which have made the past three years conducive to buying and selling are not static. Neither are the players.
What we do know is that our panel of office technology dealers is near unanimous in its assertion that “the pipeline is full.” The need to knock on doors has passed; interested sellers are at their doorstep in full force. We’ve compiled a half-dozen of the most active and/or prolific in our industry, but it is by no means comprehensive. The scorecard that follows will provide a glimpse of their three-year history, along with insight into the type of acquisitions they’re looking to make.
Marco
St. Cloud, MN
Number of Deals (last three years): 11 (six copier, five IT)
Revenue or Percentage Increase: $100 million
Geographies Sought: East to Midwest, gaps, plus existing and new markets
Size Range of Acquisition: $1 million-$300 million
Owner Retained: Optional
Rebrand: Yes
While researching his dealership’s M&A history, CEO Jeff Gau noted that of the 44 deals the company has closed since 2005, IT companies accounted for 17 of them. As a rule, the dealer seeks to balance its growth between organic and acquisition, though a fruitful year of deals can skew the balance.
Market density is a main consideration when looking at copier companies. Existing market opportunities are always a plus, and Gau loves to fill in geographic gaps. Its late 2018 acquisition of Phillips Office Solutions was the company’s biggest, giving it inroads into Pennsylvania and Maryland. Cornerstone acquisitions in new markets is the M.O. for most dealers, and Marco is no exception. Contrary to popular opinion, Marco is not afraid of adding $1 million performers in optimal conditions, in addition to nine-figure targets.
“We have access to capital,” Gau noted. “I’m not that hung up on the product and service mix, and brands don’t really matter anymore. I like good IT opportunities, but I really still like copier companies. It’s just a good business.”
Gau finds that cash is still king in deals. Owners can choose to remain active with the company, and Gau finds the ones who are deep into sales or service are generally the best candidates.
“If we’re aligned with the owner’s wishes or criteria of their dominant selling mode, it just seems to work out well,” he observed. “The owner just needs to be clear with us as to what they want to achieve out of a deal.”
Novatech
Nashville, TN
Number of Deals (last three years): 8
Revenue or Percentage Increase: N/A
Geographies Sought: Primarily Southeast, seeking larger dealers in new territories
Size Range of Acquisition: Variable
Owner Retained: Optional
Rebrand: Optional
Throughout the past few years, Novatech employed a no-holds-barred approach to acquisitions, simply because the dealership did not want to limit the scope or opportunities that arose. Whether it was lease irregularities, split-ownership situations, divorce, loss of largest customer or successional-related difficulties, Novatech could dig deep into an opportunity to find the best outcome for both the dealership and the seller.
Not that Novatech, under the leadership of President and CEO Dan Cooper, is only seeking reclamation projects. Indeed, Novatech is still scouring the Southeast in its quest for fortifying holdings in areas such as Tennessee, Mississippi and Georgia (it has augmented its standing in Atlanta). Cooper is following through on the corporate blueprint to expand Novatech into new geographies with large anchor holdings, backed by the financial empowerment of Trivest Partners.
“We pursue all types of managed print and managed IT companies, with the ideal acquisition being a solid company that enables us to expand into new markets, has a great management team who have fostered excellent customer satisfaction along the way, and who possess a desire to continue moving forward, exponentially growing the business,” Cooper said. “While Novatech is currently based throughout the Southeast, we are looking at opportunities enabling us to expand into new markets across the U.S.”
UBEO Business Services
Austin, TX
Number of Deals (last three years): 7
Revenue or Percentage Increase: 3x revenue ($200 million total)
Geographies Sought: Texas, Louisiana, Nevada and California (existing), open to all regions (new markets)
Size Range of Acquisition: $1 million-$100+ million
Owner Retained: Yes
Rebrand: No
Now the largest independent dealer in Texas, UBEO Business Services is acquiring dealerships at a dizzying pace, with seven deals completed in little more than a year, and two others that were set to close by the end of last month. UBEO spread its M&A wings not long after carving out a deal with Sentinel Capital Partners, which gave president and CEO Jim Sheffield the firepower to advance his acquisition platform.
In keeping leadership in place, Sheffield has been able to focus on the core companies while growing his best practices and hiring critical executives to smooth out the process. He doesn’t place too much emphasis on product and service prerequisites, though Sheffield admits he has a soft spot in his heart for the core MFP business.
“We will look at companies that have managed network services in their portfolio, but what we’re really after are companies that execute well, are customer centric and have values similar to ours,” Sheffield noted. “When you start looking at financial statements, for anything other than the core businesses, typically what we’re seeing is somewhat dilutive.”
The value system for a prospective acquisition is probably more important to Sheffield than its product and service portfolio. He has no specific designs on becoming the largest player in the country—he is more interested in being the best from a customer service perspective—and Sheffield would prefer new partners to share his customer service-first approach.
“If they don’t have the ambition to be what we want to be, then we’re not interested,” he said. “We’re that serious about it. We know our niche and we want to stick with it.”
RJ Young
Nashville, TN
Number of Deals (last three years): 6
Revenue or Percentage Increase: 7-8%
Geographies Sought: Southeast
Size Range of Acquisition: $2 million-$20 million
Owner Retained: Optional
Rebrand: Yes
While not a newcomer to the M&A table, RJ Young has ramped up its activity significantly in 2019, with three deals consummated and another that was slated to close at the end of July. Many of the most recent deals completed by President and CEO Chip Crunk provided the dealership with an upper hand in their respective markets, along with a new foray into Louisiana.
“When you go into a new market, you better have a process in place to make sure that it’s successful,” he said. “You can’t run it the same way that you run the business in the markets you’re already active in. It’s an entirely different dynamic.”
Many of the dealers RJ Young targets are in the $5 million to $10 million range, and Crunk notes the dealer would need a minimum $6 million performer to enter a new market. While manufacturer lines don’t play a significant role in the decision-making process, it’s easier if the prospect carries Canon, Ricoh, Lexmark or HP—RJ Young’s lines.
“The main attribute I look at is the owner of the business,” Crunk said. “If there’s a quality owner running the business, usually it has a good workforce. When there’s not a good person running it, usually their people are a little shaky as well.”
With a number of deals under his belt, Crunk can finish off a deal in as little as 30 days. Most are completed within a 90-day span. “It used to take a lot longer, but now it’s a pretty seamless process,” he added.
Flex Technology Group
Phoenix, AZ
Number of Deals (last three years): 12
Revenue or Percentage Increase: 100%
Geographies Sought: All markets
Size Range of Acquisition: $3 million and above, depending on geographic location
Owner Retained: Preferred
Rebrand: Subtitled, “A Flex Technology Group Company,” but company retains its brand and identity
Oval Partners burst on the scene a little more than three years ago with its unique acquisition platform, which allows additions to its ranks to use a pre-tax portion of the sale price realized to reinvest in the Flex Technology Group (FTG) holding company. It has proven to be a popular strategy; since its initial investment in FlexPrint and the creation of FTG, 11 more dealers have entered the fold.
According to Dan Ruhl, a principal with Oval Partners, FTG’s goal is to bring on approximately $100 million per year in revenue from acquisitions. The organization is currently in the process of closing three more deals, and Ruhl expects that number will grow before the end of 2019.
FTG is on the hunt for dealers whose core business is in the imaging space, with an emphasis on contract-based business. A good reputation and consistent growth are prerequisites in addition to the $3 million revenue base. FTG allows newcomers to retain their name, corporate culture and management team, but will also entertain dealers where the primary owner is looking to retire.
“A big part of it for us is the company’s reputation in the industry and its management team,” Ruhl noted. “That tells us a lot about the company. We look at their organic growth rates over the last couple of years and whether their business is under contract or not.”
Visual Edge Technology
North Canton, OH
Number of Deals (last three years): 30
Revenue or Percentage Increase: N/A
Geographies Sought: Coast to coast, gaps, plus existing and new markets
Size Range of Acquisition: $3 million-$100+ million
Owner Retained: Yes
Rebrand: No
It is interesting to note that Visual Edge Technology (VET) has not announced any new acquisitions in 2019, but the platform is coming off a year in which it welcomed 18 new dealers, bringing its total to 34 in roughly the last four years. The collective boasts sales in excess of $300 million.
VET is famous for its quest to add only the highest-performing players in the industry; it does not entertain overtures from distressed entities. It wants committed management teams that share its vision for growth, both organic and acquired. In fact, VET provides access to capital for dealers who wish to expand within their markets. VET also provides succession planning for members opting to retire at a certain point. To date, however, only one owner has completely cashed in.
VET’s scope isn’t limited to pure dealers. It also analyzes IT value-added resellers and managed service providers.
“Our strategy is to be a national company with locations coast to coast and in the top 50 BPI marketplaces,” said Michael Brigner, senior vice president for VET. “We search for well-run companies with excellent executive leadership and a solid relationship with its customer base and its employees, while providing a wide array of office technology solutions from MFP A3/A4, PageWide technology, software and managed IT services. We focus on companies that are performing at a good level of profitability against industry benchmarks.”
In addition to taking a high degree of risk off the table and increased visibility, new members to the VET organization enjoy a number of benefits. They garner insight into organizational management, share ideas and best practices with other member companies and reap economies of scale in many operational areas.
