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Bridgepointe, One Source Explain How M&A Tactics, Agent Targets Vary

By James Anderson | March 29, 2023
M&A

Partners in the agent channel considering M&A need to weigh multiple factors before agreeing to an acquisition.

M&A in the technology advisor (agent) market continues to capture the attention of business owners. While the number of national TSDs has turned into just a handful of providers, a plethora of strong independent customer-facing agencies remain. However, many of their peers have agreed to deals with a strategic buyer. Some of the sellers did so to gain a financial option for retirement. Others wanted to stay on board at the combined company and grow their existing business. Partners need to understand exactly where they stand on what they want from M&A, as the strategic buyers vary in what they bring to the table.

Four of these buyers will participate in a session at the upcoming Channel Partners Conference and Expo. The conference track, "Emerging M&A: Not All Plays Are Created Equal," will take place on May 2. The panel will feature Steve King, chief development and M&A officer at Amplix; Scott Evars, co-founder of Bridgepointe Technologies; Tim Meng, CEO of One Source Communications; and Seth Penland, founder and CEO of Bluewave Technology Group. Their respective companies have all engaged in agent M&A over the last two years.

Those four companies don't represent the only M&A in the agent space, of course.

For example, E78 Partners acquired MacroNet and Profit Enhancement Systems using funding from private equity firm Further Global. E78 provides financial and  accounting solutions targeted to CFOs, and more recently it has expanded its technology advisory and management service line. ARG has bought multiple advisory firms over the last several years, including NextWave and GNS.

And then of course, Berkshire-funded Upstack has purchased a reported 27 agencies. In addition, some strategic acquisitions have occurred, like with Renodis buying a few complementary businesses, and Resourcive buying a cybersecurity consultancy.

We chatted with Evars of Bridgepointe and Meng of One Source about their M&A plays and advice for agents.

[Editor's Note: See and hear more than 150 channel visionaries and experts speaking at the Channel Partners Conference & Expo. The event also features more than 375 ICT companies in the massive expo hall. Register now for the world’s largest independent channel event, May 1-4, at the Venetian in Las Vegas.]

Channel Partners: Could you summarize the M&A options you offer to partners?

Tim Meng: While we can accommodate a wide range of structures, we most often engage with a seller by acquiring the operating assets (for example, taking over contracts and customer bases) for a guaranteed cash payment at close, without requiring a long-term employment obligation from the seller or restricting their options through a non-compete.

Scott Evars: We have programs to fit multiple outcomes depending on the desires of the partner or agency.

Primarily, we’re looking to make strategic investments in independent sellers with growing client bases, solid renewals and opportunity for cross-sell. Our investment deals enable partners to take some risk off of the table and take advantage of the current acquisition climate while continuing to run their business over the next few years and see elevated valuations based on accelerated growth as a result of additional products, capabilities and resources. Additionally, every Partner (with a capital P) receives early-stage equity alongside our founders.

One Source Communications' Tim Meng

Bridgepointe's Scott Evars

We’re also interested in acquiring customer bases and surrounding them with support to grow in cases where partners are seeking a full exit for whatever reason.

Lastly, we’re acquiring regional [TSDs] and strategic services businesses to expand our geographic coverage and most importantly to add commissionable services for partners to sell under the Bridgepointe brand to capture more wallet and increase retention.

CP: What are the core aspects of a transaction offer?

SE: Any deal will generally have a valuation based on a multiple of EBITDA. That multiple will be based on the size of the base, retention, its growth rate and several other factors. Subs and employees also filter into the equation. There is an upfront investment, a long-term growth component and the opportunity to participate in the equity of the business long-term.

TM: Beyond the attention-grabbing headline number, a typical offer is made up of the following components: guaranteed cash-at-close, earn-out, seller financing, equity roll, non-compete, consulting agreements and/or employment agreement. Except for cash-at-close, all other components require and deserve significant diligence effort by both sellers and buyers to avoid misaligned assumptions or interpretations.

Given One Source’s business model and acquisition approach, our offers tend to be very simple and clean, with a clearly defined cash-at-close amount.

CP: Partners could agree to a transaction for multiple reasons. Retirement, choosing a new career or needing a way to scale come to mind. Are there additional reasons? And has one reason been more prominent than others in your deals?

TM: In addition to the aforementioned motivations, we also engage with agent partners who are deeply passionate about the art of “consultative selling” but are not interested in building an operations team, people management, or becoming an employee at the prime of their career. Our approach accommodates these agent partners by offering to take over the support obligations of their steady-state customer base and leaving their business (and more crucially their entrepreneurial freedom) intact. This structure, coupled with the lack of a non-compete, allows them to pursue new customers within minimal reinvestment in infrastructure. One partner thoughtfully described her experience as “unloading a fully loaded truck at the warehouse, so she can go load up new cargo.”

SE: Retirement and scale are certainly two of the biggest reasons, and they are fundamentally different deal structures. Because in the retirement case, we’re investing in a base but needing to surround it completely with support, whereas in the scale conversation we’re investing in a partner to grow their own base. While we have a great structure and a significant back office to cover the retirement plan, we have focused on partners who have told us they’re not done yet, but desire help in marketing, systems, account management and strategic consulting.

Many of them are not only looking for scale in these areas, but they are looking to take advantage of the current macroeconomic environment surrounding our industry. While they’re growing, they, like many people at this juncture, are concerned about the economy and the swift consolidation in our space and don’t want to be left holding the bag in a few years. We help them take some risk off the table now and provide them the resources they need to continue to grow.

CP: The session (at CP Expo) is going to delve into some of the key questions partners should be asking of potential buyers and what they should be looking for. I’m curious what you, the buyer, are looking for in your M&A targets.

TM: As one of the oldest (27 years), the largest (more than 300 people), and the most operationally focused agency in the country, we tend to focus more heavily on a selling agency’s customer support model, in addition to the customary due diligence topics. Specifically, we care about “the evidence of historical engagement with customers” and somewhat counterintuitively “the readiness to disengage." “Historical engagement” provides a solid foundation for One Source to step into the seller’s shoes and carry on the legacy of service excellence. “Readiness to disengage” creates a trusting environment to transition from a principal-led to a team-based support model.

SE: We’re looking for growing bases with solid renewals and good opportunity for cross-sell. If all that is there, there should be the EBITDA to justify an investment. But for us, culture is king. We have assembled a team with significant experience in doing M&A and actually integrating companies. So we’re not just looking to buy assets, we’re looking to integrate cultures and ultimately to grow together.

Other considerations are vertical or technology specialization, good back-office personnel who can be additive to our story, good ARPA, interesting geography and the desire to be part of a growth story.

Tags:
Channel Partners Conference & Expo, M&A