The past summer saw an M&A frenzy as smaller firms seemed to be snapped up left, right and centre by larger channel companies and private equity (PE) houses.
Examples of those acquisitions include unified comms VAR AdEPT buying Microsoft and Citrix partner Shift F7 for £7.9m, Shearwater Group's £30.3m purchase of security MSP Brookcourt Solutions and German VAR Cancom's buyout of OCSL for £29m.
However, for those resellers that have an eye on an exit, timing the deal correctly is imperative. Selling when the company is at its most valuable is key, but how does a company owner know when that is and how do they go about getting there?
CRN spoke to a number of PE partners with experience in buying VARs and MSPs, and they provided some top tips for those who may be considering selling up in the near future.
Attracting buyer interest
Paul Franks, partner with Beech Tree Private Equity, said that value proposition to customers is key to what he looks for when seeking to add to the equity firm's portfolio.
"If I'm looking at a reseller business, the questions I ask are: what products are they working with? How are they using their suppliers to create the competitive edge for their client? I'd also be looking to see if they are reselling a number of services that give them a distinctive proposition in the market," he explained.
A reseller needs to offer their customer a combination of services, not just basic hardware and software in order to make themselves attractive to buyers, according to Franks.
"[If they are just reselling kit] why would a customer not just deal direct with the product provider?" he said.
"The reseller brings something to the table that a direct relationship doesn't. I would invest in a reseller or MSP only if I could clearly see what the customer gets only by working with them."
Scalability and geography are other factors that can add value to a company and can lure in potential buyers, according to Matt Caffrey, partner at PE firm Livingbridge.
"A UK focused entity will probably be less valuable than a European or global entity," he advised. "The plan should be to scale up beyond the UK over a period of time because increasingly customers are demanding global service."
Timing and people
Being decisive about wanting to sell should not be committed to in haste. If a reseller or MSP is thinking about selling, they should be putting processes and people in place to facilitate the eventual move.
Luke Kingston, partner with PE firm Lyceum Capital, said that an owner-manager of a reseller business should be thinking two or three years in advance from the date they plan to sell. The changes that need to be made to maximise the value of the company should be made and embedded in this timeframe, he added.
Kingston noted that one of the top priorities for Lyceum when valuing a potential purchase is the market in which it operates. He advises that dipping a toe in a niche sector of the industry can help add value to the company's price.
"What are the interesting niches and dynamics that play out in the sectors that they are currently in?
"In two years' time, it may not be the majority of their business, but at least if they are playing in those kinds of fast-growing markets then that will certainly have an impact on valuation because it could play a bigger part in the future growth of the business and that is what we are looking to invest in," explained Kingston.
A solid management team is also attractive to potential buyers, and steps should be put in place to facilitate any changes in the board before the transaction is complete. For example, if an owner plans to step down, appoint an MD who can move to a chief executive position and smoothly take the reins from their predecessor.
Kingston advises any VAR or MSP to bring on a CFO before conducting a deal with a PE firm.
"Having a CFO in place for a period of time before entering into that transaction would be a wise investment," he stated.
"Owner-managers don't always necessarily see the value of a high-calibre CFO before they go into these types of transactions or engage with an investor, because it's perceived that CFOs just look at the numbers.
"But there's a huge amount of value that they can bring strategically in terms of investment into new areas and looking forwards. In terms of transaction, they are worth their weight in gold."
When the decision is made to sell, and all the changes and plans are afoot, there is still the question of whether to sell to a trade buyer or a PE house, and if so which PE firm to choose.
If PE is more attractive, any owner-manager should first think about the culture of the firm they intend to partner with, according to Livingbridge's Caffrey.
"I would always encourage people to take references on the PE houses, understand how they behave - both in good times and bad times - and meet as many people as they can from the organisation," he advised.
"You need to find that partner that understands your business and your industry and can help you set a really clear strategy, but, most of all, will help you think through the execution piece and deliver you practical support and advice in execution."
Selling to a trade buyer can achieve a higher price, as bigger brands can save on cost as they can significantly reduce back office costs. However, it can sometimes be a more fraught affair than selling to PE, as the buyout can often be an emotional one for the owner, according to Lyceum's Kingston.
"As an owner you can achieve a higher cost, but on the flipside you can spend 35 years building a business and the last thing you want to see is it being broken up and the name disappear," he warned.
"The joy of PE is that we often construct a transaction where the owner just de-risks.
"They may own 100 per cent of the business, can crystallise 50 per cent and bring in an investor to provide some liquidity, but retain an equity stake in the business for the period a PE firm will be invested in as well.
"We are looking to invest in the ongoing business and the management team that the owner has pulled together themselves. It's like the best of both worlds.
"It comes down to the individual's desire as to which route they want to take. When they come to sell a business they'll probably engage with both, but having a clear idea about the individual's aims from a transaction - and therefore engaging more fully with one or the other - is probably sensible."
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