The Rise of the Mega Dealer (Part 1 of 3)
How Acquisitions and Organic Growth Are Bringing About the Latest Industry Transformation
Keypoint Intelligence was thrilled to provide the cover story for the January 2019 issue of the BTA’s Office Technology magazine. We've also published the full article for our bliQ and InfoCenter subscribers (must log in to view each). But now, right here, we’re equally as excited to bring this informative and comprehensive piece to the general public. Behold the first of three parts—happy reading!
The office equipment dealer channel has undergone tremendous transformation since its early days of selling typewriters, calculators, and office furniture. This transformation has not always been easy. One significant challenge was the shift from analog to digital. This transformation took several years, requiring big changes in infrastructure as well as investments in new technical talent. This evolution brought dealers to a new level, enabling them to tackle IT related environments. Today, the focus is shifting to bigger output equipment, IT services, and even future office technologies outside of the document industry. The journey has been difficult for some; acquisitions as well as competitive pressures have drastically reduced the number of office equipment dealers. There are now just over 2,000 dealers, compared to 7,000-plus in the heyday of the 1980s.
But the dealer community is stronger than ever, with strong levels of sophistication as well as profitability. And while competition is still strong, some view the office equipment dealer channel as being the strongest community of independent channels of any industry. Its local presence, family culture, and robust fleet of service and IT feet on the street give it a unique combination of strengths no other channel can provide.
Then there are the mega dealers in the US (those that generate more than $100M in annual revenue). Over the last five years, these organizations have grown in number from three to 13—and more are on the way. These dealers, like many others, have fascinating roots and a history of success. Much of this success has come through organic growth, but in many cases acquisitions have also played a role.
These are the stories of seven mega dealers in today’s office equipment industry (two dealers are presented here and three will appear in Part 2, with two more in Part 3.)
“There have been two milestones in the history of our company,” said Frank Gaspari, CEO of Flex Technology Group. “The first was when we opened our doors in 2005 with the goal of being a nationwide organization that’s clearly focused on MPS, particularly with enterprise accounts. The next occurred nine years later when we reached the $50 million revenue mark. At that time, we decided to aggressively expand our infrastructure and business model through our relationship with Oval Partners.”
The entrepreneurial spirit burns bright in him: During his 20s, Gaspari founded a couple of office technology companies in Chicago—Column Office Equipment and Image Manufacturing, an MPS house. He sold both to Global Imaging in 1999 and 2004, respectively.
And the results of the past three years? Today, FTG has become a $255 million operation, with over 1,000 employees, compared to a mere 200 employees in 2015. The company has its eye on reaching the $500 million milestone sometime in 2020. “It’s not a race, but we feel like it’s a realistic goal that we will exceed,” Gaspari said. “We’ve done four acquisitions in 2018 and we’d like to bring on $100 million more with new partners next year. The pipeline is made up primarily of dealers with $15 million to over $100 million in revenue.”
The company’s acquisition strategy is simple: FTG seeks like-minded businesses that are interested in reinvesting in the parent company—entrepreneurs that are passionate about the future and open to reinventing themselves. The continued success of the FTG M&A team can be attributed to its early involvement in the process. From onboarding to shared operations, the company supports the continued success of the acquired organizations rather than make any attempt to rebuild them. Today, all of FTG’s partners are singularly focused on organic growth initiatives and manage the concept of “low leverage, high profitability” with passionate employees who will fuel business.
Gaspari has a long history of growing business organically. During the ’08 recession, FTG went from $10 million to $15 million in revenue. As Gaspari explained, some verticals aren’t affected by recessions, so the best bet is to hound them. Conversely, when life is great, don’t be afraid to make difficult decisions, otherwise there will be double the amount of work at the next downturn.
|Frank Gaspari, CEO of Flex Technology Group|
The company sustained consistent growth for the following six years. By the time FTG had attained $50 million in revenue, it was the biggest privately held MPS organization in the US. At that time the company was providing MPS support in all 50 states, covering nearly 5,000 cities, according to Gaspari. That’s when Oval Partners entered the picture. FTG had always had an “MPS first” mentality, but with more capitol came more acquisitions, including Caltronics and the Connecticut-based MPS house Flo-Tech.
FTG’s mission is to increase revenue organically by 10 percent a year, top line. The company initiated a theme, FTG OG (organic growth) that all the companies have rallied around. The core source of organic revenue growth for the company will be office hardware, MPS, and production print, which Gaspari is confident will take a $15 million leap forward in 2019, thanks to partnerships with Canon, Konica Minolta, and Ricoh.
While many of FTG’s mega dealer peers have deep roots in managed IT, that’s one area that the company isn’t focused on today. “You can’t dabble in managed IT—you have to invest in it, have the right, experienced people, and stay committed to its success,” Gaspari said. “We understand you can’t be great at everything and that there’s a need for managed IT, but we’ve identified other spaces to pursue. Our train is rolling down the tracks really fast so we don’t want to derail it, and I’m comfortable with that.”
MPS is a $130 million a year practice for FTG, and it shows no signs of slowing down. Even though the profit pool has been shifting more toward hardware as a result of bringing more legacy copier dealers under the FTG flag, with its MPS expertise, it’s very clear that these same dealers will become skilled in selling MPS by leveraging FTG-proven MPS initiatives. Gaspari noted that it took millions of dollars to build the infrastructure to support enterprise clients, 24/7/365 from coast to coast, which is a competitive differentiator for all of its companies.
“To have teeth in the game is one thing, but to have flesh in the game is something entirely different and more meaningful,” Gaspari said. “We’re about real partnerships with our acquired companies, employees, customers, and OEM partners.”
“We help customers manage their equipment, their documents, their IT, and their brand,” said Dan Meyer, President of Impact Networking. “Go big or go home: We practice that to an extreme extent, every day.”
Managed IT is one example of how the company is “going big.” When discussions were happening to decide whether or not Impact Networking would enter this arena, the idea of building the practice itself—instead of acquiring an IT house or outsourcing the work—was the most attractive option. After a lengthy search, the company found the right person to lead the charge. Five years ago there were just eight IT employees, but today that number has skyrocketed to over 100. And even though the company had some semblance of an IT piece from Day 1, it was all billable hours and nothing long term.
“We were putting out fires and chasing our tails,” Meyer said. “Now, however, our average IT deal sits at $5,000 a month over an almost five-year term—and contracts for $20,000 a month are far more frequent than with copiers. Managed IT represents about 23 percent of our revenue.”
Organic growth, of which managed IT is definitely a part, is nothing new to Meyer and Frank Cucco, who co-founded Impact Networking in 1999. For 14 years previous to that, both of them sold liquid toner Savins before working for two startups. The experience they gained during this time gave them the confidence that they could build a business. Today, the company has approximately 550 employees, with 16 offices in four states.
Impact Networking’s cumulative YOY growth rate over nearly two decades is 27 percent. “Most of that is organic,” Meyer said. “In 2016 we did $58 million in revenue, the next year it went up to $96 million—we had more feet on the street that led to more activity, and that’s when managed IT really took off. Our 2018 revenue will be roughly $118 million.”
Given that the company sells a wide array of hardware (including displays), software (reseller of DocuWare and Kofax), and services, there’s no doubt that Impact Networking will continue to grow organically. Meyer shared the current revenue breakdown: hardware at 33%, supplies at 24%, service at 20%, and solutions (software, IT, and the marketing group) at 23%.
Still, acquisitions have contributed to the company’s success. “In our history we’ve bought five organizations, all of which happened in the last 10 years,” Meyer said. “They range from the relatively small to the one we did last year where we purchased our third largest competitor in Chicago. From our inception until now, 34 percent of our revenue is from acquisitions.”
|Dan Meyer, President of Impact Networking|
And what does Impact Networking’s acquisition strategy look like? As Meyer explained, the company isn’t just after a sales list, no—it wants to retain and help further grow the expertise of the purchased organization’s employees, too. Another critical facet is that the dealer’s strong customer base must be buoyed by contracts that have a strong commitment to recurring revenue.
The recession that began in 2008 was a make-or-break time period for Impact Networking. Along with buying a dealer in Wisconsin, the company expanded into Indianapolis and built a distribution center. Then, on top of all that, including tight purse strings, Cucco made a bold call by partnering with the Chicago Blackhawks—when the team had literally no fan base and the cost of the contract was very high.
“We were trying to take the next big leap, we’d already increased our footprint exponentially, but revenue was stuck at $29 million from 2008 to 2011,” Meyer said. “Every expense was studied, even coffee, and headcount fell from 180 employees to 130. But we didn’t shrink, client retention was good, and the money we spent to get our name out there during the tough times led us to where we are.”
The company’s plan over the coming five years is to attain $300 million in revenue (22 percent YOY growth; doesn’t include any acquisitions). Meyer would also like to reach 50 percent of revenue from managed services by then and eyes an even more well-balanced portfolio.
“When Frank and I put together our business plan in 1999, a positive culture was at the top of the list,” Meyer said. “Our employees today put culture at the top of their list of why they like working at Impact Networking. We see a return on the investment we make for culture and we don’t want it to be disrupted.
“Private equity can be attractive, no doubt about it,” he continued. “Private equity, when involved, also looks at expenditures and might think it’s a little too much spend to better our culture. The way we see it, though, culture and organic growth are tied to each other.”