Securing maximum value

What options do channel companies have when it comes to mergers, acquisitions and raising finance? Comms Business talks to channel companies who have gone through a process and financial experts to find out more.

Despite the unsettled economic environment in the UK and beyond, the Channel remains ripe for investment. Evolution Capital is an independent corporate finance consultancy that specialises in IT, telecoms and technology businesses. In recent years, the company has steered deals for key channel players including Nine Group and AdEPT Technology Group.

Fraser Dixon, mergers and acquisitions advisor, Evolution Capital, explained the broad trends he is seeing in the channel around mergers, acquisitions and raising finance. He said, “In our space, being exclusively telco and IT, there is still plenty of activity. Appetite and multiples remain healthy for strong businesses which are well-presented, meticulously prepared and clear for acquirers to both interpret and digest.

“That is probably most key at this point as buyers are spending wisely with the cost of debt being high. While this cost will start to more noticeably shift as we near H2, it should be held in mind.”

Dixon added that whilst the mergers and acquisitions landscape remains buoyant, the detail matters more than ever before. Investors and lenders are being strategic about where they place their efforts, and this calls for robust preparations.

Dixon explained, “While appetite for funding remains strong, lenders are now able to be far more particular with the opportunities they back. This, along with the rates put forward, are very much dependent on the preparation which goes into the proposition, and this drives confidence.”

Best practices

In terms of the best practices channel companies should keep in mind when thinking about their corporate finance options, Dixon, from Evolution Capital, explained why it is important to stand out.

He said, “The market is incredibly busy, with acquirers often sifting through dozens of opportunities, trying to identify those which offer the best fit and potential to quickly add value into their business. Being able to quickly and easily differentiate these ‘premium’ businesses from the noise is incredibly important, and something which those thinking of an exit should certainly add to their list of considerations.

“Being able to prove timely and, ultimately profitable, integration through concise, well-prepared documentation is more critical than ever.

“The preparation to the business itself is also incredibly important, with the ability to really build-in value through a longer preparation process entirely achievable. The term ‘preparing for sale’ is not simply a case of arranging your balance sheet and profit and loss.

“It is analysing your billing data, management account information, addressing any contract issues, customer concentration; so much more. Up to date run-rate recurring gross profit calculations are a key valuation metric we are seeing at present, and this information should form the base of the most real-time, accurate revenue and cost of sales information.

“This cost of sales is especially the pertinent with resellers and wider channel partners, as it should clearly outline sell/buy prices and suppliers. This is a further area where it is possible to identify opportunity to unlock additional shareholder value and, typically, cannot be gleaned from management account information alone.”

Maximum value

Carrying out a process might feel daunting for an owner, CEO, or managing director that hasn’t gone through a process. Yet there are similarities with other financial services we might have experienced.

Dixon explained, “Think about selling a house. You want to go with the best estate agent in your area; one that will attract your target buyer, at your target price and take away the headache. They will come and take photos, edit them beautifully and produce a glossy brochure for you.

“Now, picture an alternative agent who has the capabilities to extend and architecturally remodel your house, redecorate it in-line with the latest styles, landscape your garden and transport the entire plot to a desirable, gated location in the catchment area of one of the country’s top schools.

“Before this, they will have carried out a complete structural survey and fixed any issues, before also upgrading your insulation. This level of preparation is more of a ‘must-have’ than a ‘nice-to-have’, if realising maximum value is on your agenda.”

External support

Bringing in external expertise and support can be key to achieving the best outcome for a business, and Evolution Capital is experienced in helping channel companies manage transactions, whether that’s buy-side or sell-side.

Dixon said, “Quite simply, it depends on which advisor you partner with, as scope of works vary drastically with each organisation. There are typically around seven due diligence workstreams in an average process, including financial. Ensuring you work with a party who clearly defines the needed support they will provide you is incredibly important.”

Dixon emphasised the importance of prioritising tax advice. He said, “Tax advice is certainly a point we would also strongly advise that you secure, as attempting to save fees in this area almost always costs shareholders more, and this relates to how the consideration is handled, not just through tax due diligence. Legal advice is clearly a prerequisite, and engaging with a specialist in the field is recommended, as we have ourselves previously supported less experienced legal teams in the final stages of SPA negotiations.”

There is no secret to deciding on the best consultancy for your business, but many channel companies find it easier to work with those who understand the Channel.

Dixon said, “Working with a sector specialist is the first recommendation, rather than a generalist advisor or broker. We would always recommend speaking to past clients, as this not only provides the confidence on delivering to promises, but also lets prospective clients more fully understand the difference between varying consultants. Track record in the sector is also something to dive into, though sellers must remember that a generalist completing a couple of MSP deals does not necessarily make them an industry expert.

“Choose an advisor who is long-standing in the sector; one which not only has the demonstrable relationships with multiple premium buyers to ensure that your proposition is heard among the noise, but also one which frequently stays abreast of changes and challenges in the sector. Someone who is able to understand the commercial aspects of your business and therefore unlock any potential routes for adding additional value for you.”

What is important is that you work with a consultancy who can ensure your business’ best assets are made clear to investors or prospects. Dixon explained, “Financial acumen is of course equally key. In the event of a sale, buyers will show little appetite or interest in your management accounts and balance sheet simply being presented to them. They want to understand your business and what makes it special. They need the deep analysis into services, contracts, customers, capabilities; all of it.

“If the consultant you work with takes a soft approach to the detail, this not only masks your intrinsic value, it also risks any deal falling over entirely during the process.”

Learning from your peers

For resellers, MSPs and other channel companies, keeping an eye on other transactions across the market can be eye opening. There are often learnings that can be shared, and finding out if your peers would have done anything differently if they went through a similar process can be advantageous. ETB Technologies is an owner-operated enterprise IT reseller business that was founded in 2001. The company was majority acquired by the Swedish investment company Röko last year.

Nick Stapleton, managing director at ETB Technologies, discussed his experience. He said, “Having grown into one of Dumfriesshire’s biggest local employers, having a succession plan had been top of my mind for several years. In late 2021, we engaged with Swedish investment company, Röko, to consider taking a majority stake in the business, which they did in 2022.

“While I had previously been approached by investors, I was clear on what I wanted for the future of the business. In particular, I felt it was important that any potential partner would support the company’s growth while allowing us to retain our culture and independence.”

For Stapleton, it was important the business would continue to operate as normal following bringing new investors onboard. He explained, “Röko have essentially been hands-off when it comes to the running of the business, other than some of their team sitting on our board. So bringing Röko on board has added to our financial strength, and is supporting our growth internationally while allowing us to continue operations as normal. This approach is working well for the business and has not impacted headcount.”

Towards the end of 2022, Berry Technologies Groupwas acquired by Babble Cloud Limited. Berry Technologies Group was advised by BDO, led by partner Duncan Lamb, which provided sell side lead advisory to the shareholders.

Paul Hallam, shareholder and director of Berry Technologies Group, highlighted the importance of working with an advisor who will persevere to achieve the best outcome. He said, “We are very grateful for the support of Duncan, James and Sam. Their hard work, dedication, persistence, and experience were invaluable in getting us through the process and delivering a superb outcome for the shareholders and the business going forward.”

Duncan Lamb, partner at BDO LLP, added, “We were delighted to support Paul, Simon and Jo-Anne on the sale of Berry Telecom Group to Babble. The transaction creates an exciting partnership for both companies by combining Berry’s fantastic reputation in the telecoms sector with Babble’s scale and UK-wide capabilities. The combined business has very exciting growth plans and we look forward to seeing the partnership achieve their ambitions.”

In February of this year, Knight Corporate Finance advised the shareholders of Zest4 on its strategic investment from Focus Group. Zest4 is a unified communications provider, and now operates alongside Focus Group’s existing direct channel operation. The investment will be used to accelerate new business growth opportunities, extend the portfolio of products and services for the channel and create a scalable channel business.

For Mandy Fazelynia, CEO of Zest4, having an existing relationship with her advisors was an important aspect of delivering the right outcome for the business.

She explained, “We have known the team at Knight for many years, and they have always been there when we have needed informal advice on various strategic opportunities. When we decided to undertake a formal process, we already had an appreciation of their sector knowledge, and they knew Zest4 and our culture.

“It was clear that Knight had strong relationships at CEO level with every party we wanted to include in the process and were able to deliver a genuinely diverse range of offers from some fantastic businesses.

“We selected Focus as they were able to meet the individual aspirations of all our shareholders with a deal that enabled all shareholders to re-invest, Freddie and Kevan moving to an advisory role, whilst allowing myself and the management team to continue leading the business and to benefit from Focus’ scale and ambition moving forwards.”

The transaction was led by Paul Billingham and Dom Lillie of Knight Corporate Finance, supported by Jack Burgess and Ethan Devine. Paul Billingham, director at Knight Corporate Finance, added, “We have known the team at Zest4 for as long as we have operated Knight, and to be able to work with the team to secure a transaction that includes an investment to propel the business over the next few years for Mandy and the team, is one we are very proud of.”

Evolution Capital’s Dixon added that, whilst his company cannot speak for companies who have gone through a transaction, there are common areas that can hinder effective deal-making.

He explained, “Many clients we represent have worked with alternative advisors and brokers alike, along with attempting to navigate solo through past failed deals. I would not speak for them, but common themes are a lack of understanding into the later transaction process and due diligence, incorrectly believing dealmaking is simply a marketing exercise. There is also ensuring the opportunity is not only seen but understood by the right potential buyers.”

Dixon summarised the best path forward for any company looking to enter into a process: “Failure to prepare is preparing to fail. A cliché, but this old adage applies more to corporate finance in our sector than any other. Take your time. Prepare. A good advisor will never rush you and you only want to go through the process once.”

This feature appeared in our June 2023 print issue. You can read the magazine in full here.