Resellers across the country must have been shaking in their socks two weeks ago when OnX Enterprise Solutions announced that it plans to sell off its VAR division and concentrate on its Internet business.As outlined on the front page, the board of publicly-traded OnX pushed co-founders Sheldon Pollack and Phil DeLeon — who are also major shareholders — to do something about the company’s languishing shares. After examining various options, Pollack and DeLeon offered to buy the VAR business themselves. They’ll continue to run the other side, which pulls in regular revenues from its managed services and Web business, while owning — but not managing — OnX.
An unusual arrangement? Perhaps. But what must have caught the eyes of resellers was the sale price: $6.8 million (including liabilities) for a business that Pollack told me is pulling in $45 million a year.
That works out to 15 cents on the dollar.
A lot of VAR owners must have been wincing. A valuation firm set the worth of OnX’s solutions provider and reseller business at no more than $7.3 million, and as low as $6 million.
To ensure there is no conflict of interest (or hanky-panky) an independent committee of the board was formed to review the offer. As benefiting shareholders, Pollack and DeLeon can’t vote on the offer to be put to the rest of the shareholders Nov. 28.
Blame the market, said Pollack, which undervalues VARs — although he acknowledged that the Internet side of the business was chalking up gross profit margins of as much as 40 per cent, which the VAR side wasn’t coming near.
But the truth is many VAR owners will see this as meaning their companies aren’t worth as much as they hope.
“This is a reality check as to what these businesses are worth,” says Bruce Stuart of ChannelCorp. Management Consultants of Vancouver, who advises VARs on running their firms.
“Most of these guys think their businesses are worth way more than they really are.”
Which could be frightening to owners who are in their 50s and 60s and are looking to cash in soon and retire.
Stuart works with many of them who want (or need) to beef up their businesses in anticipation of a sale. But that can take several years.
“I keep telling them, ‘You should be building the business you want to buy,’” he says. If you want to buy it, someone else wants to buy it. Quit dragging your ass. Get somebody in marketing. Do all the stuff you know you should do.”
There’s another way of looking at the OnX sale, Stuart suggests: Why build your business when you can buy one relatively cheap?
“There’s got to be great opportunities out there,” he says to VARs. “So clean up your act in 2007 and get on the acquisition warpath if you want to build these things up.”
