2017 was another extraordinary year in the AV sector. Now that the digital ink has dried on one of the most transformative acquisitions of the year (Sharp’s AV was sold to AVI-SPL), small to mid-size AV firms are beginning to wonder if 2018 will be another active year for mergers and acquisitions (M&A). I remain confident, due to strong market fundamentals paired with the high levels of optimism among owners, that it will. More specifically, listed below are the reasons to understand why I remain bullish:
- Valuations of AV systems design and integration firms are still attractive;
- Continued technology convergence as industry is going through structural changes;
- Low interest rates;
- Need to scale in order to compete;
- Other private equity groups are noticing those investments, renewing the attractiveness of the AV vertical;
- Foreign firms are actively looking to acquire U.S. platforms.
As important as the sector is, the actual profile of each potential seller is much more influential to their sale-ability. While different growth strategies are resulting in more deals being done, the main question is what does your firm need to do in order to be acquired in 2018? Buyers seek a company that is well positioned for growth with the following qualities:Profitable Growth
Markets in general reward firms that achieve ongoing profitable growth. Companies in the AV industry are not immune to that basic tenet. Simply put, acquisitions that are not accretive to growth suck resources away from internal activity. Instead, accretion supports the virtuous cycle of balanced growth in both internal development and external activity. Sharp’s signature managed services business, Rapid Care, was one of the fastest and most profitable programs in Canada. Exceptional Management Team, Solid Employee Relations with High Retention Rates
Take a close look at your senior management team and key employees. This is central because buyers are heavily influenced by the perceived quality, experience, and integrity of the seller’s key executives. To prepare for an eventual sale, sellers should strive to retain a senior management team that has demonstrated success through strong and weak economic cycles. At Sharp’s, the core management team had been together for more than 15 years. Enhancements to Financial Reporting and Other Business Systems
Does your current technology generate timely financial reporting information and other essential operating metrics? As part of due diligence, sellers will have to produce performance statistics and trends. Buyers will want this to be demonstrated as there will be deep dives into contracts, accounting systems, and policy/procedures. Sharp’s spent several hundreds of thousands of dollars on implementing and customizing a robust ERP system to help them manage their business. Diversified and Longstanding Customer Base, “Sticky” Business Model
One of the top few reasons buyers consider M&A is to accelerate growth by expanding their customer base. Ideally, you have deep relationships, a diverse spread locked in via long-term contracts such as “managed services” because customer concentration creates vulnerabilities. Additionally, sticky business models, sustained by managed services contracts, provide solid cash flow and facilitate the ability to pursue large projects. Sharp’s boasted customer relationships that spanned as far back as 20 years and which varied across many sectors from energy to higher education. The company also had one of the fastest growing managed services offerings in the Canadian market. Sustainable Competitive Advantages via Unique Solutions and Offerings
As always, strategic acquirers generally buy to garner new or critical mass in technologies or capabilities. Some strategic buyers look to fill their need of new solutions and offerings from “smart” M&A. Being a leading integrator for certain types of technology helps with identifying unique long-term growth opportunities. With Sharp’s, AVI-SPL acquired the leading Microsoft collaboration technology solutions partner in all of Canada.
This list shouldn’t be viewed as a silver bullet. Buyers are willing to make acquisitions based on their economics, potential synergies, and specific strategic objectives. The goal is to position your company as favorably as possible prior to sale by making any necessary improvements that are within your capability.
As we wrap up the successful close of the acquisition of Sharp’s AV by AVI-SPL, our sell-side M&A pipeline is stronger compared to this time last year. The macroeconomic environment and overall AV integration industry momentum are supportive of an extended period of M&A activity in the sector.