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M&A the Right Way, Part 2: Evaluating M&A Candidates

Channel pros in the market to buy or merge need to thoroughly vet candidates for business strategy, financial health, and cultural fit. By Megan Santosus
Reader ROI: 
GROWTH by M&A is a solid strategy, provided the target company is thoroughly vetted by the business owner or a buy-side broker.
THERE ARE THREE PILLARS to a successful M&A: strategy alignment, financial alignment, and cultural alignment.
RATHER THAN LOOKING FOR an “identical twin” to acquire, focus on finding a firm that complements and enhances your growth plan.

IN THE QUEST to grow your business, acquiring or merging with another channel pro is a common strategy. According to PitchBook Data, M&A activity in North America topped $2 trillion in 2019, and nearly 20% of it occurred in the IT sector—the second highest percentage ever.

Still, while a successful M&A can expand both your footprint and revenue, a failed one can be demoralizing and expensive, so identifying and evaluating the right M&A candidates to pursue is all-important.  

Channel pros often give this process short shrift, however, according to Mike Harvath, CEO of Revenue Rocket, a Bloomington, Minn.-based consulting company that focuses exclusively on M&A in the IT services industry. Many firms, he says, take an “opportunistic” approach to M&A: They wait for a sell-side broker to call them, and then often force fit the candidates that are proffered into their strategy. "Usually that means a deal won't be as successful as it could have been, or it will just fail," Harvath says.

Three Pillars of Success

In Harvath's view, there are three pillars to a successful M&A: strategy alignment, cultural alignment, and financial alignment. "Channel companies look to buy another company at the right price or focus on the financial angle of the deal, thinking that if the price is right, the deal will work," he says. "It doesn't work that way."

A better approach is to have an established, organic growth strategy that has proven successful, “and make certain that your acquisition is a hand-and-glove fit into that strategy," he says. The overriding principle of a solid M&A tack, Harvath adds, is to accelerate your existing plan.

Strategic Alignment. Determining the most appropriate attributes of M&A candidates depends on the underlying specifics of that plan. "When a company comes to us that wants to grow through acquisitions, we first do a strategic review to figure out how big the company is, what the company can afford, how the company will finance it, and what the company wants to achieve," says Bob Dale, partner at boutique investment firm Austin Dale Group, of Austin, Texas, which provides both buy- and sell-side advisory services to technology companies.

Bob Dale

For instance, the goal may be to expand geographic reach or time-shift resources, or conversely, to co-locate or consolidate data center space locally. Channel pros that want to enter a new market or add a new product or service may decide to do it faster by acquiring or merging with another firm that has relevant experience. An M&A can also be an expedient way to add expertise to a company's ranks. "Based on the characteristics specific to their business," says Dale, "we come up with a list of what ideal targets look like."

Cultural Alignment. Discerning the culture of a prospective acquisition takes considerable time, but is an essential exercise. "A trustworthy seller is the first thing you want to look for," says Ramsey Sahyoun, head of M&A at Evergreen Services Group, a San Francisco holding company that has acquired 19 MSPs since January 2018. "It's more important than things you can see in a spreadsheet."

From Harvath's perspective, most IT business leaders are good judges of character and can decide after a short conversation whether another company is led by someone they can work with or not. Trust leads to productive conversations, which in turn lead to relationships where cultural fit is best determined. "You want to know what's most important to the owner or the management team," says Dale. How a company treats its customers and employees is critical, especially when a situation calls for a decision that is not black or white, he adds. If companies have divergent values in terms of customers and employees, moving forward with a deal is not prudent.

About the Author

Megan Santosus's picture

Megan Santosus is a Boston-based freelance writer and frequent contributor to The ChannelPro Network.

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