Q&A: Channel Buyers on What’s Driving M&A Deals
As promised in an earlier column in our series on channel M&A, “To Buy — or Not to Buy – an IT Services Business,” we reached out to channel executives that are in the buying state of mind to find out what’s driving their merger-and-acquisition strategies.
We connected with two – a managed services provider (MSP) and a telecom master agency. They include:
Paul Bush, CEO and President of OneSource Technology Inc., an MSP serving businesses in Kansas and Oklahoma since 1998. Last May, OneSource acquired ICT Technical Services, a managed IT provider based in Witchita, including approximately 25 customers. ICT’s founder John Shamasko exited the business as part of the deal. This is the most recent transaction for OneSource, but not the only one. Its first acquisition was in 2006, followed by three more in 2012.
Alan Sandler, Managing Partner at Sandler Partners, a connectivity and cloud services distributor based in Hermosa Beach, Calif., with a network of nearly 5,000 sales partners and a portfolio of more than 200 service providers. Last summer, Sandler Partners made its first acquisition, purchasing a smaller master agency, X4 Solutions Inc., based in Chicago. Two owners are exiting and the other two are staying on, as are all the X4 employees. Sandler has said he is looking for additional opportunities to make a deal. (Full disclosure: Sandler is a client of the author’s company.)
We asked each of these executives six questions to find out what they are looking for in a potential acquisition and why.
1. What made you want to acquire?
Bush: We are constantly looking for acquisitions that will allow us to grow our client base.
Sandler: Even though our organic growth has been the fastest among the master agents, thanks to our incredible agent partners and employees, we felt to survive and thrive in this evolving industry we had to get bigger faster.
There are several reasons for this:
- There are many new companies with cloud offerings and no internal sales forces that will look to alternative channels for distribution. We need to be big enough for them to seek us out rather than beg to be their distributors or be forced to work through traditional box sellers.
- Consolidation among telecom providers means dealing with fewer larger providers and more complicated relationships. For example, you must be large enough to qualify for a direct contract. Without it, we risk losing the control that has allowed Sandler Partners to be recognized so positively with our partners and with the industry.
- We realized it’s the same amount of cost and effort to create education and training materials for 10 agents as it is for 5,000 agents.
- Our increased size and new revenue production makes us one of the top two contributors of new MRR to many of the providers in our portfolio. This enables us to continue to negotiate stronger and more financially rewarding agreements for our partners.
2. What factors are most important to you in considering potential acquisitions?
Bush: We look for targets with the majority of their clients being managed services clients, or ones that have a good potential for upsell to managed services or other recurring services.
Sandler: Our philosophy for targeting and caring for agents is similar to our philosophy for acquisitions.
We realize one size does not fit all partners and transparency is key.
Just as we have several different plans and options for our agents, and just as we are transparent to our partners regarding our provider agreements, we want potential sellers to know we are incredibly flexible and open.
We are willing to:
- Buy out owners and let them retire and keep their team in place.
- Buy out owners and still keep them in place.
- Merge other companies in and let the owner maintain shares in Sandler Partners.
Obviously, the key broad factor is whether the acquisition a good thing for our employees, our agents and our providers.
We prefer companies with a strong, caring culture and a good industry reputation.
It is challenging to hire great employees, so it’s a bonus when the seller has a strong team in place.
In addition, we look to see if their carrier portfolio complements, diversifies or strengthens ours. Similarly, their partner mix also is important.
We also do modeling to determine whether we could organically grow at a lower cost and get to the same results as buying the acquisition candidate.
In the case of X4 Solutions, which we acquired in August 2016, everything lined up.
There was little geographic overlap, they had a strong employee team and great management, carriers that diversified both our portfolio and our revenues, and fantastic loyal agent partners.
3. What are you acquiring for — scale, scope, diversification?
Bush: We are currently acquiring for scale. Would also look at acquisition targets with service or skill sets that would expand what we offer our clients.
Sandler: I think a lot of this was answered above, but scale and scope (and the diversification benefits of scope) are key.
4. What’s a deal killer?
Bush: Lack of a roadmap to profitability. We recently looked at an acquisition target in Missouri that wasn’t profitable the last two years.
That wouldn’t have been a deal killer, but the principal was leaving and two out of the three technical staff were leaving at the close of the sale.
It kind of makes it hard to jump into a market with only one technical person and have to immediately invest in staffing. Just didn’t see the long-term fit.
Sandler: Other than dishonesty, probably nothing.
There’s always a value inherent in a company, and if we can agree as to that value, we can make a deal.
5. How is the massive shift in IT spend toward cloud impacting your business development and acquisition strategies?
Bush: We provide cloud services to our clients and look at that as another piece of the recurring model.
We encourage all of our clients to let us manage their cloud services as part of our current managed services model, so cloud doesn’t scare us.
It’s just another tool in the toolbox.
We like to think that every client can make use of some services that the industry is calling cloud.
Our job is to help them identify what makes sense and what doesn’t.
Sandler: We need to position ourselves in the mind of the cloud companies as the alternate channel most valuable to them, because we bring them the most chance for significant revenue.
And, even though contractually we are master distributors, we need to act every day so they feel we are true partners for them.
On the partner side, we need to continue to work hard on all aspects of our business, so that our agents continue to believe we are the best option for them to access the services being offered in the marketplace. Our team has worked very hard to earn that reputation in the industry.
The biggest change I see is that we now have tangible evidence that our agents are not just selling one product and not just selling bandwidth to their customers.
They are offering and selling multiple services and entrenching themselves into customer relationships.
Through education, training and support, Sandler has helped our agents turn their customers into clients, i.e., the agent is viewed as the professional adviser.
So, in my mind, the bigger transition is no longer the spend or the cloud, it’s the idea that business customers are desperately looking for one person or team to advise them on as much of their business technology as possible.
At the same time, the carriers finally have productized their services so they’re easy and cost effective to deliver, enabling agents to layer services and spend more time with each client.
6. When you think about the future potential in our industry and your position in it, what keeps you up at night?
Bush: Sorry, I sleep great.
Our team stays in close communication with our client base and prospects, and my feeling is that if you listen to the client, they’ll tell you how to serve them and that’s the key to being here for the long term.
Sandler: Those that know me well know I am always nervous.
Everything keeps me up at night!
As I respond to this question, I can think of 10 things today that make me nervous about our business.
Khali Henderson is senior partner with BuzzTheory Strategies, a marketing consulting firm specializing in the channel.