Considering the current trend of Private Equity snatching up Value Added Resellers, I thought I would share my opinion on what this means for companies being purchased, their employees, and their customers.
Let’s start with a question: Why does PE buy any asset? PE firms are able to identify undervalued assets. ‘Undervalued’ can mean the sum of the parts is greater than the whole, or that cutting costs can increase the value of the financials for a sale. These firms have a standard practice of buying businesses and then after steering them through a transition of rapid performance improvement and cost containment, they sell them.
A PE acquisition is about profit for the PE firm, not about the increasing the value of the business being purchased.
PE acquisitions are a means to financially engineering an end. Generally, this comes with significant headcount reduction, removal of senior personnel, selling-off of core or non-core assets, and an overall change in corporate culture. Essentially becoming a black box for employees, customers, and investors.
A VAR is about the people. I like to compare a VAR to a real estate broker. A prospective buyer or seller does not look for a broker, they look for an agent they are comfortable with. If the broker has a business model or practice that the agents do not like, they can easily move to a different broker and their customers will still buy from them, because there is a relationship. The VAR is like the broker and the agent is like the account manager.
Why are PE firms buying VARs? On the surface, there is usually complete agreement within a takeover, as most VARs have suffered from neglect, unrealistic performance targets, and have an over-compensated workforce. To further qualify, the financials for the resale side of a VAR are unlike most any other business and can look obnoxious. To an outsider, it can appear to be a smart planning exercise and seem as if it will turn a quick profit. However, the value in a VAR is the people, as I stated above. The value is made up of the relationships that each account manager has with their vendors, their customers, and with each other. The true value of the VAR lies in the knowledge the team has acquired over their career.
“Don’t worry, nothing will change” Maybe things don’t change for a month, or a quarter, or even a year. Adjustments are inevitable, despite the message that, “nothing will change.” Transformation is the very reason PE got involved in the first place: Buy. Change. Increase multiple. Sell. Implementing change around compensation, budgets, and investments, will not build a much-needed loyalty for the new firm and the company’s leaders. The PE’s primary focus is on the improvement of the financial health of the asset for the sole purpose of selling it. They are not focused on the customers or the employees. If you have not worked in an environment where financial metrics prevail at all costs, let me share a thought with you. Unless the market is booming and all metrics are trending up, the culture will be in a painful state, there will be no investments, and no programs to improve customer satisfaction. Cost cutting will become the primary focus and the employees will feel it.
What cost cutting really means at a VAR is reduced compensation for the revenue drivers (the account managers), removing over-compensated senior engineers, and lowering the support staff that assist customers. Essentially, cost cutting in a VAR means removing the “V” from a Value Added Reseller. By their very nature, a VAR has a high cost of doing business. A well-run VAR understands where to spend heavily and in which increments. Thriving VARs have owners, investors, and leaders that understand culture is the heart of the company.
Messing with people’s compensation, benefits, and ability to perform well in their job is the epicenter of culture deterioration.
This is simply my perspective based on what I am seeing in the current marketplace. This is not intended to criticize PE firms, as they are generally the smartest folks in the room. This is meant to highlight the people and culture factor inside a VAR, that many are not taking into consideration. Despite all of this movement, I believe starting a VAR in 2014 was the best decision I have ever made. We at EVOTEK believe customers need a partner that will help them through their transformational journey and provide fully integrated recommendations, from revenue to infrastructure. This is far beyond the model of just reselling products. With all of the PE acquisitions taking place, major opportunities are being created for employees, customers, and competitors. With support reduction and sales and engineering attrition, customers will be looking for new partners and employees will be looking for new employers. Give me a call, at EVOTEK people are our priority.