Scale the Business Model / Buy Side
Challenge: A Midwest-based Valued-Added Reseller that primarily focused on PC resale and integration services had to reposition for growth. The reseller had $60 million in annual sales and earnings before interest and tax of $1.85 million. It had one primary location with approximately 90 employees. In addition, it had limited access to capital to grow the business going forward, and a platform that was not scalable to facilitate growth by acquisition. The reseller also had a lack of incentives to attract, train, and retain employees.
The reseller had a primary shareholder who wanted liquidity from the business. At the same time, the reseller wanted to add scalability to its business model and entice key employees to stay on board and deliver desired outcomes. What was needed was a strategic buyer that would recognize the value of a merge in entering new markets.
Solution: We developed a proposal that consisted of cash at closing, seller financing (promissory note), and a earn-out for exceeding agreed upon thresholds over a three-year period, providing some upfront liquidity for the shareholder.
The buyer viewed the integration more as a merger than an acquisition. It put incentives in place to retain key people. And, it allowed the target company to go from a deal valued around 5 times earnings before interest and tax to a multiple of greater than 6.5 times – A clear “win-win” for both parties.
Results for seller: The deal allowed for a liquid event for shareholders. The seller achieved nearly 100% retention for key employees and customers. The seller was able to leverage the combined buying power with original equipment manufacturers, resulting in better pricing. The seller was also able to provide existing customers with better service by utilizing a scalable platform for additional growth.
The seller maximized its earn-out by leveraging its sales and technical resources across the buyer’s existing customers, and through improved buying power, better systems and tools, and a scalable platform.
Results for buyer: The buyer was able to ultimately expand into five additional markets in three states and retain key customer and employee relationships. Revenues went from $60 million to $80 million in 12 months. For the same period, the service business as percentage of sales went from 3% to greater than 10%. Earnings before interest and tax improved from $1.85 million to over $3 million in the same 12-month period. Additional revenues resulted in the buyer achieving direct buying status with a specific manufacturer.