Every VAR should want to increase recurring revenue, form stickier relationships with customers, maintain organized financial records, and accelerate growth. If you listened to sound bites of Brooke Ybarra’s (pronounced ee-bar-a) keynote presentation at Channel Executive’s Retail IT VAR Of The Future conference in April, you might have thought she was giving advice on how to run a successful IT channel company. Instead, the senior manager at First Annapolis Consulting (recently acquired by Accenture) was giving VAR executives insights on how to prepare their businesses for a sale. Much of Ybarra’s advice is similar to the buying and selling process she sees regularly in the enterprise payment space. No, solutions providers are likely not going to be involved in a $10.4 billion deal any time soon (that’s what Vantiv paid to acquire Worldpay in August 2017, not to mention the $1.65 billion it paid for Mercury in 2014). Still, Ybarra knows the channel, and her insights into M&A fundamentals apply to businesses of all sizes.
It should come as no surprise that the M&A market for payment companies is healthier than it is for the IT channel as a whole. Forrester’s Jay McBain says the IT channel is down 30 percent since the recession, though that’s not all doom and gloom. Some could see this as a market correction: many resellers came out on the other side of the economic downturn thriving with increased profits, and the companies who lacked the discipline and processes to survive were cleared out of the way so these more stable resellers could capture new customers. McBain offers this portrayal for many of the 600,000+ channel companies:
Regardless of the size of a deal or the timing of it, understanding the buying and selling process can help any VAR improve business processes and run a more-effi cient, profitable company. As Ybarra points out, “The value drivers and the steps that you can take to be preparing your company for sale are really applicable, whether you’re a payments company, a VAR, an MSP, or involved in other pieces of the value chain.” She outlines important things solutions providers should consider before they try to sell, including understanding value drivers, marketing the company to potential buyers, and getting your business organized now instead of waiting until you are ready to sell.
Ybarra recalls a conversation she had with a private equity firm about the channel. Simply stated, that private equity firm wouldn’t even entertain engaging in a potential deal with a VAR because it considers most resellers too small. One way for a VAR to get the attention of bigger players could be to scale up with other VARs, either through acquisition or by forming a regional consortium. Although the market for acquiring VARs is far from booming, she notes there could come a time when payment processors and vendors might look to buy resellers and augment existing sales. Payment companies have already started adding ISVs to portfolios, and VARs could be next. For now though, many resellers looking to sell their company will be tasked with finding another reseller to buy them.
On the financial side, resellers should consider more than just margins and profitability. The size, growth, acquisition cost, and retention rate of customers, along with opportunities for future revenue generation through cross-sell and upsell will be important to any buyer. Tracking and understanding metrics related to marketing and churn are actions solutions providers should be taking regardless of whether they are considering selling right now. Of course, recurring revenue is towards the top of the financial considerations food chain, too. This is true for any company looking to sell, not just VARs. For example, when Adobe transitioned to a monthly subscription model, its market cap increased 122 percent in just two years, from $16 billion to $35.5 billion.
Strategically speaking, value increases if your business has a product, process, or niche market expertise that is of unique value. According to Steve Jones, VP at M&A advisory firm Corum Group, “Attractive targets are those services firms with expertise in custom app integration, core development, and technology expertise coupled with strategic consulting services with specific deep domain proficiency and knowledge.” That means run-of-the-mill line card providers are in for a disappointing exit if and when they are ready to sell.
It’s not just vertical expertise that matters, buyers also care about the expertise of your management team and employees. “Specialization sells,” says Ybarra. “Put simply, a deep understanding of a particular market niche, a set of products, or pieces of technology, and really being the expert can help a buyer understand how all of the different pieces of their business fit together.” She also points out scale itself isn’t necessary to sell, but rather, solutions providers need to show potential buyers how their current processes and systems could be scaled post acquisition, once the buyer brings resources to the table.
The next value driver, the customer, is core to any buyer’s decision. VARs not only need to have customer agreements in place that help them influence buy decisions now, they also need to consider how their contract language will influence their customers down the road once the company is sold. Customer control doesn’t necessarily mean relying on long-term contracts either, according to Revenue Rocket Consulting, which recommends one-year contracts with automatic renewal clauses that have built-in price increases to address inflation. These types of contracts are meant to shorten sales cycles, motivate companies to improve customer satisfaction, and ultimately stabilize a client base.
Determining the value of your company doesn’t have to be guesswork either. Resources like Prosperity Plus Consulting’s Value Builder Score are free tools available to all resellers (www.prosperityplus.biz/Value-Builder-Score.html).
As Ybarra explains the phases of the selling process, she alludes to the importance of marketing to potential buyers. “It’s a story. It is marketing to sell your company. The financials are going to be important, but it’s as much about the future as it is about the historical. That is going to be less about what we did yesterday, but the story about and the value proposition that you can describe to a buyer for what’s coming tomorrow.” Buyers are going to want answers to questions such as: What is the growth picture? How is your expertise relevant? What’s the next market that you’re moving into? Preparing to sell your business is no different than preparing for a job interview. If you’re looking to add a new member to your executive team, it would be a short interview if a candidate didn’t have good answers for how they were going to help your business grow.
The first phase of selling involves creating a marketing plan — gathering information, defining your value proposition, and preparing materials to tell the best possible story to the market. Phase two involves getting that marketing material, such as your financials and management bios, in the hands of potential buyers. Marketing materials should be tailored to the profile of the buyer. The point of marketing to your buyer is to get that buyer comfortable enough to enter the third phase of the process, the actual negotiations. Marketing to a potential buyer should be treated like marketing to a potential customer. That’s why firms like Prosperity Plus Consulting help solutions providers with things like website development, slide decks, email marketing, direct mail, and sales collateral geared towards buyers.
VARs should start organizing this marketing plan long before it’s needed. Ybarra suggests companies should have the business processes in place, organize financial books and records, and have access to all of your customer, vendor, and partner contracts. She says, “Maybe it sounds like nothing, but I can’t tell you how many times we come into a situation and we ask for what we think are basic agreements, thinking ‘of course you’ll have them in this file folder or you know exactly where they are,’ and it’s not the case.”
Hiring a specialized tax attorney, obtaining a third-party financial audit, and reviewing financial records and customer contracts are proactive steps companies can take to prepare to sell. When it comes to contracts, Ybarra points out the importance of having everything in writing. If customers and services provided are not under contract, they likely won’t be considered an asset by a potential buyer.
Jim Kahrs, president and senior consultant at Prosperity Plus Consulting, suggests resellers should start preparing to sell at least three years before the sale. Even if your target retirement date is well beyond three years from now, and even if the channel M&A market isn’t at an all-time high, that doesn’t mean it’s too early to start thinking ahead. Organizing your assets, understanding your company’s value proposition, and taking an honest look at the factors driving what your company is really worth can help any VAR run a better business, regardless of whether or not you are looking to sell.
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