Selling Your Dealership: Dial M For Merger

So you think you?ve worked hard enough and you want to reap the rewards. All you have to do is find a buyer for your business and you?ll be on the next flight to the Bahamas. Drew Cullen reports

There comes a time in every dealer principal?s life when he needs to consider his future. Reselling is a young people?s game, and needs huge energy to sustain what are, for the most part, small, fragile businesses operating in a high-risk, low-margin world. It is perhaps better to sell up, while the going is still relatively good.

Dealers need to grow or die, but it is a struggle for most to finance growth requirements from their meagre resources. Age, exhaustion and boredom are all strong reasons to sell up and build that better life in the sun you always dreamed of.

But these are hardly great sales points. If you want prospective purchasers to fund your retirement from the industry, you better get your thinking hat on. Simmons and Magee did it; DS Group?s Ian Black did it; and Xenon?s Frank Noon has done it several times. What is the secret of their success, and how can resellers climb on board the M&A gravy train?

Merger and acquisition activity in the UK channel is at its most buoyant since the late 1980s. In January and February alone, 14 channel companies sold out to rivals. And there are plenty of potential buyers out there, ranging from privately-held companies such as Specialist Computer Holdings, to stock-market listed firms like Datrontech, to foreign-owned channel players such as Info Products and Elcom.

Elcom, the US-owned corporate reseller, expects to do #200 million of business in the UK this year. Its parent company is quoted on Nasdaq, so funding growth presents little problem. Phil Garnar, joint MD of Elcom UK, forecasts a polarised market featuring 10 or so pan-European resellers, each with more than #200 million of UK revenue, and sub-#20 million players plying niche skills or working niche geographies. ?There will be nothing in the middle,? he says.

Elcom is buying companies to accelerate its growth. In the past 18 months, the company has bought four channel players ? Rapid Recall, AMA, Portable Computers and DS Group ? and Garnar wants to buy more. ?We will continue to acquire as long as there is a reason to do so,? he says.

?We would like to increase our size in the UK market and we are primarily interested in niche networking and communications skills. Our sights are firmly set on Europe. We anticipate partnership agreements in the first half of the year with like-minded resellers in the key cities in Europe. We will offer them our Pecos electronic trading system and seek to understand each other. Then we will consider acquisition.?

Mass is of critical importance for resellers, says Garnar. You need to increase your mass in the market to attract the mindshare of the manufacturer.

Economies of scale lie behind the acquisition policy at Info Products. The Dutch-owned reseller has received the green light to obtain #250 million of UK acquisition. It?s almost a quarter of the way to its target with last month?s purchase of Simmons Magee ? the #60 million Richmond-based reseller.

Martin Hellawell, general manager of Computacenter, agrees with the need for critical mass. ?You?ve got to have scale in this market to exist; you need a lot of credit and stock, and a very strong balance sheet. Otherwise you won?t be able to use leverage with your suppliers to secure good terms and conditions that enable you to handle issues like stock rotation and obsolescence,? he says.

How can the majority of dealers hope to compete with channel giants? The higher the perceived value of the company, the higher the exit multiple it will achieve, says Ken Olisa, chairman of Interregnum Venture Marketing, a London-based company which advises clients on how to transform technology into wealth.

Olisa says company value is determined by four pillars: brand, technology, market base and people. Low- margin product resellers earn no marks for technology, average marks for people and will find their exit multiples determined by their market base and branding. The price achieved for your company is determined by a fifth pillar, he says. ?You must be totally aligned with the strategic vision of the buyer. You must understand the buyer?s needs. And you should be able to demonstrate how your company converges with their vision.?

This is easier for Vars operating in single vertical markets, according to Peter Rowell, head of IT M&A specialist Regent Associates, which advised on 25 UK takeovers in 1996. ?The simpler your business, the easier it is to sell. If you can describe your company in three words you are half way to selling it. If it takes a paragraph then you are in trouble.

?Vars dabbling in a number of markets are a much more difficult proposition. It is harder to sell a Var operating in two vertical markets, or even worse, in one vertical and one horizontal market,? he says.

Prospective purchasers are attracted to pure-play companies because their value is easier to assess and they do not need to concern themselves with the disposal of unwanted units. Rowell says the key theme of the last year was consolidation. ?A word I don?t use a lot, especially in vertical market areas. Vars that have vertical market skills are seeing price differentials 50 per cent higher than those in horizontal markets. The key reason is that users want more skills and understanding of their particular business requirements.?

Companies aiming to sell should consider three fundamental elements on their checklist, says Rowell. ?First you should see what the value components are ? it might be profit, or good growth. With most companies the key components are people and people skills. Second, examine how loyal your customer base is and what your recurring revenues are. Third, do you own software or intellectual property rights? Make sure you know what the value of the company is and get professional advice. You may be good at selling, but you have not sold a company before.?

Olisa advises companies not to oversell themselves. ?Selling a business is all about presentation, but make sure the reality is what you are presenting. You will be found out in due diligence. At best you will get a lot of horse trading over price, at worst the prospective buyer will walk away. So package any bad news up front,? he says.

SCH?s Peter Rigby is offered one company a week; Phil Garnar is offered two. But buyers tend to be rather picky. Garnar adopts different criteria with each purchase. ?Rapid was about building mass, and we merged it into Elcom. With other acquisitions we have bought niche markets or skills.

?We retain these companies under a group umbrella. We operate a common IT infrastructure, and hold bulk stockholding at group level. The general commercial functions are also carried out by the group. But our subsidiaries keep their sales and marketing identities. This means they can keep their focus and culture aligned.?

Aldershot-based distributor Datrontech operates a similar acquisition policy. Last month it bought RD Trading, a #1.5 million computer recycling company set up by Rod Best ? a larger than life character who, at one time, was sales director at defunct corporate reseller Bonsai. Datrontech paid a massive #5 million, including a performance related earn-out of #1.85 million, for a company which only made #100,000 profit in 1996. We can assume that Datrontech is paying a premium to gain access to a very fast-growing business.

On the same day it bought RD, Datrontech also announced the acquisition of Xenon Distribution, the #12 million networking reseller, maintenance firm and technical training group, for #3.68 million, including a performance-related element of #2 million. Xenon MD Frank Noon has been ?around the block a few times?, made a few million quid, and is still only in his 40s. He has remained committed to the industry. ?You can?t spend your entire life playing golf,? he once said.

Noon, a former leading light at Logitech, has been involved in an MBO, a flotation, a full listing, a management buy-in and now a trade sale. ?The only thing I haven?t done is a receivership, and I certainly don?t intend to add that to my CV,? he says.

Noon adopts different criteria for buying and selling companies. ?When buying, I am looking for a company that has latent potential but is not on the point of collapse, because I don?t want to pay too much. The company should be fundamentally sound but lacking in invention or innovation, and not maximising its potential.?

He found his takeover target with Xenon, a #5 million company acquired in 1994, by himself, Jim Pickup and Keith Jones. ?This had been run for 17 years by four technocrats who had not been overly ambitious in terms of growing the business. They were beginning to realise that the company would do better without them,? he says.

This is all well and good for buyers, but sellers need to set their sights higher, as Noon shows with Xenon. Every which way you look, the new Xenon management team improved the value of the firm, and this is reflected in the price Datrontech paid. ?In terms of job creation, we now have 140 staff, compared with 80 at the time of the buy-in,? Noon says.

?Turnover is three-times higher ? we?re running at #15 million ? and the venture capitalists got back four times as much as they put in. The directors got a 20-fold return.

?We were two years into our growth plan. Our intention was to float after five years and not sell the company. But then Steve King at Datrontech painted a picture that was more attractive. He could provide a potentially enormous market for our services through Datron- tech?s reseller base. Our growth plan is now backed by a company with synergy and empathy for our course.?

Establishing synergy and empathy with a prospective buyer is the way to maximise your exit multiples, but you could find yourself locked into a three-year service contract. Yet this is a very light prison sentence, typically attached to a very juicy earn-out. And what is the alternative? UK IT firms tend to be small, under-funded and under-marketed, according to Olisa. But he is optimistic that they can still find buyers.

?There are some big companies emerging as effective marketing machines. But the bigger you get, the harder it is to be innovative. Three guys working out of a garage will work harder and faster than 12 people in a corporate worrying about their pensions and parking spaces, but they will be under-marketed. Buyers will continue to acquire these companies, and then use their marketing muscle.?

Olisa?s observations have a note of optimism that should encourage small channel companies. Get selling.