|Over 18,000 Global Readers and Growing! October 26, 2011 - Issue 6-8 BusinessSpeak|
Is the fourth quarter busy-busy or is it just me?
As I write this – I’m watching the roller coaster on CNBC of the equity markets, European debt crisis and have my business hat firmly affixed front and center. Life is good!
This issue has heaps of goodness. See the subject line above and read the information below LOL! Seriously – we really appreciate your reading our newsletter.
PS – What is your favorite GeekGift for the forthcoming holiday season? I’m writing an article for the magazine on this topic. Lemme know!!! Just reply back into this e-mail and I’ll get it. Or call me at 206-201-2943.
PPS – I’ve got a webinar on October 27th at 10AM – join me!!!! It’s hire right for higher profits – you can hear the amazing Alex Rogers!!!
Harry Brelsford|Founder, SMB Nation, Inc.|www.smbnation.com
Getting into the M&A Game: How to Tell if Growth-by-Acquisition in IT Services is Right for You
By David S. Schafran, Managing Partner, Cogent Growth Partners
Common M&A Myths:
“Acquisition is too expensive” – While sometimes true, not nearly as often as you might think. Transactions can be structured with the bulk of payments occurring over time, minimizing the up-front cash. Also, the expense should be evaluated relative to the total cost of client acquisition. Compare that to what it would cost, how long it would take, and the risks associated with bringing on the same revenue and number of clients through organic methods.
“I’ll have to take on a lot of debt to make an acquisition” – While debt financing is one way to go, there are more attractive alternatives. Proper deal structure helps minimize risk while avoiding taking on debt.
“Acquisitions are hostile and confrontational” – Not the good ones. Hostile takeovers are great Hollywood drama but rarely apply to private companies. A good deal is generally a fair deal, arrived at through win-win negotiations, making winners of the buyer, seller, and both firms’ employees and clients?
“A lot of people are going to lose their jobs” – While one of the intentions is certainly to consolidate wherever possible, this usually means several changes, but few are dramatic.
“M&A in the channel, wow that must keep you busy, there’s a lot of that going on” is the typical response I get after telling people I help IT solution providers grow by buying or merging with other solution providers. And they’re right; consolidation in IT services is here, front and center.
Growth-by-Acquisition in the IT Services space (ITGBA) is accelerating. It began gaining momentum a few years ago and will probably continue at least through 2014, barring a complete upending of the global economy by the current craziness in Washington and worldwide. Why is ITGBA so appealing to both buyers and sellers, and for whom is it a good fit? Let’s find out…
Key Reasons Companies Choose Growth by Acquisition:
Several drivers lead companies to choose to grow by acquisition including:
Outperform Organic Growth- Growth by acquisition is dramatically faster than traditional organic growth and can simultaneously have a much lower per client cost of acquisition.
Achieve Economies of Scale Consolidation leads to higher margins.- By consolidating expenses such as technology, office space, staff and other overhead, the acquired revenue delivers higher margins than either firm could achieve individually.
Add New Capabilities- Service providers wanting to develop new core strengths (security, document management, application development, etc.) can do so organically by: allocating staff, who create a business plan, lead the initiative to determine how services will be priced, marketed and delivered, arrange staff training then initiate marketing, or alternatively, they can purchase a functional, ready-to-go practice.
Make In-Roads into New Vertical Markets- Building experience and establishing a presence within a vertical market takes time and resources. Service providers looking to diversify their client base or pursue a particular vertical market can use acquisition to achieve this quickly.
Open a New Geography- Acquisition can be used to gain better coverage of existing territories or break into new markets, developing a regional or national presence. Despite the expense of an additional office, it is likely there are administrative and overhead expenses that can be consolidated to deliver economies of scale.
Acquire New Talent- Hiring top-notch talent is time consuming. What if suddenly there were a pool of talent that had been vetted, had a track record, and could be snapped into the buyer’s organization, as is the case in most acquisitions?
Reduce Competition- If you have competitors you regularly battle for the same business, you can both win by joining forces.
Any of these reasons can seed a compelling argument for undertaking growth by acquisition. ITGBA is not, however, a replacement for traditional organic growth. The ability to market and sell services is a core competency that will still be needed with acquired clients. A provider will need marketing skills to enroll acquired staff and clients into the vision of why they are better off with the new, combined firm than they were before. The buyer may also want to upsell these clients to different service plans or additional services that the seller may not have offered (or known how to properly position), and the buyer will certainly want to sell their clients additional projects and services over the life of the relationship.
What’s in it for the Seller?
Many think that owners would choose to sell as a method of “cashing out,” but more often than not, there’s a lot more behind their decision. Often it is an investment in the future. Some of the drivers to merge with another firm are similar to those of buyers, as described above.
Then there are different motivators:
Sitting on a Plateau- Despite having built a successful firm, it is not achieving the level of organic growth desired; the owner understands that to take the business to the next level, something has to change. The answer can be joining forces with a rapidly growing organization, especially if the larger company is realizing a higher net profit percentage. An owner is better-positioned owning 10% of a growing $5 million business with net profits of 25% than 100% of a $500,000 business with net profits of 10%, essentially twoand- a-half times better-positioned.
It is Hard to Self-Consolidate- While management can look inward to find opportunities to reduce costs, it is very difficult to reach the economies of scale that can be achieved when merging companies.
Career Enhancement- Some owners have gotten sucked into running their company at the expense of doing the work they love. Some would rather be architecting or selling solutions, others prefer implementing networks. But most would gladly trade their left arm to never be involved with accounting again. Merging their firm into another organization can create the opportunity to refocus on the work they love.
Should you be the CEO of a larger company?- Numerous IT services firms are started by talented engineers who grew a practice into a firm. Some evolve their skills and are good chief executives as the company grows through various stages. For many, there comes a time where they may not be the best person to lead the company; running a ten person firm is quite different than running a 50-person firm. Numerous sellers join the merged entity as minority owners with varying job responsibilities. Some join as senior executives on the management team, others take on non-management or consulting positions, refocused on the work they love.
Lifestyle Improvement- Few owners feel they have enough hours in the day, lamenting a lack of time to work on their business, in their business, to spend with their families or for hobbies and relaxation. For these sellers, acquisition can mean reducing their workload and responsibilities while preserving and growing the value of their equity. They can be an owner without the hours.
Selling as an Investment Strategy – Many owners merge to improve the value of their equity. Merging with a larger firm creates the opportunity to greatly accelerate growth and value.
Exit Strategy and Creating a Liquidity Event- And of course, sometimes an owner wants to lock in profits and take some, or all, of their equity out. Some are done with IT services or working altogether. They may be looking to explore their next challenge, retire or take a break for a year and travel the world.
Usually, the decision to sell is driven by a combination of these. Whenever I think I have a complete list, I meet a potential seller with different motivation.
M&A Sounds Great, Sign Me Up!
So now that we’re clear on why Mergers & Acquisitions (M&A) can be an attractive strategy, how do you know if it might be right for your firm?
There are many pieces to a successful transaction; it is not as easy as it looks. Finding the right company, negotiating and consummating a merger is a time-intensive, delicate process; most firms, already time and resource constrained, have challenges doing this while simultaneously keeping up their day-to-day operations.
The main challenge is integration. Integration is the key to achieving maximum value from a transaction. A failed integration is a failed acquisition. There are many issues to address pre- and postclose – things like reconciling HR policies & benefits, corporate culture fit, staff and client angst over the unknowns associated with change, normalizing differences in operational workflow that can have negative effects on both firms’ clients and staff.
Some issues are clear from the start, and others pop up during the integration, which can take about three to nine months depending on size and complexity. During this process it is imperative to keep the staff focused on their “day jobs.” This helps prevent a brief drop-off in non-recurring revenue right after a transaction has closed because the employees are distracted and not clear on what they should be doing differently (even when they have been told the answer is “nothing”).
Now that you have a larger firm, can you handle it? It is common for companies to encounter growing pains as they scale. As the organization grows, structure will probably change, new management responsibilities and departments may be introduced, and service delivery may be changed or augmented.
To assess your firm’s readiness to pursue ITGBA, in addition to the tips in the side bar “Top Five Tips for Buyers,” think about cash on-hand. What is your monthly “Nut”? This is all of your recurring expenses: payroll, rent, utilities, everything required to keep your business operating month to month. You should have a cash reserve of at least six months. Determine how much company or personal cash is available to fund an acquisition and its related expenses.
As an overly simplified rule of thumb, to begin, you should have available cash earmarked for ITGBA of at least 10% of your top line revenue. This allows you to target firms roughly half your size using a deal structure with manageable variables including cash at closing, payments over time (guaranteed and/or earn-out) and perhaps equity in the combined company. The ITGBA budget should be completely separate from your corporate reserves. Companies of any size can engage in M&A as long as management is mature and stable enough to handle rapid change and the company is reliably profitable with sufficient cash reserves.
OK, Now What?
So you think an acquisition is the right path for you, now what do you do? Do you try to do it yourself or engage an intermediary? An intermediary can take a variety of forms: an M&A advisory firm, a business broker, your accountant, your lawyer or another trusted adviser. There are pros and cons to each approach:
So there it is, now get out there and GROW!
David S. Schafran is Managing Partner of Cogent Growth Partners (www.CogentGrowth- Partners.com), a “buy-side” M&A advisory firm focused on IT service businesses. Having 25 years of experience in IT Services and helping MSPs grow their businesses; David is a widely respected consultant and speaker.
David began focusing on managed services (MS) in 1999; his expertise encompasses all aspects of MS including M&A planning and integration, MS sales, marketing, operations, technology and corporate governance. For more information, David can be reached via email at: david@CogentMergers.com
For more tips about acquiring and selling a business, be sure to check out the article in the SMBNation Magazine.
This just in from D&H!
With over 93 years of distribution experience, D&H has a solid history of dedicated service and evolving with the times to offer the latest technologies across networking, infrastructure, servers, mobile and desktop computing and many other categories of interest. D&H has more recently been recognized by the ACSII Group’s second annual Distribution Survey where they won 8 out of 16 categories – more than any other distributor in its class. In 2010, D&H was also recognized by Cisco as Global Distribution Partner of the Year and won Microsoft’s Operational Excellence Award in Licensing for the seventh consecutive year
Gain more purchasing power just by tapping into the promos that D&H Distributing has brought to you from leading manufacturers: Save 15% on select Mice and Keyboard from Microsoft, 3% off select Cisco Small Business skus, 3% off Epson Scanners, 3% off all TrendNET and more. For the latest, check out www.dandh.ca/smbnation .
Remeber, D&H’s Incentives Program is now available in Canada! Resellers will earn reward points on qualifying purchases that are redeemable in the D&H Incentives online mall where they can select from hundreds of merchandise items such as: services, travel, gift certificates and many other great incentives! During the month of November only, earn double points on HP Commercial purchases! Shop on www.dandh.ca today!
You can learn more about the benefits of doing business with D&H Distributing by visiting www.dandh.ca. Set up a free account and receive a $50 Petro-Canada gift card when you make your first purchase of $1000.
Last week, our friends at Redmond Channel Partner gave us a quick shout out (or “Love Tap as we like to call it here at SMB Nation) in response to our Fall Conference held late last month. Written by Rich Freeman, one of the journalists who attended the event, the article discusses the general overall “buzz” heard around the conference (from both attendees and vendors) as well as the general consensus that “cloud computing was (surprisingly) weak among attendees” at this year’s event.
The article in RCP begs the question of: “Where did all the cloud supporters go?” It seems as though there would be more buzz and interest about this technology, which makes several daily appearances within various industry publications, blogs and social media networks. However, the article in RCP debates the cloud hype; SMB Nation Chairman and CEO Harry Brelsford even went on record with Freeman at the event stating matter-of-factly: "Less than half our guys are excited about cloud…it's a huge cultural divide."
To learn more and to see the full article on Redmond Channel Partner’s Web site, click here.
“The Show Goes On!”
As you have heard, CharTec is the SMB channel’s leading provider of Hardware as a Service and MSP sales training. We have designed and built the largest MSP Training facility in North America.
I am inviting you to join us on December 1st to attend CharTec Academy at no membership fee. This is our annual “Open House Academy” and your opportunity to experience nearly every key component of what MSPs can include in their offerings in real time.
In my keynote at SMB, I spoke about refining your offering and capturing clients through a line of products and services. Visiting CharTec Academy will give you the opportunity to get your hands on products and services like these:
HaaS - BDR - Tele-presence - Digital Signage - Mobile Computing - Email, Network, Internet and IP Security - Engineer, Consulting, and Training - Help Desk and NOC Services - RMM Solutions – Service Ticket Triage – Technical Dispatch Instruction
This is a great opportunity for you to visit CharTec for no obligation. Check us out, kick the tires and see what we are all about.
Plus, we are extending our show membership price. Call us at 866.544.2772 for more information, or visit us at www.chartec.net.
Remember… Be Unique! Stand Out!
Got another customer on a managed service agreement. The sales process we learned at the Academy is working great for us!!! Thanks – Scott Cordell of Redfire Technology Services
By far the best training event I’ve ever been to! Thank you to Alex and the entire team for the hospitality. – Eric Moore, Affect4 Technology Solutions
CharTec Academy really works, it helped my company simplify our offering, cut down client expenses, and give the clients more of what they needed: 1 bill, new equipment, and freedom to use capital expenses for other projects! – Bryan Badger, Integral Network
2011 Small Business Influencers Speak Out!
This past September, a diverse gathering of Small Business owners, managers and influencers met in New York City to celebrate a year’s worth of hard work and to honor those who had been the most inspirational in the small business niche.
The event was co-hosted by Smallbiztechnology.com’s Ramon Ray and Smallbiztrends.com’s Anita Campbell, and sponsored by RIM, Sage and Infusionsoft. The top 100 Small Business Influencers were chosen based on a two-weight system of voting, with the community having a 40% weight, and a panel of judges having a 60% weight.
Attendees came from all genres of the small business arena to share their experience, knowledge and inspire their community. SMB Nation’s own Harry Brelsford was one of the top 100 chosen this year, for his work in the small IT business field.
The question “What does Small Business mean to you?” was posed to attendees of the event, and the answers were both inspirational and revealing. See the video below to hear from Small Business Influencer 2011 Award winners Michael Simmons, Janine Popick, John “Colder Ice” Lawson, and co-hosts Anita Campbell and Ramon Ray:
Go with Intronis to Save you Time and Money: The Best Cloud Backup and Recovery Solution in the Market
Intronis Cloud Backup + Recovery is a world class online backup solution for the IT Channel. Intronis provides the industry’s easiest to use secure data solution for offsite and local backup. Intronis is built from the ground up for the IT channel and provides both reliable and fast restores. Not only does Intronis offer the best, deepest Exchange and SQL backup on the market, but the online backup solution is also integrated to major PSA and RMM solutions. Our product has been field tested by thousands of MSPs and the market spoke by awarding us the 2011 Vendor of the Year from ASCII.
Give us a call at (800)569-0155 or email us at firstname.lastname@example.org and take a free trial today!
Calling all chocoaholics! Come PARTY WITH ME on November 2nd!!!!
Based on innovation, ultrabooks and education, D&H Distributing’s Mid-Atlantic Fall 2011 Technology Show will be held November 2 at the Hershey Lodge and Convention Center, Hershey, PA. With SMB Nation’s own Harrybbb hosting a session on SMB telepresence, this year’s fall show will feature eight seminars from powerhouse D&H vendor partners—the largest amount of educational opportunities featured at a D&H Show in recent years.
Sep/Oct 2011 SMB PC Magazine is HERE! Download NOW!
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