M&A Bonanza: Growing Cadre of Players Vies for Shrinking Pool of Sellers

You need to go back to the 1990s to find a market for mergers and acquisitions (M&A) in the office technology sector that’s more robust than the past two years, and we have the pandemic to thank for the sharp upturn in activity. The notion of thanking COVID-19 for anything is absurd; “attribute” is more appropriate to describe the 40% uptick in deals consummated, which varies by source.

The pandemic proved to be an accelerant in a number of areas, from the reduction in print volume to the growth in work-from-home activity. M&A was initially stifled during 2020 as businesses mobilized to focus on maintaining viable operations. As the smoke cleared, pent-up demand led to an explosion of deals in 2021 and 2022.

The motivations were clear-cut. Owners who were on the brink of retirement or had sketched out a plan to phase out amped up their level of urgency. Paycheck Protection Program money helped keep others afloat, but the pandemic may have delayed plans to make critical investments in areas to grow business, from entering or enhancing managed service capabilities to other improvements to bolster efficiencies in back-office operations, client/fleet management and various forms of automation. Hiring grew more difficult as industries crossed borders to pilfer high-performing sales representatives, managers and talented executives.

A lack of growth and an unwillingness to move forward independently spurred many sellers to seek the comfort of partners with more resources and comprehensive product/service offerings who could provide their employees and clients with a path forward. However, after two years of substantial transactions, has the industry reached a tipping point in the volume of deals? In this month’s State of the Industry report on M&A, we canvassed the views of two major deal facilitators and a large sampling of buyers to get their thoughts on what the near-term market is bearing.

A Lesson in Locations

Geography plays a role in the availability of sellers, according to Jim Kahrs, president of Prosperity Plus Management Consulting. Some regions remain fertile, while others are lacking in inventory. The true dearth may be the availability of larger dealers in the $10 million-plus range, he notes. But the sellers are still out there, as evidenced by the dozen or so clients he’s currently engaging in an effort to find suitors.

“Some buyers are looking for very specific criteria,” Kahrs noted. “It’s not always easy to address the parameters of size, location and product lines. The more detailed and specific a buyer’s criteria is, the smaller the pool becomes.”

Kahrs also notes the field of buyers is continuing to grow, based on the new faces on the other side of the negotiating table. This points to more dealers seeing M&A as a viable growth strategy. He believes the pandemic and the resulting pressures from supply chain and HR challenges steered more on-the-fence companies toward an exit. Most notably, large dealers that purchase smaller ones are no longer shedding assets such as employees and facilities in an effort to take advantage of synergies.

“Viewpoints have changed; finding talent is so difficult, buyers will bring over all the employees,” he added. “The pandemic created more of a sense of urgency among buyers to replace revenue lost during that period in a way that’s highly profitable. When done properly, [buyers] can bring in service revenues without a lot of expenses.”

I think the shift will be away from larger deals, because that pool of sellers isn’t as significant, but there’s still plenty going on out there.

– Jim Kahrs, Prosperity Plus

Kahrs expects to close a lot of business in 2023. Despite the growing interest rates, he believes buyers aren’t dissuaded. “I think the shift will be away from larger deals, because that pool of sellers isn’t as significant, but there’s still plenty going on out there,” he added.

Historical Perspective

Another major player in the office dealer M&A realm is Mike Dudek. Along with partner Rich Wisniewski, he’s helped facilitate more than 500 transactions under the flag of Zygoquest Group. A former VP of acquisitions for IKON Office Solutions—which grew to $5.5 billion prior to its sale to Ricoh—Dudek has sat at the negotiating table for some of the largest deals in the history of the industry.

Dudek sees a generally smaller group of would-be sellers engaging with buyers for a couple reasons: the industry isn’t nearly as fragmented as it was 30 years ago, and demand is much higher from the burgeoning roster of buyers in the market. “Even with a steady supply of willing sellers, the supply is spread thin among all the interested buyers, resulting in no individual buyer consummating many transactions,” he said.

The profile of today’s buyer is much different, Dudek noted. In the 1990s, IKON, Danka Industries and Global Imaging Systems, as well as the manufacturers, stormed the top 100 U.S. markets with aggressive pricing and terms and conditions (Ts&Cs) in vying for quality dealers. Independent dealers who entered the fray found it difficult to compete with the consolidators and OEMs for the top prizes on the market.

Those consolidators were all acquired by manufacturers, Dudek said, leaving in the wake private equity-based rollups, large independents and a host of medium-sized dealers and some manufacturers—none of which are as aggressive from a pursuit and pricing perspective as their predecessors.

“With limited exception, the present private-equity-backed roll-up companies are far less aggressive from a pricing and Ts&Cs perspective; therefore, some otherwise-willing sellers aren’t agreeing to sell for the prices and terms being offered,” Dudek said. “Private-equity-backed players, even those that consider themselves strategic acquirers, generally require higher ROIs and therefore offer lower, less-risky purchase prices and other Ts&Cs which don’t bring some otherwise interested sellers to the table. Frankly, some equity-backed roll-ups are acting only like financial buyers that are more risk-averse and require higher ROIs, and therefore lower purchase prices, with more onerous upfront and post-closing terms and conditions than what truly strategic acquirers had been offering.”

Activity among some of the more prominent private-equity players slowed in 2022 for several reasons, according to Dudek, including executive turnover and “digesting” prior purchases, although he believes at least one group will be ramping up its efforts in 2023. Meanwhile, sellers are continuing to reconcile post-pandemic effects, including equipment backlogs, which have depressed operating results and thus would impact a sales price. He believes the struggles to obtain and maintain top-flight salespeople, which crosses into most industries, will be one of the greatest hindrances to growth.

Given the vast field of purchasing suitors, Dudek feels now is an optimal time to consider selling. However, he believes sellers need to be knowledgeable and diligent about finding a buyer willing to offer a fair price, not to mention optimal Ts&Cs.

“That’s what we do for a living,” he said. “We know the buyers who are fair from the inception of an offer until closing. We know which buyers aren’t fair on the front end and those who tend to change the rules halfway through the deal, or even worse, at closing.”

Even with a steady supply of willing sellers, the supply is spread thin among all the interested buyers, resulting in no individual buyer consummating many transactions.

– Mike Dudek, Zygoquest Group

The following is a snapshot look at some of the industry’s leading buyers:

Doing Better Business
Altoona, Pennsylvania

2022 Deals Closed: Canton Business Machines, Multiscope Document Solutions, Rocco & Strain

At just south of $25 million in annual revenue, Doing Better Business (DBB) is relatively large by industry standards, but less than half the size of the next-smallest dealer on our panel. That hasn’t slowed the company in its M&A efforts; DBB has completed 11 deals in its history, including the aforementioned trio and another, Cooper Business Machines of Erie, Pennsylvania, that closed at the end of January.

Joe Dellaposta, the company’s COO and brother to President Debra Dellaposta, notes that the market for smaller companies in the $3 million to $4 million range isn’t a contested one. Many of the $1 million and $2 million, family-owned/lifestyle businesses are keener to sell than the larger ones due to the intense pressure on maintaining those levels of operations. As such, there is no lack of opportunities for DBB to add candidates to its stable; the dealer engaged with at least a half-dozen firms in 2022.

We’ve been pretty lucky. We have a good success rate of previous owners coming on board and loving the experience. They really enjoy working with us.

– Joe Dellaposta, Doing Better Business

Forging relationships with family-owned sellers is critical to DBB’s success. “Debbie does a good job with the introductory letters and setting up initial meetings,” Joe Dellaposta said. “We’ve been pretty lucky. We have a good success rate of previous owners coming on board and loving the experience. They really enjoy working with us. I think that’s really helpful.”

Onboarding the Cooper business gave DBB a solid entry into the Erie market, and the Cooper family itself is highly involved in the community, which dovetails with DBB’s corporate culture. “They really remind me of our parents,” she added.

Acquiring dealers in Ohio and the tip of Pennsylvania took DBB a little more outside the geographic range it prefers, and the preference is for sellers who carry DBB’s predominant lines (Ricoh, Sharp, HP and Canon). In terms of its MPS program, Debra Dellaposta feels her company is in a good place as far as being able to fit the customer with the proper device.

They have to be a good fit with our people. We take the time to learn about their business practices and their reputations in the community.

– Debra Dellaposta, Doing Better Business

“The big thing for us is a prospective company being a cultural fit with ours,” she said. “They have to be a good fit with our people. We take the time to learn about their business practices and their reputations in the community.”

Flex Technology Group
Mesa, Arizona

2022 Deals Closed: Copy Link, Standard Office Systems

If there’s anything that runs counter to M&A, it’s the inability to accurately evaluate a prospective company’s 12-month trailing performance. This is exactly the predicament that stymied many deals in the immediate aftermath of the pandemic; it was impossible to project, with any certainty (especially if PPP loans played a role) an accurate picture of the financial health of an organization.

In the case of Flex Technology Group (FTG), the farther the pandemic is in the rearview mirror, the easier it becomes to access a candidate’s financials and garner insight into what the firm’s ongoing run rate will be. Then again, FTG doesn’t scout companies that are struggling or distressed. Flex’s partnership with private-equity firm Oval Partners has enabled it to add 18 companies since 2016, most of which record a minimum of $15 million in annual sales.

FTG returned to M&A action with a pair of deals, including Standard Office Systems, a $35 million performer based in Duluth, Georgia. According to Dan Ruhl, a partner with Oval Partners, another dealer has signed a letter of intent in 2023, as the company seeks to add high-performing companies to its collective.

“We continue to grow and perform extremely well,” Ruhl said. “It’s a stable vehicle for growth in an industry that’s had its share of challenges. We have a reputation for bringing in companies and creating great opportunities. They share our vision for taking care of the customer. We want partners that are successful, growing and excited about the future.”

We have a reputation for bringing in companies and creating great opportunities. They share our vision for taking care of the customer. We want partners that are successful, growing and excited about the future.

– Dan Ruhl, Flex Technology Group

Flex employs a decentralized model, seeking partnerships with companies that may be looking to leverage some liquidity from their business while maintaining the name, leadership, strategy and operational autonomy. Those companies then reinvest in Flex’s platform. Some smaller companies ($5 million) also have the opportunity to do more of a transactional deal and are folded into the operations of existing member organizations.

Gordon Flesch Company
Madison, Wisconsin

2022 Deals Closed: Stan’s LPS Midwest, Oshkosh Office Systems

It wasn’t just the rash of deals that contributed to a drying up of the seller pool, according to President and CEO Patrick Flesch. The years immediately preceding the pandemic also saw an unprecedented number of transactions. Market prices were reaching in the 5-7x EBITDA range at its height, Flesch noted, but have receded to the 3-5x level.

“During that flurry of deals, the multiples we were seeing were crazy high,” he said. “They seemed to have normalized somewhat as of late.”

Gordon Flesch Company (GFC) was a significant buyer in the 2019-2020 time frame, adding five companies to its stable. Generally, most of the suitors Flesch engages lack generational family members who are involved with the business, prompting sellers to seek an exit strategy. Most of the opportunities are from sellers who reach out to GFC as opposed to contested opportunities.

“In those cases, if the fit is right, we try to move into the letter of intent stage as quickly as possible, which, in effect, eliminates the threat of additional bidders,” he noted.

GFC employs a different approach in comparison to the private-equity/venture capitalist segment. Flesch tends to not engage in a bidding war for a firm that’s shopping around, but rather guarantees the buyer that it will provide a secure future for both employees and clients. GFC seeks manufacturer partnerships that align with its current OEM base of Canon, Ricoh and Lexmark.

Geographic alignment is also very important to us. Recently, we were able to expand into Iowa via acquisition, and that has worked out really well and has opened the door for us to continue to grow to the west.

– Patrick Flesch, Gordon Flesch Company

“It’s so much easier if the seller carries the same products,” Flesch said. “Obviously that isn’t always the case, but at a minimum, we look for at least one match in the product line. Geographic alignment is also very important to us. Recently, we were able to expand into Iowa via acquisition, and that has worked out really well and has opened the door for us to continue to grow to the west.”

Kelley Connect
Kent, Washington

2022 Deals Closed: Advanced Document Systems, Superior Office Systems, Michael Business Machines, OfficeTECH, Lee’s Office City

CEO Aric Manion isn’t looking to make a major splash in the M&A theater. He isn’t seeking to acquire $20 million dealerships in various regions of the country; in fact, Kelley Connect doesn’t have any designs on straying outside the Pacific Northwest. Manion’s primary targets are in the sub-$10 million range, probably closer to $5 million, with fewer than 30 employees. He considers most of his deals to be employee hires and focuses on the best candidates with strong books of business and solid monthly recurring revenue.

“It’s a team fit, almost like an interviewing process,” Manion said. “Many owners are more concerned about making sure a deal is in the best interests in their employees and customers moving forward. For them, it’s not about making the most money. We bring everyone into the company and take care of them, as opposed to consolidating and making cost-cutting measures.”

Oregon, Washington, Montana and northern Idaho are the main focus regions, although Manion reached into Alaska a few years ago. He’s noted that the seller pool doesn’t appear as vibrant in 2023, but the opportunities he’s seeking primarily revolve around managed service providers, namely IT, with mainstream copier dealers becoming fewer.

Quality people make a big difference. We acquired a software company mainly because of the talent they had in software development. Onboarding talent is one of the most important aspects of any deal.

– Aric Manion, Kelley Connect

A strong local reputation and a loyal customer base are critical factors he seeks in a dealer. “There are companies out there that are just motivated to sell, and it’s because they’re not taking care of the customers,” Manion said. “Those are high-risk; when customers go away, we’re not left with anything to buy. So it’s important to look at the profile of the team they have in place.

“Quality people make a big difference. We acquired a software company mainly because of the talent they had in software development. Onboarding talent is one of the most important aspects of any deal.”

Novatech
Nashville, Tennessee

2022 Deals Closed: ManagedPrint, Atlantic Business Systems

What does it take to catch the eye of a longstanding firm such as Novatech? The dealer looks at many dynamics in assessing a prospect—the candidate’s market penetration, industry, geography, bench talent and tenure from a headcount perspective. Other factors include the health of the company’s P&L statement and the amount of debt it carries, according to CEO Dan Cooper.

Novatech is currently in talks with managed IT, managed print and copier-centric businesses. Those who stand out the most demonstrate a strong reputation for customer satisfaction within their local markets, boast strong employee tenure and enjoy a corporate culture that meshes with Novatech. As a nationwide provider, its geographic reach has no boundaries.

Our goal is to grow and take each acquisition to the next level of success, leveraging and developing their existing teams, including their leaders.

– Dan Cooper, Novatech

“Our culture is rooted in an entrepreneurial-driven foundation,” Cooper said. “Our goal is to grow and take each acquisition to the next level of success, leveraging and developing their existing teams, including their leaders. Many members of the Novatech executive team include leaders and/or owners of our past acquisitions.”

RJ Young
Nashville, Tennessee

2022 Deals Closed: Ethos Technologies, Lewis Digital, Syndesi Solutions, Unitech

The past few years have effectively reset the market, with buyers adjusting to post-COVID numbers, valuations and demographic shifts, according to AJ Baggott, COO for RJ Young. Meanwhile, he believes sellers have come to grips with decreased enterprise values following the post-pandemic drop in aftermarket business for smaller dealers.

“The initial influx of private equity to the market drove multiples quite a bit higher pre-COVID, but those appear to have normalized in the 5-7x range, depending on the balance sheet strength and other operational factors,” he noted.

Three of RJ Young’s acquisitions were imaging-centric businesses, with the fourth specializing in managed services. The dealer currently has a robust pipeline, and Baggott expects to close more deals in the next six to twelve months.

Its candidate list generally falls into three buckets: firms in new/adjacent geographies; firms that add market share in emerging/newer markets with existing opportunities; and MSP or technology businesses that will help grow RJ Young’s talent, skills or organizational capabilities. The first and third buckets are currently garnering the most focus.

The pandemic created a seismic shift in the service-driven business and an uptick in the MSP side of our business. We’re more actively pursuing those businesses in order to ensure our infrastructure keeps pace with the rapid growth we’re experiencing.

– AJ Baggott, RJ Young

“The pandemic created a seismic shift in the service-driven business and an uptick in the MSP side of our business,” Baggott said. “We’re more actively pursuing those businesses in order to ensure our infrastructure keeps pace with the rapid growth we’re experiencing. We’ve shifted away from buying companies in many of our existing markets, as we’ve seen substantial success as a larger dealer winning market share organically.”

UBEO Business Services
Austin, Texas

2022 Deals Closed: Centric Business Systems, ADS Imaging Solutions

The rising interest rates haven’t dampened the enthusiasm of CEO Jim Sheffield, as acquisitions have pushed UBEO beyond the $250 million mark and are still growing. He feels many would-be sellers are still licking their backorder-addled pandemic wounds in order to leverage the higher side of the 3-6x multiples enjoyed in the market. And in 2023, Sheffield has faith that UBEO will be able to polish off two to four more acquisitions, but it would be hard to top a year in which the company added a prestigious performer in Centric Business Systems.

Recent years have provided critical foray into markets such as Boston and the Carolinas. It was the 2018 Ray Morgan Company acquisition in California that truly put UBEO on the M&A map and cast it as a formidable player.

“We’ve had a lot of success in the Mid-Atlantic/Northeast region, all the way up to Boston,” he said. “We’re looking anywhere, especially out west in Texas and the surrounding states. If we were to do something in the Southeast, we’d want to put together several good deals to have a strong position.

“We’re not looking to become the biggest; we want to build a great company. Excellence isn’t a destination, it’s a journey. We want to be the premier customer experience company in the industry. So if we started in regions such as Florida, we’d need to scale in order to deliver on that promise to customers. Long term, we’re going to be a national company.”

Excellence isn’t a destination, it’s a journey. We want to be the premier customer experience company in the industry

– Jim Sheffield, UBEO Business Services

Sheffield isn’t seeking out any “fixer-uppers.” Rather, he’s searching for M&A candidates whose corporate culture and customer philosophy mesh with UBEO’s—do what’s best for the customer, what’s best for the employee and what’s best for the company. The first two elements will invariably take care of the third.

“It’s important that a dealership has solid financials and great people, but we also want to work with people we like,” he added. “We want people who love to win. It’s important that we can share best practices, show each other our playbooks and figure out ways we can improve both of our organizations.”