Mitch Morgan
The number of dealers open to adding Managed Services to their menu of products and services offerings is growing as scores of industry consultants and even the OEMs themselves validate this new- fangled business model for the document imaging industry. There’s so many ways to do it, including doing it yourself, leveraging the resources of your OEM such as Konica Minolta’s All Covered or Ricoh’s CHAMPS program, or acquiring an MSP.
Each option is ripe with risks and rewards, albeit some options might be considered riskier than others. Arguably, the riskiest is acquisition as this approach requires due diligence and ensuring in advance, as best as possible, that the two parties can peacefully and successfully coexist under one roof with a mutually agreed upon goal.
At the risk of over generalizing, most dealers don’t have the background or discipline to handle an acquisition on their own. Sometimes outside help is what’s needed to find the appropriate match and manage the process. That’s where GAP Partners and the Zygoquest Group come in. GAP Partners provides Managed Services training and possesses a wealth of knowledge in the space and is a Continuum partner. GAP Partners has also aligned itself with acquisition specialists Zygoquest Group who is adept at matching buyers and sellers as well as handling the due diligence aspect of the match.
During the annual Continuum Navigate 2015 conference in Las Vegas in September, ENX/The Week in Imaging spoke with Mitch Morgan and Chris Ryan of GAP Partners as well as Mike Dudek of Zygoquest Group about the process of matching dealers with MSPs.
The roots of GAP Partners’ partnership with Continuum were planted a few years ago after Continuum saw the promise in the office equipment channel. “We align dealers with their solutions,” says Morgan.
According to Morgan, Continuum is about 60 percent less expensive than its competitors and by far the largest organization of its kind in the Managed IT Services space.
“This fits well with our client base because they’re looking for a reliable supplier who can provide a cost effective service,” states Morgan. “Many office equipment dealers aren’t looking to build their own infrastructure and this [approach allows them to] focus on selling it and scaling it as quickly as they want to.”
For dealers interested in starting a Managed Services business there’s one thing they tend to be looking for from the outset.
“They want a business model, which we created with Continuum,” states Morgan. “Continuum manages 600,000 devices, they know how often they fail, what happens when they do, what the metrics should look like from an operational perspective, and they have financial metrics for that.”
Another thing dealers want to know about is what’s involved in the sales process, i.e., how to sell it and how to identify the target market.
“From a dealer perspective they want to get comfortable with outsourcing,” says Morgan. “They’re pretty good at servicing their customers and control oriented, and sometimes they have to get comfortable with releasing that control. Once they do that and see how it scales what they say is ‘We like what we’re doing, we want to go faster.’”
As dealers start enjoy some successes and Managed Services becomes a larger part of their revenue, that’s when some start thinking about acquiring an MSP as a means of accelerating the business. The risk, however, is taking two separate businesses and pairing them together. Here it helps to understand the type of MSP owner that makes the best fit in this scenario.
“It works best when you have a business owner who likes taking care of customers, enjoys the technology, would like to build a process they can scale, but doesn’t want to take the HR calls and worry about payroll,” says Morgan. “When it works really well, and it has in a number of cases, it’s a good operator who wants to grow faster than he can probably grow on his own, and an office equipment dealer looking to make an acquisition and let that person run that business within a business, and provide the support to make that person part of the team.”
What’s helped GAP Partners and Zygoquest Group in their mission to match dealers with MSPs is that the MSP business has become more understandable to the office technology dealer channel.
“The MSP businesses is a contract-based business with a recurring revenue stream, which is easy for people like Mike Dudek to wrap their arms around from an evaluation perspective,” says Morgan. To date GAP Partners and Zygoquest Group have made seven acquisitions since joining forces.
Dudek and his partner Rich Wisniewski bring a lot to the table as acquisitions specialists; something that Morgan concedes GAP Partners is not.
“What I know about acquisitions is what Mike taught me,” he says.
For dealers looking to acquire an MSP, what’s the criteria for matching and MSP with a dealer?
“These are smaller businesses,” says Morgan. “Employee count is where we start. That’s probably one of the biggest indicators of the size of the business overall. Most of those employees are technical people.”
He further explains that recurring revenue and an interest in transitioning the business from a traditional break-fix model to where 60-70 percent of revenue is recurring or under contract is the ultimate goal.
Mike Dudek
Dudek and Wisniewski represent both buyers and sellers. For the buyer, Dudek looks at the size of the business, what its wherewithal is, and the market they’re in.
“If it’s a $10 million office equipment company they may be in the market for a $1 million or $2 million MSP,” says Dudek. “If you’re looking at a $50 million office equipment company they may have a bigger appetite. It all depends on the profile of buyer, the market, and the supply.”
He reports that there are many MSPs in every market he looks at, albeit the MSP market is very fragmented.
“We’re basically identifying the possibilities, interviewing them and understanding how much of their business is recurring and where they are in their business model,” states Dudek. “At the end of the day, it often comes down to personalities, culture, and the respective owners of the businesses and whether they’re compatible or not.”
“Mike described these guys are fragmented and small and that’s the predominance of what we see,” adds Morgan. “We’re also looking for a level of business maturity, not just the owner, but also to build some scalable processes. That’s important, especially for a smaller guy.”
Dudek believes that a fragmented high-growth industry such as the MSP industry is tailor made for consolidation.
“We’ll do any size transaction,” he says.
There’s a fair amount of dealers who have made acquisitions on their own, some have worked out and others have not. Rather than repeating their mistakes, some dealers are more open to working with an outside party to ensure a better fit.
“You have to follow the process,” says Morgan. “There are lots of traps, and based upon the experience Mike brings to the table, we’re able to help people avoid those.”
“We have expertise, we know what can go wrong, and not every single deal we do will be a home run for someone,” acknowledges Dudek. “But if you follow the process, know what to look for, and do your due diligence before making an offer, that’s why our combined expertise is very valuable.”
For those wondering what it costs to hire outside acquisitions help, Zygoquest’s fees are typically based on a percentage of the transaction.
“These aren’t large transactions, and they pay for themselves,” states Dudek. “On the buyer side, you’re not paying us unless we find a fit. On the seller side, there’s a low upfront fee and we don’t see any money unless we [complete the acquisition].”
The other thing Dudek and Wisniewski do is offer a full scope of advisory and legal services. This can be especially attractive as he’s seen clients over the years run up large legal bills related to an acquisition.
A concern among MSPs that are considering selling their business is what happens to them after the deal closes?
Chris Ryan of GAP Partners and Rich Wisniewski of Zygoquest Group at Continuum’s Navigate 2015 conference.
“A lot of MSP owners think after they sell the business will they want you?” says Morgan. “Yes they will; they want you to build a business within their business.”
He recalls an MSP from Cincinnati who told him after he sold his business he’s managing more than he ever thought he would plus he’s working for people who are bright professionals and who he enjoys working for.
Ultimately, the culture of the two companies is critical and that’s where the matchmakers must ensure a good fit. “There’s going to be barriers, there’s going to be mistakes, people who acquire and who forget that that MSP owner is the sales organization and the MSP owner flees,” notes Morgan.
One issue to resolve up front is identifying how that MSP owner will participate in the business and what needs to be done to get them to stay because if they leave the dealer has lost the asset they bought.
Another benefit of working with an outside organization such as GAP Partners and Zygoquest Group is that they can usually expedite the acquisition process, particularly when it comes to identifying candidates for acquisitions.
“We have a substantial database of MSPs,” says Dudek. “If an office products company calls us and says I want to buy an MSP in Boston, we already have a database and we can use our resources to see who is available. We’ve made a big investment to facilitate that and make the process more efficient. We know what processes to follow and can move this as quickly as people can provide information.”
GAP Partners and Zygoquest Group have closed seven deals to date and at press time had another deal closing and several more in the pipeline.
At the end of the interview I asked Morgan, Ryan, and Dudek what they might tell me 12 months from now should I run into them at the Continuum Navigate 2016 conference.
“We’ve had a meaningful impact on the office technology dealer and have helped them transition their business into adjacent strategies,” responds Morgan. “And that we’ve been able to help them transition faster [into Managed Services] and have helped MSPs scale their businesses in the right way.”
“I would hope we made a stake for MSP acquisitions not only in office products industry, but in the MSP industry and that we’re recognized as a name and a go to company for these entrepreneurs, and we have a healthy combination of buyers and sellers, which make the world go round for us,” adds Dudek.
“If we look back on the year and are able to say we were able to pair two progressive companies together for their mutual benefit and to take advantage [of the opportunities in the market],” concludes Ryan.
