VAR market ripe for consolidation, says KPMG

With the value-added reseller market showing all the signs of an industry ripe for consolidation, and with the current strength of capital markets, the time has rarely been better to sell a business or acquire the financing needed to fuel future growth.

That’s the message KPMG’s corporate finance team gave attendees at a special briefing for resellers prior to the Computer Dealer News Top 100 Solution Providers event last week in Vaughan, Ont.

Peter Hatges, a senior vice-president with KPMG Corporate Finance in Toronto, said consolidation increases purchasing power, with larger companies having the ability to spread their overhead costs over many more sales dollars.

“That’s the name of the game; it’s a competitive environment,” said Hatges. “I think there’s constant pressure from companies on suppliers and vendors to drive costs down.”The observation was echoed by Doug MacKay, president of KPMG Corporate Finance in Canada. MacKay said VARs are facing more pressure both from clients that increasingly want one source to supply all their IT needs, and from vendors that would rather deal with fewer and larger channel partners to simplify their own sales channels.

“With the factors in place we would certainly not be surprised to see a great deal of merger and acquisition activity in this space in the next little while,” said MacKay.

The timing may be serendipitous, because MacKay said the conditions have rarely been better for business owners looking to sell their business or acquire the financing they need to grow.

“Because of the nature of the market the seller has most of the power right now,” said MacKay.

It’s a case of more investment capital chasing fewer opportunities, said Hatges. Buoyed by strong returns in recent years, more private equity capital has entered the market, so equity firms have to work harder and compete to secure the top investment opportunities.

“There’s a huge amount of capital out there and it’s looking for a home,” said Hatges. “It’s great if you need to sell or borrow to grow because you can get a better deal now than you could a few years ago.”

Because there’s now competition for quality investment opportunities, Hatges said companies have a lot more power now than they’ve had in the past. Things that weren’t on the table before like structure, financing terms, or giving up control are now open for discussion with investors and lenders, he said.

“The power that companies have now is really around choice,” said Hatges.

For the business owner looking to divest completely, perhaps as a prelude to retirement, Hatges said preparations should begin six months before the divestiture process gets underway, with another six months budgeted for the sale process itself.

In the lead-up to beginning a formal divestiture process, Hatges said a business owner should determine who on the management team is going to be a part of the process. Those key people need to be given incentives to see the sale through, with a bonus on completion. It’s also important to look at the balance sheet and see what can be improved and what needs to be cleaned-up before opening-up the books.

Once the divestiture process has begun, Hatges said the biggest mistakes that sellers tend to make are a lack of preparedness and an inability to focus on the big picture and what’s really important.

“Sometimes, in the heat of the battle, when you’re negotiating you tend to lose sight of the important points over things that aren’t,” said Hatges.

He added the more potential suitors the better, recommending a formal search process to invite as many qualified offers as possible.

“I can’t overemphasize enough what happens when there’s competitive tension,” said Hatges.

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Jeff Jedras
Jeff Jedras
A veteran technology and business journalist, Jeff Jedras began his career in technology journalism in the late 1990s, covering the booming (and later busting) Ottawa technology sector for Silicon Valley North and the Ottawa Business Journal, as well as everything from municipal politics to real estate. He later covered the technology scene in Vancouver before joining IT World Canada in Toronto in 2005, covering enterprise IT for ComputerWorld Canada. He would go on to cover the channel as an assistant editor with CDN. His writing has appeared in the Vancouver Sun, the Ottawa Citizen and a wide range of industry trade publications.

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