How To: Selling Your VAR Business
Whether a VAR primarily provides services or focuses almost exclusively on products, prospective sellers should take certain steps to ensure a smooth and profitable transition from business owner to amateur tennis ace. Misconceptions abound, executives cautioned, and it's wise to plan the sale of a business as far in advance as possible.
The Bottom Line
Chicago-based VAR Logicalis, which recently acquired STI and Eisco Technology, doesn't stop at extensively reviewing financials and market positions when making an acquisition; the company also researches partner relationships.
"Logicalis' goal is, and has always been, to dramatically grow our revenue through the acquisition of complementary and very successful integrators of our top product lines, which include HP, IBM, Cisco and EMC," said Mike Cox, Logicalis' CEO. "Our acquisition of STI quickly takes us to a whole new level in our IBM sales and service capabilities."
Although profitable businesses generally command a higher price tag, executives can sell organizations that operate in the red, said Jeff Gold, president of Trailmap, an Athens, Ga.-based business consultant, who has owned and sold 10 companies, and who works with both SMBs (small and midsize businesses) and enterprises.
"Both are salable. A lot of people have a business that's not doing well and close it down at a time when another company might have been interested in buying it," he said. "Buyers fall into two primary categoriessomebody who wants to take a profitable business and build it up, or somebody who wants to buy a business that 'synergizes' well with something else [he's] doing, whether or not it's profitable."
Those solution providers that survived the recent lean years generally are extremely salable, said Jody Rookstill, vice president of sales and marketing at Valuation Broker, which brokers valuation services for companies with sales of $100,000 to $30 million per year. By including owners' salaries, for example, a business's bottom line instantly improves, he said.
"Those that were around, that started in the mid-1990s, have a lot of bigger groups and individual investors looking to buy them," said Rookstill.
Name Your Price
Of course, one of the first questions prospective sellers want answered is the value of their business: how much they can expect for their company.
"Don't be unrealistic," said Rookstill. "Nothing kills a deal faster than unrealistic expectations of the selling group. You chase off a big chunk of buyers by pricing yourself out of the market."
While some VARs already have relationships with CPAs or attorneys who can help determine the value of their business, VARs also may consider using a valuation service, said Rookstill. "It sets a baseline value," he said. "We've found the sales process goes a lot faster when you have a valuation document."
Since it brokers valuations through a series of partners that specialize in different businessessuch as VARs and integratorsValuation Broker claims its valuations are 30 percent to 40 percent less than comparable services through other companies. Typically, Valuation Broker gets quotes from a handful of valuation companies and provides this information to the prospective seller, who chooses whether to use the service. "Opinion of valuation" reports start at about $1,400 for smaller companies, Rookstill said.
"Our services to [VARs] don't cost them anything," he said. "We get paid by the valuation firm and the [real estate] brokers. We stay involved from a quality-assurance perspective."
Since many VARs and integrators differentiate themselves based on relationshipswith their vendors, their employees and their customersprospective sellers must take steps to document how to retain these assets after the sale.
"When you sell a business you have tangible assets, and then you start getting into the intangibles like personnel," said Rookstill.
Well-crafted contracts with key employees, as well as strong written deals with a wide breadth of clients, help cinch a deal, he said.
But written documents are not always necessary, countered Gary Martin, president of Nevada Business Systems, a Las Vegas-based Konica Minolta reseller, who earlier this month sold his 20-employee dealership to Konica Minolta. "Do we have an employee contract? No," he said. "Do we have commitment, desire and determination? Yes. It all boils down to personality. A service tech is looking at security for himself and his family. A sales person is looking to make more money."
Of course, the onus of honoring these contracts and continuing strong relationships then falls squarely on the buyer's shoulders. "The buyers need to figure out what they need to do to retain key employees," said Gold. "That's just going in and talking to them during the [sales] process, and bringing them into the process."
Sellers must create a written plan that details their exit strategy. Often, former owners are asked to stay for a transition of anywhere from 90 days to several years, said Rookstill. Generally, sellers aren't encouraged to take the money and run, he noted.
"I will stay on for a couple of years. We've got it in writing. It lends some credibility to the employees," Martin said. "At this stage in my life, health becomes an issue. I'm sure in the next two, three years, a successor will be named."
Often, it's wise to abbreviate the transition period, said Gold. "I would sever all ties with an existing business other than a transition period or consulting for so many hoursbut specify that. If they need you after that, you negotiate it at that time," he said.
Sellers planning to remain in the same industry must disclose that fact to prospective buyers, said Gold. "If you're going to be involved in a similar business or consult, make it clear to all parties," he said, warning against poorly written non-compete clauses that last too long.
When a business has some potential or real problems, sellers should inform anyone interested in acquiring the company, said Rookstill.
"If there are skeletons in the closet, be very forthcoming with prospective buyers. Be upfront," he said. "If there are things you know are a definite weakness or [a problem] from the past, be upfront. Buyers are very savvy. If it comes out later rather than sooner, more often than not you've lost your prospective buyer."
By doing so, sellers often can keep a deal aliveand preserve their integrity and reputation in the industry, Rookstill added.
Gold, who generally recommends selling a company's assets while retaining the name, warns sellers to protect themselves from any possible mistakes the buyer may make.
"Sell everything as-is. You're not selling it as-is in the sense that you're selling bad product, but because so many things are subjective," said Gold. "Somebody can buy a business. For whatever reason, they want to change everything the first two weeks they're there. You want to be careful you don't do anything that makes you liable for the new owner's mistakes."
By selling assets, rather than the entire company, both buyer and seller are clear on what is in play, he said.
"There are so many things, when you sell an entire business, that can come back and make trouble for you," he said. "When you make an asset sale, it's real clear what you're selling and what you're responsible for. Both sides end up a lot happier in the end."
Ideally, channel company owners will operate their business as if they were on the marketeven if they have no immediate, or even long-term, plans to sell, said Rookstill.
"Most business owners are so focused on running their company, they don't develop an exit plan," he said. "If you run your business always assuming you'll be selling in three months, when you're ready to sell, it'll all be done. You'll get a premium over the guy who's working day-to-day and who doesn't have a plan in place."