Effusing what seems like genuine interest in your office technology dealership, the tone from the Monday caller suggests an offer might be in the works. You agree on Friday for breakfast. Maybe you can hit the golf course afterwards and try hitting the green on Hole 12 in two strokes. It’s a par 5, and your brother does it all the time.
Opportunity?
The buyer represented a private equity (PE) group that owns some office-tech dealers and three commercial printers in an adjoining state. You know those dealers are doing well. So are you. The meeting left some interesting numbers running through your head.
“PE guys like the monthly recurring revenue dealers have with service contracts on the machines we sell,” explained Patrick Flesch, president and CEO of Gordon Flesch Company, a large dealer in Madison, Wisconsin. Of course they like it: Not many deals have predictable monthly revenue.
Based on what they have seen in the state next door, the PE broker said office technology is an important part of printing and that your company could be a good fit. You smiled inwardly. You already have some managed IT that’s paying off and a good mix of customers. It sounded as if the investors have decent experience and probably would treat your customers well. It could be a pretty good wrap on your 29 years. Then he started talking money.
What got your attention was that if you stayed on for a year, your monthly check could double as part of the buyout. Most of your team would also keep their jobs for at least a year. Not bad. Writing tuition checks for the kids would sure be easier, and you could put a new year-round home on that lakefront property you bought. Selling might also help knock a few strokes off your golf game. Your wife might like it too. Hmmm.
While still in the thinking-about-it stage after that first meeting, get with your CFO or accountant. Loop them in if you are interested in moving forward, and get a lawyer involved. Bear in mind, cautioned Roger Gimbel, CEO of print-industry consulting firm Gimbel & Associates, “Your regular lawyer or accountant may not be the right fit.”
A way out?
PE is not a major factor in the office technology sector, although there is growing interest. It is part of some deals, but most large office-tech dealers grew by acquiring smaller shops. PE can be a path forward for dealers. The choice is about personal preference.
Should office technology dealers maintain business as usual or opt for PE as a route to selling? PE deals have been happening in commercial print because print in general is seen as a lucrative market, due in part to business owners looking for a path to retirement. Gimbel had been up close and personal with PE after a couple of decades in commercial printing.
Two flavors
Then there’s Peter Schaeffer, founder and partner of New Direction Partners, a leading mergers and acquisition (M&A) company, who offered a more pragmatic angle. Schaefer described PE deals as being either financial or strategic. A financial deal is pretty much what it sounds like. Investors want to buy a company for resale, perhaps a few years down the road. A strategic buyer sees a company’s value as part of a mix of several businesses it has acquired or is acquiring. Either way, it’s about the value each company provides. Not far away are the haves and have-nots, which describe the companies involved. We’ll get to them in a moment.
“Let’s say the goal of either type of buyer is maximizing the value of a business over a five-year window,” said James Loffler, president of Loffler Companies in St. Louis Park, Minnesota. “In contrast, a privately- or family-owned company focuses on building something for the next 20 years.”
At the same time, a PE deal may have longer legs than just the one being discussed. “Talking with a PE broker can be a good thing because he or she may call again even if one deal is not right for you,” said Mike Lepper, CEO and partner at Impact Networking in Lake Forest, Illinois. “That first look can open doors to other investors in their portfolio.”
Tribal knowledge
Some financial buyers may be more inclined to keep you and/or your team around for a specified period. These buyers, lacking knowledge of your business, customers, and markets, may value your tribal knowledge—sales and service expertise, and understanding office technology customers. In contrast, strategic buyers may be able to replace employees or an owner because they have other companies to draw from. This distinction may be important because selling is about more than bolstering your bank account. You may revel in the notion of not having to go in every day, but your business and team have been part of your life for a while. This makes being comfortable with the buyer important even though you may not be involved in the business. The fact is, a year from now, if you’re not involved in daily operations, the buyer may have forgotten all about you, aside from the non-compete clause in the sales agreement.
Are you a have or have-not?
Haves are dealers who invested in equipment and employee training for things like cybersecurity, managed IT, wide format, and even light production printing. More than a few of these are large dealers. Haves are usually more appealing to PE buyers because the investment in people and technology has been made; some expertise is in place, and the customer mix may help a buyer see revenue today that can be attractive to future buyers. Haves, noted Schaefer, can also be quite adept at showing expertise, value, and making their offerings appealing. This can help foster growth and increased business.
PE buyers are discovering that “the office technology business is more complex than it appears from the outside,” said Loeffler. “This is especially true as the industry shifts from copy and print to fully integrated IT services. These require long-term commitment, deep expertise, and alignment across many parts of the business.”
In contrast, have-nots are the dealers (often smaller ones) that have not moved much beyond copying and printing. Some are Luddites who don’t want to learn digital technology, perhaps thinking there is no real demand for it. Others have tiny markets or customers who need only the basics. Still others are closing in on retirement. Some have-nots lack the interest, skills, or budget for expanding their offerings. Have or have-not, this is basic competitive stuff that does not pass unnoticed in any kind of acquisition.
Due diligence
Try to find office technology dealerships that were part of PE deals even if they took another path. Take what they say under advisement. If you do find a dealer to talk to, keep in mind that their PE group probably won’t be the one you ate breakfast with, but hearing about someone else’s experience can be worthwhile. If you can’t find a dealer with PE experience, pick up the phone and find out what others have to say.
Perhaps obviously, think about your customers. When possible, Schaefer suggests adjusting your vision of the business with the buyer’s. This helps you make choices that maximize the value of your dealership while setting the stage for the new owners’ success. Buyers appreciate knowing which customers are likely to bring the most revenue and those that need extra care and feeding. Still, accept that some of your objectives may be irrelevant once you are no longer involved.
PE buyers (or any other kind) will want to know all the details of your business, so have the information at hand. Above all, cautioned Gimbel, do not try to dress this up. He described incorrect or missing accounting data as major red flags, so be sure all financial and accounting detail is readily available. Another important point, says Gimbel, is “Not guaranteeing performance.” Sellers and buyers alike presumably know this but never assume. If, for example, a large customer went away two years ago the PE number-crunchers will spot this, so have reasons ready and be able to back up what you say.
Protect employees
Something we hear from all types of business owners is a desire to protect employees’ jobs. Even in lean times, many business owners are reluctant to trim payroll, seeking to minimize disruption and stress for their people. This is common to the family-like nature of many independently owned businesses and is hardly limited to office technology dealers. Gimbel and Schaefer both said this can be a negotiable point in a PE deal. Pay attention to this because it reflects on you as a business owner: Are you a take-the-money-and-run owner, or do you respect and care about the people who have empowered your business? A new buyer may not care and assume that new people can be hired for less money.
Read every word
Why are some office technology dealers selling? There are a host of reasons, including the age of business owner(s), succession challenges, competition, changing demands, and more. Whether the cash arrives from private equity, an acquisition by another dealership, or a high-hopes entrepreneurial purchase, there’s plenty to think about. Read every word of the sales agreement and listen to your lawyer and accountant. And remember a few things.
- Especially with PE, “Engage a lawyer and accountant experienced in this kind of deal,” repeated Gimbel, noting that the ones you use for other matters may be able to recommend ones that will fit. Ask around, too. A PE deal requires specialized knowledge on the legal and accounting sides.
- Be sure a safety net for employees is part of the contract. If it’s not, “Your people might find themselves vying with others to keep their jobs,” noted Gimbel. While this topic probably will be raised in earlier discussions, you still must make sure it is part of the sales agreement. Do not take this for granted.
- The purchase-and-sale agreement is a binding legal document. Precise language is critical. Make sure it works for you.
Take your time covering all the variables. When the money is in the bank, the tuition is paid, the windows are going into the new house, and you’re an easy five-foot putt from being two under on Hole 12, you’ll know you’ve made the right decision.
