Few things in this industry stir the imagination as much as a major acquisition. Last December, we witnessed a pair of jaw-dropping deals on both the dealer and manufacturer fronts. Donnellon McCarthy Enterprises virtually doubled in size with its acquisition of Ohio Business Machines. And only days before Christmas, Xerox tied a pretty bow onto the biggest present it could’ve given partners—the addition of Lexmark to its stable.
The makeup of these deals comprised a unicorn-esque quality. It’s not often that a dealer takes on a like-size competitor. And while the industry has witnessed its share of joint ventures over the past few years—namely Ricoh and Toshiba (manufacturing benefits) and Konica Minolta and Fuji (a hedge against future supply chain shortages)—all four are maintaining independence and autonomy. If memory serves, the most recent OEM acquisition was HP’s annexation of Samsung’s print business in 2017.
Transactions are much like icebergs; what we can see is but a fragment of the long and sometimes laborious process of bringing an agreement to fruition. Most deals never rise from the ocean, having been nixed by any number of factors during the courtship (vetting). Unfortunately, unlike a proposed player trade in the sports world, we’re rarely afforded details regarding industry acquisitions that fizzle out on the launching pad.
NDAs keep all the juicy details of negotiations under wraps, leaving observers to speculate on what unions would be a good fit from product, geography or OEM line standpoints. But just because we can’t name names, that doesn’t prevent us from asking some of the industry’s most prolific horse swappers about the variables that often torpedo a proposed deal. Similarly, we asked these dealer executives to shine a light on characteristics behind a near-perfect transaction.
Make the Break
The apron strings that tether an executive to his/her dealership can be quite strong, which is understandable. Many times, the seller has the desire to see the business continue and flourish but sadly was unable to develop a succession plan. This is usually because their progeny (if any) showed no interest in taking the baton, or senior leadership didn’t express an interest in buying into the dealership.
Eric McIntosh, senior vice president of WiZiX Technology Group, has seen deals collapse late in the process because sellers weren’t prepared to truly let go, “particularly if they wanted to keep working,” he added. One of the most frequent issues that can stall negotiations at the outset is when the sellers overestimate their business’ value in comparison to the EBITDA calculated by WiZiX’s acquisition team.
The ideal scenarios in McIntosh’s estimation center on the seller having all its business affairs in order prior to any engagement. “Our number one advice to any dealer thinking about selling is to get your house in order,” McIntosh said. “Clean up your inventory and AR, make sure your accounting is in order and be prepared to respond to the due diligence process with quick, accurate information. That way, there are no surprises for the buyer or the seller that cause the pricing to change or the deal to go sideways.”
Sometimes the difference between a seamless engagement and a deal that fizzles at the outset is a simple matter of math. Or perhaps not so simple. In the case of M&A maven DEX Imaging, the disconnect ensues when the numbers presented by the seller don’t quite match the realities of their revenues and profits, observes CEO Dan Doyle Jr.
Introducing professionals to the process can help avoid a degree of the frustrations that may arise. “Audited financials always help make a deal go more smoothly,” Doyle said. “Having a broker involved also helps in the due diligence process.”
Checking Boxes
The earliest communications during the due diligence period can often foreshadow the ease or difficulty of interactions with the seller and that company’s management team. Jason Weiss, executive vice president and chief operating and legal officer of New York City-based Atlantic Tomorrow’s Office, firmly believes the level of transparency, collaboration and compromise are among the major indicators as to what direction negotiations will take.
Weiss’ checklist is more than a theoretical or ideal set of position points. A combination of the following issues brought an end to two sets of negotiations that were approaching the final stages.
“Buyers understand sellers are operating their businesses during the deal process. So full transparency with the buyer (on both positive and negative developments) helps build trust to overcome any obstacles that arise,” Weiss noted. “Financial statement ambiguities, irregularities and/or inconsistencies; lack of transparency; bad faith in dealings (e.g. deviations from prior agreements) or material; or concerning changes we discover independent of disclosures are potential deal breakers.”
The best of engagements entail the seller bringing forward financials that are consistent, accurate and well presented, according to Weiss. He advises sellers to ensure their budget and projections are reasonable, supported by reasonable assumptions and an associated staffing plan. The sellers should also take a sensible posture when it comes to add-backs, Weiss notes.
“For us, once at due diligence and beyond, we’ve confirmed cultural alignment, strategic fit and systems alignment,” he pointed out. “So, a near-perfect deal is when the preceding elements are in place, the process is smooth and parties are collaborative.”
Tipped Scales
One of the most often-cited sticking points happens when a prospective seller’s revenue is concentrated in a handful of major accounts. Just what the tipping point is for buyers during the valuation process varies from company to company, but an abnormally high concentration has torpedoed more than a few deals.
In the case of Doceo, based in York, Pennsylvania, having 50% or more of a dealer’s revenue composed of just a few key accounts raises a red flag. Jim Haney, chief marketing officer for the dealer—which has been among the more active M&A players in recent years—believes a more balanced account portfolio will go a long way toward extending the due diligence process.
“A diverse customer base minimizes risk, ensuring no single client represents a disproportionate share of the business’s overall revenue,” he said.
The most attractive selling prospects, in Haney’s estimation, carry the Toshiba and Lexmark product lines, which dovetails with Doceo’s portfolio. Another element—while not necessarily something that could put the kibosh on negotiations—is the value of sellers that are already plugged into e-automate as opposed to another ERP software. Haney notes that the cloud-based subscription software can provide a smoother operational transition for the integration process.
In the case of UBEO Business Services, the bulk of unpleasant surprises are generally ferreted out early in the course of an M&A engagement. Travis Sheffield, vice president of acquisitions for the Austin, Texas-based acquisition giant, notes the dealership has lost few candidates due to an 11th-hour collapse in negotiations. Still, Sheffield points out that challenges can arise when material issues aren’t transparently addressed early in the due diligence phase of an engagement.
On the flip side of the coin, the best-case scenarios involve financially stable candidates that boast a strong market reputation and a commitment to transparency from the start. “Operational sophistication further instills confidence in the accuracy of shared information, enabling a smooth due diligence process with minimal surprises,” Sheffield added.
