According to some executives, 80 per cent of Canadian channel businesses are looking to acquire, merge or be acquired in the near future.
That is quite the statistic, and one that CDN has witnessed anecdotally – just last year 19 members of the CDN Top 100 list either merged, acquired or got acquired.
But even if somehow you are not one of many owners of channel companies looking to sell their business in the coming years, maybe you ought to be.
That was the key message from one of two workshops at the CDN Top 100 Solution Provider’s awards gala Thursday evening.
Presenter David Reid of Winnipeg, Manitoba should know what he’s talking about. Two years ago, the former CEO of Epic Information Systems sold his firm for eight times its value to regional telco provider MTS, and has since then been sharing his experience with other companies.
The reason why owners should consider selling even if at present there is no compelling reason is twofold.
First and foremost, Reid says, is that the best time to sell is when you do not have to, as in when you are not desperate to get out and less likely to settle for a lower offer.
Second is that getting a high valuation on your company when the time comes takes years of planning and preparation – in Reid’s case, it took him nearly a decade.
Key steps in prepping for a sale
Finding a strategic buyer
In his case, Reid considered various types of sales including family succession, employee ownership, management buyout, national and international buyers, but settled on a strategic buyer.
He notes that a strategic buyer, especially one that you actively seek out, will give a higher valuation for a business that it does not already have, is not easily built, and one that presents synergistic opportunities.
Get to know them, make them know you
After identifying a strategic buyer, it’s time for some good old-fashioned networking. Reid recommends getting to know the potential buyer’s executives, attending the same events, making competing bids, creating complementary solutions and generally getting on their radar.
Pay off debt
Reid began looking to pay off his company’s debt almost immediately after deciding to sell. He emphasized that this is because anything owed will be deducted from the company’s value in order to pay the amount off.
Start looking at EBITDA
EBITDA refers to earnings before interest, tax, depreciation and amortization, and multiples of this ranging usually from 2 on the low end to 9 determine the valuation, assuming a company is debt free, has adequate working capital, and FMV assets, Reid said.
Companies looking to sell need to look at maximizing the multiple.
To do so, Reid recommends the managed services model.
A 100 per cent resale business has no guaranteed income, and has little added value besides a client base, that cannot be expected to be loyal. In the same vein, buyers also prefer to see diversified or a larger pool of clients as opposed to larger but fewer customers.
Furthermore, outdated systems, and not following GAP financial practices add both cost and risk for the buyer.
“Your accounting practices are the first thing they look at,” Reid said. “They’re absolutely using your financial statements. If they have to do a lot of massaging, they’re not going to do well.”
Instead, Reid recommends the following.
Having predictable revenue, such as managed services, long-term contracts, or even a procurement contract will up the value of your company.
Demonstrating low employee turnover will also lower risk for buyers, especially when a sale tends to drive exits.
Demonstrating growth and having systems and process sophistication means less money that buyers will have to inject to update or reinvigorate the company.
Improve on documentation, budgeting and reporting
A lot of questions that Reid received in the process was about budgets, an area that he admitted his company did not excell at. However, he was able to improve on reporting time to the point where it would be done within the next day.
This involved cleaning up everything from personal expenses, balance sheets, employee contracts, vendor agreements, frankly anything that can be a liability for the buyer.
“Demonstrate you’re squeaky clean, and your valuation goes up,” he said.
Empower your management team
Owners, who Reid describes as the riskiest person in a sale, cannot be vital to the day to day operations of a company. They should be looking at long-term strategy rather than critical operations and must be able to leave for extended periods of time without the business falling apart.
The reason, Reid says, is that it’s a huge mind shift for an owner to become “just an employee” following a sale. They may not work as hard once the business does not belong to them anymore, and in turn hurt the company.
“When you’re replaceable, your business is ready to sell,” Reid said.
Simulate an offer
Due to the complexities and paperwork involved, Reid recommends hiring a lawyer or accountant to simulate the process that follows an offer. He was shocked when he saw the documents pile up to the thickness of a textbook.
Compelling event
One can pick the strategic buyer but not tell them when to buy. The timing, and reason, needs to come from them, with the channel company having only some influence over this event.
In Reid’s case, it took the strategic buyer 8 years after Reid picked it.
At the time, both Epic and MTS were looking to build a data centre. One company had the resources while the other had the expertise. Rather than partner, MTS decided to buy Epic outright, after Reid approached the company with the idea.
Since it’s usually coming from the buyer, tt’s rare that the compelling event will be predictable, Reid noted, but companies should nevertheless become balance sheet and debt ready in the meantime.
Other tips
- The best time to sell is when you don’t have to. Make it clear that, since you don’t need to sell, you will only consider a “premium” valuation
- Look at how much your peers have sold for to determine whether your valuation
- Your company isn’t your baby, it’s an investment, and once you close, you are just an employee
- Even if you are not looking to sell, you should start preparing today by getting your house in order
- A buyer’s compelling event determines a sale – not your arbitrary date