March 24, 2023
For Robin Hau, president and CEO of USWired, business owners should look at cultural fit more closely when considering an acquisition.
Hau in early 2022 announced that Quatrro Business Support Services (QBSS) was buying the MSP firm and making it one of its subsidiaries. He said multiple factors influenced his decision to pick Quattro over other suitors. That included a high-end valuation and equity opportunity, as well as QBSS’ track record buying and selling other MSPs. But partners mulling a deal should never overlook cultural alignment, Hau said. He added that USWired experienced growing pains around culture when it made an acquisition in years prior.
USWired’s Robin Hau
“Cultural fit encompasses a wide range of factors, such as leadership styles, communication styles, employee attitudes and organizational values,” Hau said in an interview with Channel Futures. “A misalignment in any of these areas can lead to conflicts, misunderstandings, and ultimately, a failed integration.”
Hau will share the story of the USWired acquisition and his M&A advice to partners in a session titled, “Finding Your Magic Number and Surviving the M&A Process,” at the Channel Partners Conference and Expo, May 1-4, at the Venetian in Las Vegas.. Rick Murphy, CEO and managing partner at Cogent Growth Partners, will join him on stage.
Hau answered several questions from Channel Futures about the content of their talk.
Channel Futures: You note in your session preview that “getting too preoccupied with top-line revenue growth could spell disaster vs. focusing on gross margin and net cash results.” Why?
Robin Hau is one of more than 150 channel visionaries and experts speaking at the Channel Partners Conference & Expo. The event also features more than 375 ICT companies in the massive expo hall. Register now for the world’s largest independent channel event, May 1-4, at the Venetian in Las Vegas.
Robin Hau: Focusing solely on top-line revenue growth can lead to disaster for a business because it may not necessarily translate into profitability. In fact, businesses can grow their revenue rapidly but still struggle to generate profits due to high costs and low gross margins. On the other hand, paying attention to gross margin and net cash results provides a more comprehensive picture of a company’s financial health. Gross margin is the percentage of revenue that remains after accounting for the cost of goods sold. A higher gross margin indicates that a company is able to generate more profit per dollar of revenue.
Similarly, net cash results take into account the company’s ability to generate cash from its operations after accounting for expenses. This is a critical metric, as cash flow is what ultimately keeps a business running and allows it to invest in future growth.
A buyer may be attracted to the target company’s high revenue growth, which may appear impressive on the surface. However, if the target company’s gross margin and net cash results are weak, it could be a red flag that the company is not generating sustainable profits or cash flow. This could put pressure on the acquiring company’s overall profitability and strain its liquidity position.
CF: Could you share an example of a business that has successfully undergone M&A?
RH: Last year, I successfully sold the company I founded, USWired, after receiving unsolicited interest from various firms. I responded to a few, resulting in several letters of intent, and ultimately chose Quatrro Business Support Services (QBSS) for several compelling reasons. QBSS met all my non-negotiables, including offering a multiple for my business that was on the highest end of the range of valuations, without requiring any earnout or other performance-based payouts. Additionally, they structured the deal as a stock sale, which has a more favorable tax treatment than …
… an asset sale.
I was also impressed with their leadership team and their mission to become a global, tech-enabled business support services outsourcing firm. QBSS is further supported by two of the industry’s most reputable private equity firms, Veronis Suhler & Associates (VSS) and Trivest Partners LP, with a successful track record of investments spanning over 40 years. VSS’ acquisition of an MSP called Coretelligent in 2016 and subsequent sale in 2021 for more than three times its investment further validated the strength of the partnership. As part of the deal structure, I was able to roll over a substantial portion of the sale of USWired into the equity of QBSS, which gave me skin in the game and a second bite at the apple. With the backing of a global platform, I now have the opportunity to take USWired to the next level.
CF: What about a purchased business that had to learn some hard lessons or had some regrets?
RH: The previous owners of a business we had purchased had built the company from scratch over two decades and were extremely invested in every aspect of its operations, including its culture, processes and overall direction. However, after the acquisition, they struggled to let go of control and adjust to working within a larger organization.
Channel Futures has a new partnership with ITX, a Martinwolf company, that offers an M&A marketplace facilitating the sale of IT-enabled businesses. Learn about it here.
The integration process was difficult for the previous owners, who were not used to having to answer to someone else. They found it challenging to align their ideas and practices with the new company’s culture and values. This led to disagreements and misunderstandings, slowing down the integration process.
As a result of these hurdles, the company experienced a dip in productivity and profitability. It was not easy to get the previous owners to relinquish control and adapt to the new company’s structure and practices.
In the end, we learned some valuable lessons. Integration is a complex and demanding process that necessitates letting go of control, which can be a difficult transition for owners but essential for success. In addition, open communication and collaboration are vital to overcoming cultural differences and aligning on common objectives.
CF: What’s one piece of advice you’d like to offer to partners considering M&A?
RH: One piece of advice I would offer to partners considering M&A is to prioritize cultural fit when evaluating potential acquisition targets. While financial and strategic considerations are essential, the cultural compatibility between the two organizations can make or break the success of the acquisition.
Cultural fit encompasses a wide range of factors, such as leadership styles, communication styles, employee attitudes, and organizational values. A misalignment in any of these areas can lead to conflicts, misunderstandings, and ultimately, a failed integration.
To ensure a successful acquisition, buyers and sellers should carefully evaluate the cultural fit between the two organizations and seek to address any potential issues upfront. This may involve conducting a cultural assessment or bringing in an external consultant to facilitate the integration process.
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