According to CompTIA roughly 40% of the Channel is looking to retire over the next decade, this leaves a lot of business owners who will likely look to exit their business and put enough money in the bank to see them through their retirement years. In this article, David Dungay speaks to several Channel experts for hints and tips on starting a Channel business in 2017 and maximising the value that business when it comes time to exit.
Starting a Channel business in 2017 is not an easy journey to embark on. However, with the right building blocks in place and a clear strategy there is no reason your business can’t thrive. We asked members of the Channel their thoughts on starting a business in the current climate and what some of the common pitfalls to be avoided are.
Nick Brandon, Sales Director at reseller First Office said, “A lot depends on how much investment you have. If you don’t have much, then growing organically is very difficult as you need support and back office staff to support the sales and accounts. Deciding on where your focus is can be difficult. Do you focus on a local area selling multiple products or a larger area focussed on a smaller number? Getting the marketing right is tricky if you aren’t experienced. Plus, deciding on your back office applications such as CRM, service management etc is a big factor. It is more difficult now with such a complex landscape. Decide on your priorities and ensure you keep time back for building a pipeline.”
In March, Venus Business Communications was acquired by Metronet (UK). Venus was established in 2005 by Brian Iddon and Justin Keery and today is a network operator providing customers in London with superfast, low latency, high speed fibre Internet.
Brian Iddon, Director, commented, “The most common pitfall for a channel businesses looking to build a company for sale is to not be focussed enough in the early years. It is important to have a clear proposition in the market, be focussed on where you can add value and be very customer centric. Often a company can focus on trying to do too much, becoming a ‘Jack of all trades’ and a master of none. The Venus growth model was to establish ourselves as the premier network provider in London. Today we deliver revenues of £7.8 million in sectors that place a high value on low latency and superfast connectivity for mission critical data. We became an attractive proposition for buyers looking to expand their business both in London and these important sectors.”
Adam Zoldan, Director at Knight Corporate Finance, added, “In the early years the most common issue we see is with funding. It’s the compromise between investing in your business and taking profits. By investing in your business you are taking on new staff, spending on marketing and it tends to lead to growth and more customers.
Equally, for many of our clients their business is their only source of income and they need to take profits. There is a compromise to be struck so they can lead life as they want to but also have a focus on growing their business. Fortunately now we are seeing far more access to a range of funding options which enables a small business to move out of that start-up and development phase and flourish.”
Hockey Stick Growth
Growth is fundamental to the success of any business and if you are looking to exit and ride that Ferrari into the sunset getting it right will pay dividends in the future. So what is the secret to building sales growth?
Russell Lux, CEO of Telcoswitch, commented “Business growth is why most of us run the gauntlet of business ownership. That wonderful hockey stick curve indicating that we are on a trajectory to make our competitors quake. It can be challenging getting there, lending isn’t always readily available to start ups and creditors can be unsure of even minimal lending to those with only a couple of years accounts behind them. Then there is the massive pitfall that successfully growing your sales can produce, the dreaded cash deficit. Sales are easy to grow but get a couple of bad payers and all of a sudden you’re playing bank. It is a tricky balancing act but failure to watch sales and cash forecasts can easily be the undoing of a business, even a large one. There is no point growing your sales if you are simply creating a greater and greater cash deficit.”
Andrew Dickinson, MD of Jola, commented, “Focus attention and investment on sales and build a support network that can in-fill other areas for free. Some suppliers will provide you with brandable collateral and contracts and this will save you thousands in legal and production costs. Also, it makes sense to make sure your end user contract terms fit with those of your suppliers.
Plenty of people will offer you free advice but most of this is probably not worth having. If your suppliers are run by true entrepreneurs like you they can help you avoid some of the pitfalls. If you are a seasoned entrepreneur it is just nice do business with likeminded people with whom you can share ideas and problems. Find experts in your suppliers that can help in specific areas. There are some amazing marketers, sales people and technicians in the channel and they have a vested interest in helping you grow your business.”
Nick Blong, Corporate Finance Advisor at Evolution Capital commented, “Given the time, the will and necessary skills to complete an M&A programme, growth can come from a well-honed strategy of buying businesses, gaining thorough synergies and ensuring each purchase increases the value of your business by more than is paid. Success in M&A relies on great strategy and skill in execution. Funders will be far more receptive to a clear strategy than they will to supporting a reactive opportunity. Be proactive and find targets that fit the strategy, not the other way round. With a well-defined process and a good knowledge of the markets in which your targets operate, you will have a far better chance of building your business.”
Maintaining the vision
Having a clear vision from day one of your business is essential if you are looking to sell as there could be several potential headaches avoided down the line if your strategy is clear from the outset. Realise where your value is and think about how certain products will impact your value down the line.
Lux continued, “The value is in your products and your customers so ensure that you haven’t created an ogre of a product set with diverse offerings that do not fit with any potential acquirer, if you are selling hosted don’t all of a sudden add utilities or if you do be prepared to carve this out of the potential sell as this could limit your appeal enormously.
Bespoke systems often sound like they will give you a USP but again think about the administrative nightmare of integration, if there are enormous overheads involved in buying your business then it will affect your value.
Dickinson commented, “If you are building towards a sale, think about who might buy you and what their criteria might be. Most resellers sell their customer contracts rather than the shares they own in the company. If this is you, your business will probably be valued on a multiple of gross margin between 12x and 36x. Recurring margin on long-term contracts push you towards 36 and non-recurring margin or monthly contracts towards 12.
How easy will your customer contracts be to migrate? Do you have full contact details of your customers? Is the billing data easy to export? How easy will it be for your purchaser to deal with your current suppliers? Do your current suppliers have anything in their contracts with you that require you to ask permission before you sell the contracts or the company? If so, have this removed as it puts off their competitors from considering buying you.”
Nick Blong, Corporate Finance Advisor at Evolution Capital commented, “Reacting to lucrative sales opportunities is inevitable, but businesses built on this alone, without a clear focused sales strategy will result in being everything to all people. Moreover, there will be a possibly to become dependent on one or two large customers, dominating the customer base which in turn will reduce value and increase risk for a buyer.”
Preparing for Sale
If you have managed to get into the enviable position where you have an established business to sell there are some crucial steps to take to ensure that a transaction completes and you get the maximum value for your business.
Iddon says, “I believe there are three important factors to consider as you approach a sale of the business. The first is to ensure that you identify a prospective buyer that is the right fit for all concerned. The second is to be sure that your accounts are in order, filed on time, up to date and credible with future forecasts that you can deliver confidently. The third is to get professional support you can trust. We used RPL Mergers, a specialist in technology mergers and acquisitions to help us through the sale process. There are a variety of companies in the market depending on the size of your business and it’s important to get a good fit as you will need experienced trusted advisers throughout the sales process.”
Lux commented, “Get your management information in order, if you are disorganised with your key MI then it will raise questions about other information you are supplying. Ensure your forecasts, pipelines are realistic and in keeping with previous performance, demonstrate trends. If you are about to triple your margins and sales in the next 12 months then it will raise question as to why you are selling now surely you would wait to realise the upside.
Know why you are selling – most acquirers will ask, they are looking for tyre kickers and experienced acquirers won’t be interested.”
Zoldan continued, “Preparation, preparation and preparation is the way to achieve the goal when exiting your business. You need to be able to articulate your goals and put a strategy in place to deliver them.
By the time you get to this point you should have your hands on some high quality management information. You should be able to deliver consistent information on request and once you have selected a party the ability to deliver consistent and timely information will instil a great deal of confidence in any prospective buyer. When buyers are confident in the company they are looking to acquire the transaction generally happens. Sometimes buyers have a wobble when they see inconsistent information, nine times out of ten that will be a major reason for a deal falling over.”
Lux added, “don’t forget synergies! Anything that is an overhead in your business today but which will no longer be required by the acquirer due them already having this in place i.e. rent on premises, billing platforms, outsourced contracts etc should all be discussed in terms of adding back in margin and ultimately pounds to the value.”
Building a Channel business is certainly not an easy road to success which is why once you decide to leave your business behind its important the hard work is rewarded. Having an end goal in mind suddenly brings some purpose to your business, it will impact the products you sell and the contracts you secure with your customers. If this is the route you want to go down then it’s important to keep your eye on the prize.