A seismic shift is underway.
How healthy is the independent dealer channel, and what does the future hold for those dealers? The perseverance of dealers and an entrepreneurial spirit have long been cited for the channel’s longevity. Think about it. Dealers have overcome technology shifts, economic downturns, and competition from mega-dealers and OEM direct branches, catastrophic events such as 9/11 and the market crash of 2008, and the continuing COVID-19 pandemic. Based on their track record of success during trying times, one might assume that independent dealers aren’t going anywhere. But let’s not be too hasty about that. Instead, let’s examine the forces currently in play that will impact the independent dealer going forward.
On the Decline
Acquisitions continue to chip away at the number of independent dealers. Estimates vary as to how many independent dealers remain, but a realistic assumption is somewhere in the 2,000 range. That’s a significant decline from when I started covering the industry in 1986, and dealers started selling to the likes of Danka and Alco Standard (later IKON), as well as the OEMs. Estimates of the number of dealers in 1986 hover around 5,000. The reasons for the contraction going back 36 years are not all that different today: big payouts, retirement, no suitable successors, and a lack of desire to expand the business with new technologies and services.
Considering the pace of acquisitions prior to the pandemic, what’s the outlook for acquisitions in 2022, particularly as the pandemic subsides, and more dealerships see business return to pre-pandemic levels? No one predicts acquisition activity abating anytime soon.
Michael H. Dudek, Esquire, CPA, of Zygoquest Group, an organization that guides dealers through the acquisition process observed in the article “You Know It’s Time to Sell Your Dealership When…” in this issue, “I expect M&A activity in the industry to continue to be strong going forward.” That M&A activity includes traditional office technology dealerships, as well as managed IT services companies. Mega-dealers and private equity-backed dealerships with deep pockets drive much of the current acquisition activity. The amount of private equity money flowing into the channel can be viewed as validation of the channel. “From what I’ve seen of the venture capitals that have come in, they’re dedicated to the channel, they’re dedicated to growing it, dedicated to improving it,” said BTA General Counsel Bob Goldberg, who frequently finds himself on the acquisition front lines.
The wild card in this scenario is what’s next for private equity or venture capitalists since their goal is to grow an investment and flip it. As some of these private equity-owned dealerships have grown to exceed $400 million in revenues, potential suitors for organizations of that size are significantly smaller than the number of private equity firms who have been buying smaller dealerships. Then again, the mantra we often hear about mega-dealers is they will continue to get bigger. A likely scenario is an acquisition of a mega-dealer by another mega-dealer, creating a super-mega-dealer.
Meanwhile, mid-sized dealers continue to make acquisitions as well, further solidifying their future, whether it’s passing the business on to a second or third generation or better positioning it for sale much further down the road.
What has changed in terms of acquisition targets are the targets themselves. At one time, they were exclusively independent copier dealers. Now we see managed IT firms, physical security companies, telephone systems companies, and the occasional office furniture dealership in the mix.
Changing Dealer-OEM Dynamics
Historically, dealers and OEMs had an adversarial relationship, at least some of the time. That seems to be changing. “The significant event I’ve seen occur in the last 40-plus years since I’ve been in the industry is COVID,” observed BTA’s Goldberg. “It has dramatically changed the environment and the channel. There’s a new spirit of cooperation, and that’s cooperation among all levels of working together, addressing issues, and finding equitable solutions.”
Dealers had to pivot quickly and change their approach to the marketplace because of COVID, remote workers, remote customers, and a range of other issues related to the pandemic. “When I say that COVID has changed the future, I see manufacturers stepping up and working with their dealer partners trying to help them through each of the situations that have arisen due to COVID. Whatever it is, they are working together to address the most serious problems and coming to a fair and equitable resolution,” according to Goldberg.
He sees a similar dynamic between dealers and their customers. “The dealers understand that customers have had to retrench and pivot and to change their operations, and they’ve reached out to work with them in terms of meeting their new needs and the new realities. In some cases, it could be less printers or fewer A3s, but they are working with them. Salespeople are working with their employers in terms of commissions, remaining faithful to their employers despite the fact there are a tremendous number of backorders and things are not delivered or paid for, so it’s difficult for dealers in some instances to pay commissions on sales that haven’t been concluded.”
He’s also seen technicians who work remotely and were willing to visit end-user locations during COVID periods despite concerns for their health, safety, and welfare. He also references the leasing companies that have stepped up and are working with both the dealer channel and end-users to alleviate financial stress. “What I’m saying is COVID has drastically changed the pulse and nature of our industry. We have partners that are working together, and we have like goals and outcomes. I think this will hold true into the future.”
Hiring and retention has ranked as one of the top three dealer concerns in our Annual Dealer Survey for as long as we have been tracking dealer concerns. “You have to constantly recruit in our business,” lamented Andrew Ritschel, president of Electronic Office Systems (EOS) in Fairfield, New Jersey. Staffing, he said, will be an ongoing issue for the channel. Ritschel lives in northern New Jersey, where he’s been watching scores of multi-housing rental units being built, which he views as a sign. “Millennials are very transient, so they don’t want to be tied into owning a home. They want to pick up and go somewhere else two or three years later. That makes it hard for our business because how are you going to hire somebody and train them to become really good in our industry? It takes eight months to a year just to get them to do some things on their own. And then year two, they’re gone.”
With COVID-19, new attitudes about work from the younger generation, and the “Great Resignation,” staffing issues will likely be compounded. Look at the baby boomers. They are at or past the traditional retirement age, and we’re likely to see a significant exodus of those workers soon. Advances in health and wellness, as well as remote work, may enable some who might have retired sooner to continue to contribute, even if it is part time. But the industry will have some decisions to make about workers who either want to continue working or need to continue working well beyond retirement age. Can business owners afford to pay them at their current salaries, which have been accrued over a 20-, 30-, 40-year career when a younger worker, if available, can be hired to work at a much lower salary? This is another staffing scenario that can’t be ignored.
All Roads Lead to Diversification
David Ramos, chief strategy officer at Visual Edge IT, still expects to see dealers that only sell print in the channel for the foreseeable future, but he doesn’t view that as the most sustainable model. “If you’re a single-line dealer and all you are is print, you need to rethink your world, your business model, what you’re going to invest in, and how you’re going to evolve,” he said. “If anybody thinks we’re going back to a pre-COVID world, I doubt it.”
For dealers looking to sell, he noted that from a market-cap perspective, he encourages them to look at the companies that have driven value for their investors in this space. Those, he said, are the ones that are the most diversified. “If you look at the ones more on the print-centric side, look at their market cap and what they’ve done.” He also offers some pointed advice. “Don’t believe me, do your own research, have your own ‘ah-ha’ moment. If you’re relying on old information, old advisors, you need to start thinking about things in a totally different mindset,” said Ramos, concluding by quoting Billy Beane as portrayed by Brad Pitt in the movie Money Ball, “adapt or die.”
No doubt, some dealers will sell or simply fade away. Others will adapt. “Dealers will meet the new demand for print, and if there is a shift, they will find alternatives to provide to their end-users,” opined Goldberg. “It won’t be document output, but document management that will be key to the future because the data is what’s important and how it’s maintained going forward.”
Goldberg added that the future product mix depends entirely on how dealers react to the changes occurring with technology, in the market, and with processes that are driving companies. “That’s why small and medium-sized dealers have survived in the past,” he said. “If you go back far enough, many of these dealers had their roots in typewriters and calculators. As the processes changed, they evolved with it. They need to do the same thing now. I see the future of our industry revolving around services, regardless of the market that you’re in. Small dealers in big markets are probably going to have the hardest time as opposed to small dealers in small markets. There’s a lot of moving parts that determine where or how things are going to be. Medium dealers can survive forever, adjusting their business to the processes that the customers are using.”
As Phil Houser, president of Document Solutions Inc. in Albuquerque, New Mexico, told me during our interview for this month’s CR-Connect Dealer Tour profile, “I still see this as a very healthy, strong, viable business. You must be diversified to really make it work, although there are companies that are proving us wrong in that respect that are only doing print. There are so many ways to skin a cat. You can do that in major metropolitan areas. In smaller areas like in New Mexico, where you have two million people in the state, you have to offer more than just print to be successful. Had we not diversified our company prior to the pandemic, we would’ve felt a lot more pain. We didn’t lay anybody off. We held our line in terms of revenue. We didn’t gain anything, but we really didn’t lose anything. We did some things that helped us mitigate the shortfall in prints. We did that through other ancillary products like interactive panels and temperature detection devices for entrance into facilities.”
“You’re always going to have things to sell to people in business,” added Ritschel. “Are we tuned in to the right things to sell? What is the mix? As Frank said in one of his Fridays with Frank videos, you have to listen to and think about everything.”
EOS is focusing on helping customers reduce their dependence on paper with document routing software that scans and stores documents in the cloud. That’s a solution he emphasized is not impacted by supply chain issues.
Managed IT a Must?
Managed IT will likely be a segment of more dealers’ businesses in the future; however, it’s not a total panacea, especially since many dealers still struggle in this segment. “There’s lots of people that have gone into managed network services, and out of our 78 competitors in northern New Jersey selling in our marketplace, probably about 40 are now touting that they do managed network services, whether they do it or not, or they’re offloading it on somebody else,” observed Ritschel. “So, they’re partnering with an IT company or they’re half-ass doing it. There’s a lot of people that aren’t making any money in it. I heard a figure that to start an IT business, you better have about $500,000 because that’s what’s going to take. And if you’re a copier company, it better be making a hell of a lot of profits to support [itself]. If you want to go out and buy an IT business, you’re going to be paying one to one-and-a-half times the revenues of whatever they’re doing.”
And then there’s the competition in this space from strictly managed IT companies. “If I have 78 office equipment dealers in northern and central New Jersey, I have 300 managed network service businesses of all different sizes, all competing against each other and trying to steal each other’s business,” said Ritschel.
What he has done to protect his business without going all in on managed IT is partnering with local IT companies, where they bring EOS into their account and provide products and services outside of managed IT. “What we’re doing is the antithesis of what a lot of other people are doing, and we’re getting a lot of traction with it.”
Visual Edge IT is focused on acquiring managed IT companies and hybrid dealers who offer a mix of print and managed IT services with at least 20% of their revenues coming from segments outside print. That is an acquisition trend that will likely expand as other acquisition-oriented organizations emulate the Visual Edge model. However, not everyone views this as an appealing acquisitions strategy.
“We have no desire to build a better mousetrap in the IT space,” said UBEO’s Morrissey. “I don’t begrudge anybody who goes into that business and wants to build a business, but you must recognize that’s what you’re doing. You’re literally on the bleeding edge of that industry and that business. I don’t want to be on the bleeding edge. When I find an IT company that has double-digit returns and I know that’s the future, I’ll buy them.”
The Verdict is In
We now have a reasonable idea regarding the future of the independent dealer channel: more acquisitions, fewer dealers, some very large mega-dealers, hybrid dealers that offer an array of technologies and services beyond print, small and mid-sized dealers still thriving in certain markets, customers who print less, and ongoing staffing issues. Bottom line, we have a channel in flux, albeit one that will continue to adapt and find ways to thrive amidst technological changes and chaos.
“I’m very optimistic about the future,” concluded BTA’s Goldberg. “I have the great privilege of speaking with dealers daily. These people are dedicated to their business, dedicated to their customers, and dedicated to their growth in whatever form it’s going to take.”
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