At the risk of giving into hyperbole, there are a million reasons why an office technology dealer should consider selling his/her business in this current economic landscape. And since a million bullet points would be considerably more than all of you would care to read, we’ve condensed it down to these few for your consideration.
- Demand is through the roof after being pent up for much of the previous 12 months. Many independents and the so-called rollups have sat on the sidelines longer than any period in recent memory. Deals were placed into a holding pattern, but that pattern is unlikely to continue. The back end of 2021 is likely to resemble an M&A game of musical chairs.
- Optimism is high regarding the exiting of the pandemic. As vaccination needles continue to penetrate millions of arms across the country and individual states continue to ease restrictions (particularly school districts and other verticals that sustained the most COVID-based disruptions), confidence toward a resumption of business as usual continues to gain momentum.
- Financing a deal is not an issue. Even during the worst of recessions, those buyers who positioned themselves and their coffers well with judicious fiscal management are able to leverage opportunities in a down market. Money is cheap to borrow, and some companies without a private equity bankroller behind them can make good from their own resources.
- While the Paycheck Protection Program (PPP) allowed many businesses to maintain employee levels, the pandemic did prevent others from making the necessary investments that would enable them to remain competitive with their peers. Joining forces with an organization that can provide your client base with products and services other than your current offerings—while allowing you to take money off the table and ensure ongoing client retention—provides a win-win for your lifetime investment and adds assurances for the future of your employees.
- If you were harboring the idea of selling before the pandemic, the sum of these factors points toward a need to pull the trigger. The most effective dealers used the pandemic to become smarter, more trained, better organized and well positioned to exit the pandemic in high gear. If treading water and just remaining in business during 2020 was your primary game plan, riding on old tires (so to speak) when the green flag drops will cause problems as business levels normalize.
As this month’s State of the Industry feature indicates, one of the greatest stumbling blocks toward making a deal in the current environment is that the pandemic has doctored the trailing 12 month performance of many dealers. And given that, prospective sellers are loathe to peddle their lifetime investments at a discount. But the number-crunching process isn’t designed to place prospective sellers over the proverbial barrel.
To a person, our dealer panel of M&A buyers is motivated to make deals that represent a win-win scenario for all parties involved. Considering that many buyers prefer to structure deals that either keep the previous ownership intact for the long haul, or at least a 6-12 month transitional phase, picking your pocket on a transaction is not in the buyer’s best interest. And given the various tools that can help sellers ensure they reap maximum returns, there’s a deal to be had that doesn’t force you to discount value or leave money on the table.
Our panel of M&A participants, which represents many of the heavy hitters in the office dealer space, have offered some insight as to how prospective sellers can mobilize and enhance the value of their operations prior to approaching the market. These tips can help to make a dealership more attractive to the buying community.
John Lowery, President
Applied Imaging
One of the things I would want to do as a seller is cultivate more five-year lease dealers with clients that have services bundled with the lease. We’ve looked at dealers that have recurring revenue, but they either don’t have many long-term contracts or have none at all. The leasing piece is a big deal; having a lot of leasing contracts makes it easier to upgrade them down the road. So I’d want to have most of my transactions leased.
From an admin standpoint, sellers should look to become leaner with their workforce. Maybe there are some members of their staff who may be positioned to take an early retirement. That’s always one thing we like to do when we’re looking at a dealer, so if they’re already lean, that can help.
Patrick Flesch, President
Gordon Flesch Company
Sellers should make sure they have a solid handle on their overhead. Obviously, you want good revenue with solid margins, and the bigger your net income or EBITDA figures are, the more money you’re going to be able to get for your dealership. Cutting out those expenses and liabilities also puts you in a very strong position.
As we go through the negotiation process with dealerships, those that are run from a conservative standpoint, are fiscally prudent and managed to their bottom line really have the best chance to get the most pennies on the dollar. Top-line revenue really isn’t everything, it’s all about how you manage the company, how you run it and the quality of your culture.
Jim Sheffield, CEO
UBEO Business Services
For many of the deals we do, we assist the seller. We have an institutional money partner, Sentinel Capital Partners in New York, and we want these sellers to get the most for their organization. It’s got to be a win-win scenario for a transaction to happen, so we help these organizations with add backs. For example, [the seller] might have $4 million in operating income, but during the negotiations, we might be able to find $4.5 million for them through add backs. That puts an additional half-million dollars times the multiple into the owner’s hands.
We truly help these sellers get as much as they can, and they appreciate it. Plus, that bolsters our reputation in the market; the word of mouth spreads. I would hope that I have always been known as a straight shooter. Sellers need to have some level of trust with the organization they’re dealing with; it’s important to like and trust them to help you find add backs. I think a lot of sellers would be pleasantly surprised with us.
Doug Albregts, CEO
Marco
From an industry perspective, we don’t anticipate multiples for document-only businesses increasing long-term, so timing as well as finding the right buyer are very important. There are a few key levers to pull to enhance the value of the business. The first is having an aligned cost structure that is sustainable. The second is executing on a managed IT strategy to show diversification and a forward-thinking business plan. Then, it’s all about sales execution and demonstrating a track record of growth.
Dan Ruhl, Principal
Oval Partners/FTG
One of the more critical factors is to make those tough decisions related to their expense structure before they approach the market, and not expect those changes to need to occur on the buyer’s watch. Take an example in which the seller received a PPP loan and was able to keep all the employees, but revenue dropped 20%. The loan is now forgiven, but the expense structure is too high for a business that has 20% less revenue.
If a seller wants to maximize the value of the business, there are hard decisions that need to be made to right-size the expense structure for that new revenue level. It doesn’t need to occur showing profit, showing that expense reduction for 12 months, but it needs to happen.
