Fast-Growing SP Offers Peek at Acquisition Formula

And while interest in these transactions is on the rise, not many solution providers are well-versed on how to find the right partners for such deals and how to make the most of them.

Incentra Solutions Chairman and CEO Tom Sweeney says his company has followed a prescribed process in its growth-by-acquisition strategy. Together with organic growth, the strategy has increased Incentra's sales from $8.6 million in 2004, the year it was founded, to $66.6 million in 2006 and an estimated 2008 sales of $240 million once two additional companies are integrated for the full year.

The company's offerings include professional services, product sales, remote monitoring and management, and financial solutions.

Hailing from mostly telecom companies, Sweeney spent much of his career in marketing positions as a developer of products and services before starting up Incentra, perhaps giving him a different take on how to approach the acquisition process.

When looking for possible acquisition targets, Sweeney said Incentra seeks companies with the same expertise that it already offers—server computing, storage, network and security—but looks for those in geographic areas where the company does not currently have a presence.

Sweeney's company draws acquisition candidates from a list of the top VARs across the country. Then Incentra goes through and rates those companies based on the products and manufacturer brands they sell and where they are geographically.

"We have a scoring system on 30 different elements, and we rank them," Sweeney said. "We look at the top third of the companies and then we would start to contact them with an investment banker."

While the company has used this system to expand geographically, Sweeney said Incentra doesn't target a particular region at a time.

"But we try to stay away from companies that will overlap with existing operations geographically, because then you have to deal with cost reductions," he said. "Our focus is not taking cost out. It's growing revenues and margins faster."

Incentra currently looks at companies that make from $30 million to $80 million in annual revenues, but as the company has grown it has started to look at larger targets.

Often there is disagreement over how to value a company, but Incentra does have specific criteria for this, Sweeney said. Companies must also meet certain requirements.

"One of our requirements is that we want the prior owners to stay in the business and help us run it for at least the next 2 to 3 years," Sweeney said. To ensure that, Incentra offers an "earn-out" paid over a three-year period.

"That's one way to ensure success is to retain the management team," Sweeney said. And it's all part of the company's plan to "complete a footprint where we can service the major markets in the United States." Currently Incentra has operations from Chicago down to Texas and westward, and a recent acquisition has given it a presence in New York, New Jersey and Philadelphia.

Once an acquisition takes place the company looks to extract synergies, typically by broadening the product line of the acquired company. For example, before a deal the acquired company may not have sold Cisco products, but after the acquisition it will.

The strategy has been a successful one for Incentra, which completed three acquisitions in 2005, two in 2006 and two in 2007. The company has grown its staff to 280 and now has 15 offices.

"There's a difference between doing acquisitions successfully and having them become problems," Sweeney said. "When we acquire companies we do it to create synergies and to create higher gross margins. That has a better chance of succeeding than simply acquiring another VAR to be a bigger product reseller."