To Buy – or Not to Buy – an IT Services Business

Last month, we spent some time exploring a number of angles on selling your business – whether or not to sell, how to prep for sale, tips for increasing the value of your business, and a Q&A roundtable with three leading channel M&A attorneys on the current climate for shopping your VAR, MSP or Agent business.

This month we’ll dive into the buyer’s side of the transaction, or, in the case of this first entry, the potential buyer’s side of the transaction.

Unlike all the considerations on the seller’s side of the deal, which can range from financial and marketplace practicalities to factors in an entrepreneur’s personal life, the buyer’s side is more direct.

Either you want to build a bigger business for the long-haul or you want to build a bigger business before selling out (often for a higher multiple, but we’ll cover more on that later in the series).

Two Sides of the Same Coin

Many of the marketplace drivers behind your decision to buy are the same ones that drive sellers to sell – consolidation, the need for greater scale and scope, technology evolution, etc. 

They’re all the nuances, or depending on your disposition, nuisances, that make today’s market different from yesterday’s and vastly different from the one you entered years ago.

Similarly, most business owners – especially those who have never executed an acquisition – need to walk themselves through the same sanity checks as they would if they planned to sell.

Some considerations are practical:

• Can I get the capital I need to make the deal?
• Can I attract the talent I need to manage the integration and larger organization?

Some considerations are professional:

• Am I as capable of running an organization as I am building one?
• If not, is it in my personality to get out of my team’s way and not bottleneck and micromanage the company while I focus on other deals?
• If my company is racking up significant organic growth, is it worth diverting energy toward an acquisition?

All considerations are personal, but some are especially so:

• Does securing capital bring an unacceptable level of personal risk (e.g., requiring collateral, such as your home or other personal property, etc.)?
• Do I even want to work in – even if it is sitting atop of – the more rigid and structured organization necessary for a successful integration?

These questions are not trivial and some (e.g., resources) are genuine hurdles, which is why you’re more likely than not to end up on the “sell” side of the buy/sell continuum.

When You Land on “Buy”

Let’s assume you are one of the few, the proud, the buying machines. Factors you should consider when laying out your strategy include those that expand strengths (especially scale) or shore up weaknesses (typically scope). Hopefully your transaction(s) can add a little – or a lot – of each.

Other factors to consider when identifying acquisition targets (beyond the obvious ones of gaining more revenue and expanded geographic reach) include the potential to:

• Secure stronger supplier contracts
• Gain leverage with current suppliers
• Move up market
• Move into profitable verticals
• Acquire products to sell into your customers (perhaps also up market or in key verticals) and protect your customer base from other players pursuing a “one-stop shop”
• Acquire technology that will, or perhaps already has begun to, replace your current product line
• Gain some revenue before selling, ostensibly to obtain a higher value (maybe a full- or mini-rollup)
• Acquire brand equity (this could literally be to acquire a better brand, but it also could be for the huge jump in stature and market presence that occurs when a fairly well established brand is acquired by one that is lesser-known)
• Diversify revenues
• Take out a problem competitor
• Gain enough mass to compete with competitors that also are scaling up
• Any of these – or combination of these – factors that simply let you stay in the game on an evolving playing field.

Process, Process, Process

We also could have called this section “Patience, Patience, Patience.” Assimilating another organization is no stroll through the park, and if you’ve been one of those gunslinger type of entrepreneur who shoots from your hip (or, more accurately, your gut), the long-term success of your transaction will require you to put those guns away.

In fact, if you’re that kind of entrepreneur, you’re probably better off out of the way — period.

Successful integration is a game of process – adding new processes where they don’t exist, mapping new and existing processes in detail, and creating a process for processing those processes into one process.

(Got that?)

And don’t forget processes for maintaining revenue generation. Buyers all-too-often focus too much on accounting and operations integration and not enough on maintaining the revenue-generation engines they acquired. While accounting is happily consolidating books and employee benefits plans, lead generation dwindles and sales pipelines decay.

Six months or a year down the road, frustration sets in and finger-pointing starts when sales activities are not meeting pre-deal projections.

A word for the wise on this kind of hiccup and related conflict: As the acquiring party, it’s your company now, so anything that’s neglected is ultimately your responsibility. This is why the half-hearted “let’s do this part for now and slow-walk the rest” approach so often fails.

In a new organization with new leadership, if confusion over responsibilities or a power vacuum emerges, then the “status quo” isn’t the “status quo,” it’s decay. So plan it out and get it right – on the top line as well as the bottom. 

The End Game

Over the next month we’ll dig into more detail on the acquisition process, some pitfalls to avoid that could make your acquisition unsuccessful and some discussions with executives and experts that are actively engaged in buying VARs, MSPs and agencies.

Hopefully we’ll give you some food for thought and maybe some insight that can help you play it right when it’s your turn at the acquisition table.