MERGERS AND ACQUISITIONS are part of Doberman Technologies’ hypergrowth strategy. Our managed services model of a third-party IT management firm scales very nicely, and our plan is to grow 15 percent or greater every year. While we will grow organically, our business plan also calls for multiple M&As over the next five years, with a minimum of two per year.
Whether you’re looking at M&A, transitioning from break-fix to managed services, or developing an exit strategy, planning is key. I’m a member of HTG Peer Groups, and that’s something they stress. Our plan spells out where we want to be in terms of the valuation of the company, how to get there, and eventually the exit of the principals.
For example, around 2015 Doberman made the shift to 100 percent managed services, but we were smart about it and did so incrementally. It was a process of identifying clients that didn’t fit the managed services bill, and helping them find another provider, which entailed a lot of communication and handholding. We also made sure Doberman’s transition to an MSP didn’t affect the bottom line, so we didn’t part ways with a client until loss of that revenue balanced out with new revenue; the process took about 18 months. We increased profitability significantly by working smarter, not harder, doubling revenues in just two years.
This year, Doberman completed its first merger with Nonik Technologies, another Michigan-based IT management company whose staff and operations are now under the Doberman brand. The entire process took about six months. It was a small transaction—a two-person firm with about 10 customers—so it was perfect to test the waters and learn from.
We are now actively working on developing and documenting a good due diligence plan that we can use as a guideline, with checklists for weekly and monthly tasks to qualify an acquisition accurately. We will likely target a similar or slightly larger firm next to solidify and verify the process. After the second one we will try to go bigger, but adhering to industry advice about not buying a business that’s greater than 20 percent of your size.
Do Your Homework
When pursuing your first acquisition, it’s useful to get outside counsel. We turned to Service Leadership, and had very informative conversations with advisers Paul Dippell and Brian O’Connell. The No. 1 piece of advice is to talk to everyone you possibly can and get advice from someone who’s done it before, even if it’s not an IT company.
Also, due diligence, of course, is so important. With our first acquisition we thought we were fairly diligent, and we were, but any amount of time you’re spending you need to multiply by 10—you can’t get enough information. The financials are important. You have to dive into how profitable the target’s agreements are, costs per hour for delivering an hour of service, and expenses like rent and owner compensation. If you don’t know how to read a P&L and balance statement and get value out of those, you’re in trouble.
You also need to understand your own financials:
- What is your true growth margin and profitability?
- How much capacity does your service team have?
- If you’re buying an understaffed business do you have extra hours of capacity or will you drown your service desk?
As a tech service company, we also want to get an idea of what technical standards exist, what clients are used to paying, what projects are outstanding—these are all the different conversations you need to have, so give yourself plenty of time to do the evaluation.
If there are very large deltas between how you do things and how the potetntial target does things, bring it up. If an owner isn’t really up to date on contracts and renewals, you may find yourself with a whole bunch of qualified leads that will pay below your market rate. If services are not priced right it could end up being a nonprofitable acquisition until you restructure those agreements.
Treat an acquisition like a new client. You’ve got to build rapport and trust, but you also have to do discovery, and help the clients find value for your new agreement. Present to clients up front that there will be changes, but they will be positive ones, and if there are price increases you need to ensure those clients understand the value they will be getting. Put yourself in the clients’ shoes.
Finally, make sure you’re ready, staffed up, and have a firm grasp of your financials and their financials, or you’ll be doomed to failure. In other words, have a plan!