{"id":35613,"date":"2019-08-01T11:00:28","date_gmt":"2019-08-01T18:00:28","guid":{"rendered":"https:\/\/www.enxmag.com\/twii\/?p=35613"},"modified":"2019-08-01T11:00:32","modified_gmt":"2019-08-01T18:00:32","slug":"dealers-note-overcoming-obstacles-as-key-to-success-in-the-modern-ma-landscape","status":"publish","type":"post","link":"https:\/\/www.enxmag.com\/twii\/feature-articles\/2019\/08\/dealers-note-overcoming-obstacles-as-key-to-success-in-the-modern-ma-landscape\/","title":{"rendered":"Dealers Note Overcoming Obstacles as Key to Success in the Modern M&A Landscape"},"content":{"rendered":"\n

In conjunction with this month\u2019s state of the industry focus\non mergers and acquisitions, we\u2019d like to provide you with a look at the\nvarious stumbling blocks that can either stall or completely stymie a deal\nbefore the final contract is signed.<\/p>\n\n\n\n

Often times, the obvious sticking point in any deal is\nagreeing on a valuation for a perspective acquisition. There are many factors\nthat can determine whether a company should fetch in the 2X range of EBITDA,\nthe 7X high end or in-between (most of our panel placed the typical value in\nthe 3-6X range). Obviously, that span represents millions of dollars and a\nlifetime of blood, sweat and tears invested, so where that final valuation lands\nis a major point of contention. But not the only one.<\/p>\n\n\n\n

\"\"
Jeff Gau, Marco<\/figcaption><\/figure><\/div>\n\n\n\n

\u201cSome dealers will have a very large customer that may skew\ntheir business a lot,\u201d noted Jeff Gau, CEO of Marco. \u201cAn MPS deal could be a\nlarge copier customer. Depending on where they\u2019re at in the contract, that\u2019s an\nelement of risk.\u201d<\/p>\n\n\n\n

Stale Goods<\/strong><\/p>\n\n\n\n

Inventories can be another cause for concern, according to\nGau, particularly if they have sat for a year or more. A dealer would look upon\nolder inventory differently than a local bank, and Gau (for one) is skeptical\nabout whether older material on hand will actually ever be consumed.<\/p>\n\n\n\n

Another element that can make an acquiring dealer take pause\nis if the prospective acquisition is coming off its best year by far. \u201cIt\ndoesn\u2019t have to be a red flag, but it\u2019s a flag,\u201d Gau said. \u201cSo we\u2019ve got to\nvalidate how that\u2019s going to be sustained. It\u2019s one thing to get to a certain\nlevel, but how are you going to keep it there?<\/p>\n\n\n\n

\u201cSometimes, with the addbacks to EDITDA, the dealers will\nsay they invested a lot to get their managed IT practice going, and it really\ndidn\u2019t work out. Well, that might not be considered an addback because it\u2019s\nstill there, they still have the managed IT business, and they want us to pay\nfor it.\u201d<\/p>\n\n\n\n

\"\"
Chip Crunk, RJ Young<\/figcaption><\/figure><\/div>\n\n\n\n

Chip Crunk, president and CEO of RJ Young, notes that sellers\nfall primarily into three categories: those who are having cash issues, partner\nissues or are looking for an exit strategy. Each one, he adds, present unique\ndynamics that call for a tailored approach.<\/p>\n\n\n\n

It is easy to determine when a deal is going to fall apart,\nand that\u2019s generally at the onset of discovery. \u201cBeing in the industry a long\ntime like we have, I kind of know who the quality players are and who the shaky\nones are. It\u2019s important to know the ones to be really cautious about as you\u2019re\ngoing through the process.\u201d<\/p>\n\n\n\n

\"\"
Dan Ruhl, Oval Partners<\/figcaption><\/figure><\/div>\n\n\n\n

The model is different for those companies like Flex\nTechnology Group, where the owner is staying aboard and reinvesting in the\ncollective company. Dan Ruhl, a principal with Oval Partners, notes that given\nthe different mindset in the approach, not all prospective additions to the\ngroup will have a strong sense of what their business may be worth. Thus, when\nthe offer is made and the value doesn\u2019t work for the business owner, that is\ngenerally the biggest sticking point.<\/p>\n\n\n\n

\u201cIf we work through all of the other issues with the\nbusiness owner, we\u2019re normally getting to the finish line,\u201d Ruhl noted.<\/p>\n\n\n\n

Due Diligence<\/strong><\/p>\n\n\n\n

\"\"
Dan Cooper, Novatech<\/figcaption><\/figure><\/div>\n\n\n\n

Getting financials to pass the due diligence process is\ngenerally the area where most deals fall apart, says Dan Cooper, president and\nCEO of Novatech. By the same token, a red flag doesn\u2019t automatically mean a\ntransaction will not reach the checkered flag.<\/p>\n\n\n\n

\u201cMost stumbling blocks do not have to derail the deal; they\nwill just set the train on a longer path until close,\u201d he remarked.<\/p>\n\n\n\n

\"\"
Jim Sheffield, UBEO Business Services<\/figcaption><\/figure><\/div>\n\n\n\n

That is where experience and tactical patience comes into\nplay. Jim Sheffield, president and CEO of UBEO Business Services, notes that\nsellers can become impatient with a due diligence process that is lengthy and\nin-depth. But buyers owe it to themselves, and the seller, to make sure the\nnumbers are fully vetted.<\/p>\n\n\n\n

\u201cWhen you\u2019re paying good money for an asset, you\u2019re going to\nwant to look at it thoroughly,\u201d Sheffield added. \u201cIf (sellers) don\u2019t understand\nthat and get frustrated, that\u2019s probably something that can get in the way of\nthese deals.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

In conjunction with this month\u2019s state of the industry focus on mergers and acquisitions, we\u2019d like to provide you with a look at the various stumbling blocks that can either stall or completely stymie a deal before the final contract is signed. Often times, the obvious sticking point in any deal is agreeing on a valuation for a perspective acquisition. There are many factors that can determine whether a company should fetch in the 2X range of EBITDA, the 7X high end or in-between (most of our panel placed the typical value in the 3-6X range). Obviously, that span represents millions of dollars and a lifetime of blood, sweat and tears invested, so where that final valuation lands is a major point of contention. But not the only one. \u201cSome dealers will have a very large customer that may skew their business a lot,\u201d noted Jeff Gau, CEO of Marco. \u201cAn MPS deal could be a large copier customer. Depending on where they\u2019re at in the contract, that\u2019s an element of risk.\u201d Stale Goods Inventories can be another cause for concern, according to Gau, particularly if they have sat for a year or more. A dealer would look upon older inventory differently than a local bank, and Gau (for one) is skeptical about whether older material on hand will actually ever be consumed. Another element that can make an acquiring dealer take pause is if the prospective acquisition is coming off its best year by far. \u201cIt doesn\u2019t have to be a red flag, but it\u2019s a flag,\u201d Gau said. \u201cSo we\u2019ve got to validate how that\u2019s going to be sustained. It\u2019s one thing to get to a certain level, but how are you going to keep it there? \u201cSometimes, with the addbacks to EDITDA, the dealers will say they invested a lot to get their managed IT practice going, and it really didn\u2019t work out. Well, that might not be considered an addback because it\u2019s still there, they still have the managed IT business, and they want us to pay for it.\u201d Chip Crunk, president and CEO of RJ Young, notes that sellers fall primarily into three categories: those who are having cash issues, partner issues or are looking for an exit strategy. Each one, he adds, present unique dynamics that call for a tailored approach. It is easy to determine when a deal is going to fall apart, and that\u2019s generally at the onset of discovery. \u201cBeing in the industry a long time like we have, I kind of know who the quality players are and who the shaky ones are. It\u2019s important to know the ones to be really cautious about as you\u2019re going through the process.\u201d The model is different for those companies like Flex Technology Group, where the owner is staying aboard and reinvesting in the collective company. Dan Ruhl, a principal with Oval Partners, notes that given the different mindset in the approach, not all prospective additions to the group will have a strong sense of what their business may be worth. Thus, when the offer is made and the value doesn\u2019t work for the business owner, that is generally the biggest sticking point. \u201cIf we work through all of the other issues with the business owner, we\u2019re normally getting to the finish line,\u201d Ruhl noted. Due Diligence Getting financials to pass the due diligence process is generally the area where most deals fall apart, says Dan Cooper, president and CEO of Novatech. By the same token, a red flag doesn\u2019t automatically mean a transaction will not reach the checkered flag. \u201cMost stumbling blocks do not have to derail the deal; they will just set the train on a longer path until close,\u201d he remarked. That is where experience and tactical patience comes into play. Jim Sheffield, president and CEO of UBEO Business Services, notes that sellers can become impatient with a due diligence process that is lengthy and in-depth. But buyers owe it to themselves, and the seller, to make sure the numbers are fully vetted. \u201cWhen you\u2019re paying good money for an asset, you\u2019re going to want to look at it thoroughly,\u201d Sheffield added. \u201cIf (sellers) don\u2019t understand that and get frustrated, that\u2019s probably something that can get in the way of these deals.\u201d<\/p>\n","protected":false},"author":166,"featured_media":35392,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[1650,82,87,1638],"tags":[3487,545,501,3510],"_links":{"self":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts\/35613"}],"collection":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/users\/166"}],"replies":[{"embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/comments?post=35613"}],"version-history":[{"count":1,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts\/35613\/revisions"}],"predecessor-version":[{"id":35614,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/posts\/35613\/revisions\/35614"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/media\/35392"}],"wp:attachment":[{"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/media?parent=35613"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/categories?post=35613"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.enxmag.com\/twii\/wp-json\/wp\/v2\/tags?post=35613"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}