Acquisition is the only path to true growth

A VAR struggling to keep afloat or in the throes of insolvency is the ideal purchase for a company looking to expand, writes Nitin Joshi.

This year is widely predicted to be the year of IT spending recovery.

After a long spending drought, resellers should be on the lookout for buying opportunities.

But speak to any value-added reseller (VAR) and it is apparent that true growth can come only from acquisitions.

It's quite wrong to think opportunities don't exist. Many do, and often at low prices.

The past couple of years have left a trail of VARs teetering on the brink of failure. They have done well to hold on to some revenue-attracting end-users.

For these resellers, a simple solution is to sell out, preferably before formal insolvency takes hold, or to facilitate a sale out of a formal insolvency procedure.

Either way, they will need to ensure continuity with customers and key relationship managers.

A controlled exit is better than a frenzied one. Faced with problems, a large number of resellers become cute and continue to run up debts with no way of repaying them.

This creates ill will and dampens prospects for any future business undertakings.

The answer is to seek new opportunities, and mergers and acquisitions present an effective platform.

Distributors today are much more commercially minded and recognise that resellers fail for a variety of reasons.

Provided these reasons do not include fraud, they may be sympathetic in dealing with whatever emerges out of failure.

There is nothing wrong with deals made out of insolvency. The 'phoenix' syndrome has its benefits.

Directors and shareholders of struggling VARs can often get themselves a good deal by selling out to a stronger rival.

Here are a few guidelines:

• Target resellers that are of interest.
• Look for profit, not turnover. The sensible approach is to seek profitable franchises that can be delivered by an appropriate level of skill set.
• Assess synergy.
• Assess the target's state of solvency and see its last audited accounts.
• A third-party approach is a good way to start the negotiations.
• Offer a combination of cash, shares, status, service agreement and performance package.

There can be value even in resellers that are hopelessly insolvent.

Many, however, trade on with their heads in the sand until they realise, following collective action, that they can no longer control the agenda.

It's surprising just how a troubled VAR can 'restructure', albeit under the aegis of another entity.

Nitin Joshi is a partner at accountancy and business advisory firm PKF.