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Profitably Selling Your Business: Mergers & Acquisitions

26 Nov, 2007 By: Tom Callinan imageSource

Profitably Selling Your Business: Mergers & Acquisitions

This is the second piece of a two-part article about mergers and
acquisitions. This article is about being acquired or selling a business as
opposed to purchasing a company—the focus of the first piece.

The Acquisition Landscape

Over the past 25 years, there have been several large consolidators
acquiring office equipment dealers throughout the world—Alco Standard, Danka,
Hillman, Erskine, and Global Imaging to name a few.  In addition, the Japanese
manufacturers have also gotten into the acquisition game, particularly Ricoh,
Toshiba and Sharp. But the largest and perhaps the most significant acquisition
occurred in April 2007 when Xerox acquired Global

Imaging Systems for $1.5 billion. While consolidation acquisitions appear to
have run their course, there still are many acquisitions occurring in the
imaging industry albeit on a smaller scale, and predominantly in local markets.

There are several reasons why a dealer principal may want to sell his/her
business.  Besides the obvious—cashing in the equity, owners usually sell
businesses in this industry because they are approaching retirement, losing the
“fire” needed to stay competitive, estate-planning purposes, or they simply want
to do something else. 

Regardless of the rationale, every seller wants to maximize the value of the
business and achieve the best possible terms from acquiring interests.  Selling
a business is strategic, which requires both planning and performance in order
to optimize the proceeds.  Clearly, distressed sales and/or poor planning will
result in much lower yields.

Maximizing Value

As I described in part one of this series, acquisition values are assigned
by two broad categories—size of installed base or as a multiple of earnings.
Both of these factors require strategies and planning objectives that should
span years, as selling one’s business is clearly a long-term proposition. While
the size of the installed base is more difficult to impact, earnings can be
enhanced with focus in the following areas:

  • Expense reduction is the quickest path to increased profitability. Make
    sure that administrative, sales and service expenses are equal to or better
    than the industry norm. This usually revolves around headcount and the
    corresponding revenue per employee measurement. Salaries, sales compensation
    plans, and all discretionary spending should also be examined and challenged
    through this process.
  • Focus to the more profitable after-market revenue. Are you thoroughly
    analyzing equipment performance by model?  Is there a process by which CPC
    rates/contracts are reviewed and revised? How do you ensure that excess CPC
    toner isn’t being stored at customer locations? Are you identifying and
    removing older, less profitable equipment from your base?  Are your
    copies/prints per tech, revenue per employee and parts usage within industry
    average ranges?
  • Is your company maximizing cost reduction through the manufacturers’
    incentive programs—trade-in, growth bonuses, and rebate programs?  Optimizing
    these rebates/credits must be balanced with good inventory management; the
    objective isn’t to swell the inventory account, which could create
    obsolescence write-offs and reductions in value.
  • While most acquirers will recast financials, complete that exercise for
    them by excluding those expenses that will not be part of the new, acquired
    entity. In addition to your own compensation, provided that you are not
    staying on, you should also eliminate all other personal expenditures in order
    to increase the company’s margin, and therefore, acquisition value.

In addition to these profit and loss driven factors, there are a number of
other areas that could be improved to drive more value out of your business.
Some of these specific items are:

  • Balance sheet—acquirers will pay a premium for well-run companies with a
    strong focus to asset management. Inventory turns, DSO, DPO, and operating
    cash generation are critical indicators of quality companies and management
    teams.  Achievement of industry averages should be a minimum
    expectation—remember we are trying to increase the value of your company.
  • Install Base—a good mix of customer types throughout all segments is
    ideal.  Risk escalates as one’s customer base is highly concentrated with only
    a few large customers or in a particular industry.  A good example of this
    would be a state contract, which generates a large portion (20%+) of the total
  • Building, office and warehouse appearance are also important factors for
    any acquirer as it indicates organizational ability, attention to detail, and
    an overall positive perception of the owner and the company relative to
    quality. In addition to well-maintained facilities, it is important that
    safety and security be evident to even casual observers in order to protect
    hard assets, company records and personnel.
  • Customer satisfaction is certainly another measurement of a company’s
    value, which can translate into a higher purchase price. While an acquiring
    company may not shy away from an acquisition candidate with low customer
    satisfaction ratings, it will exhibit some pricing exuberance for those
    organizations with exceptional customer ratings. After all, they are buying
    the customer base and its future purchases.
  • Employee satisfaction and low turnover are other factors that can enhance
    the value of a business. Usually, this area can be supported by the results of
    an employee survey, or simply through turnover statistics. Career
    opportunities, good working conditions, solid communications, training
    programs, and a competitive compensation structure are the customary drivers
    of employee satisfaction, which generally result in higher productivity
    levels. Productivity drives value! 

The Process

After you have decided to sell your business and you have completed all the
required preparations, you might want to consider the use of an industry
acquisition/sale expert, who will guide you through the process, and hopefully,
maximize the proceeds. Usually, these experts have experience with the purchase
and sale of businesses, and as such, they can point out the pitfalls and develop
strategies that will be effective for your organization.

Regardless of whether or not you use this type of service, you must engage
professionals for legal and income tax purposes. The sale of your business will
probably be the largest financial transaction that you ever conduct, and this
professional investment will help to minimize both the legal exposure and tax
liability. It is critical to engage these services early in the process in order
to structure the transaction in the most favorable manner.

Engage multiple suitors to create a bidding process, which will provide
various choices, pricing and arrangements. The list of possible acquirers should
include the manufacturer whose line you represent, other manufacturers
predisposed to acquisitions, and local/regional competitors.

Insist on speed throughout the process, as the word will leak out over time,
which will affect your employee base, customers and possibly your negotiations.
Drive and manage this process yourself; do not delegate any aspect of this to

The Decision

While price is an important decision component, it isn’t the only factor.
Most sellers are very concerned about their employee base, and what the future
will mean to them.  Seek commitment on organizational structure, employee
benefit programs, and career pathing.  You must be very comfortable with this
element of the sale.

What role you play in the new organization may also be important to you. If
you want to stay and the acquiring company is in agreement, then secure an
employment contract with definitive responsibilities and compensation specifics.
Many times the person doing the acquisition isn’t the same person responsible
for running it.

Ten to fifteen years ago, the structure of most deals involved stock in the
acquiring company, which was good for some, but not all organizations. Today,
that is less prevalent as the large public consolidators have faded away. Defer
to your professional team of lawyers and accountants to make that decision.


Some business people believe that everything is always for sale, whether
that be a house, a stock, a rare collection of stamps or even a business.  And
while that may be true, the real question is whether or not it is prepared for
sale.  I cannot stress enough the need to be prepared for sale, which includes
strategies, action items and even business plans to maximize the value of your
business.  After all, you probably won’t have another opportunity.  Good Luck.

Tom Callinan is the founding principal of Strategy Development, a management
consulting and advanced sales training firm (www.strategydevelopment.org).
From 1998 – 2005, Callinan was an executive with IKON Office Solutions.  Prior
to IKON, Callinan was the  founder and CEO of Copifax, Inc, an INC 500
Company. Callinan graduated with honors from The Wharton School, University of
Pennsylvania and can be contacted at

or 610.527.3317.

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