The Rise of the Mega Dealer (Part 2 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 second of three parts—happy reading!
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The Rise of the Mega Dealer (Part 1 of 3)
While Loffler Companies can certainly be categorized as successful, CEO and Co-Founder Jim Loffler and his son James, Vice President of the IT Solutions Group, are focused on retaining the culture of doing right by the employees, the customers, and the community. “We’re honored to be considered a mega dealer, but it’s the way we work with each other, with our clients, that makes us great at what we do,” Jim said.
“For a big company, we try to feel small,” James added. “We don’t want our customers to feel like a number—we know their name, and they know ours.”
The emphasis on culture as well as “riding the right waves” has boosted Loffler’s revenue to approximately $115 million. A company of around 520 employees today, Jim clearly remembers when he and his wife Darcy began selling mini cassette dictation machines ($100 to $600 apiece) from their garage in Minneapolis in 1986.
It’s crazy to think that the fax machine would represent a major move forward, given where the world is today, but that’s exactly what helped turn the tide for Loffler. “The fax machine was a bigger ticket item, and there were clearly no leaders of the technology in our area,” Jim said. “So, it gave us an outstanding opportunity to grow market share quickly. Even better, there was aftermarket with the consumables and paper.”
More recently, the shift to IT services has been another big lift for the company, especially with the imaging business “at the top or on its way down.” IT, which includes managed and professional services in areas like security and the cloud, generates about $25 million annually for Loffler, and is on track once again for over 20 percent growth in 2018. “We have close to 100 employees on the IT team, so I look back to 2006 and go, man, there were only three or four of us,” said James, who is responsible for this part of the business and started in the area of telephony in 2006.
“Successful technology companies are like surfers: They wait, look behind them, and seek out the right wave to catch,” Jim said. “It’s a little bit of luck and a little bit of skill—and a lot of listening to customers. They wait for that next product to come along and then they paddle like crazy. And then you catch the wave, hopefully with a product or service that’s going to give you a very long successful journey into the future.”
|Jim Loffler, CEO of Loffler Companies|
Facilities management is another area that sets the company apart and, along with MPS and IT services, has pushed the services revenue share to 60 percent. “We have about 150 employees who run print shops, mail rooms, provide litigation support for law firms, do scanning services, shipping and receiving, etc., which allows the customer to focus on its core business,” said Gary Volbert, President of Business Services and Vice President of Marketing.
Just as important as picking the right technology and services to sell is choosing the right employees to hire and the right companies to acquire, the trio said. Because Loffler is a family business and is not owned by shareholders or an investment company, it can take its time finding the right organizations to purchase versus trying to grow the company as fast as possible. Still, Loffler has grown its footprint quite nicely—from Minnesota to Wisconsin and the Dakotas. With a home base in the upper Midwest, Loffler is proud of its PrintVision MPS business supporting clients across the United States (the company for multiple years has ranked No. 1 nationally for first call service effectiveness by BEI Services, a trusted provider of unbiased imaging device and technician performance benchmarking).
“There are great companies out there that don’t fit our culture, and we pass on those,” James said. “They could have the best technology stack, they could have high performing sales, but if they don’t fit our culture we pass—and we have passed.”
One piece of advice the team has for other dealers is to do what’s right by their clients. When one of its biggest customers today had to declare bankruptcy during the 2009 recession, the company stood by them when other “partners” took out service, equipment, and people, but Loffler gave them equipment and support and worked with them to get through the tough time. This company recovered, and today Loffler is their trusted partner.
The company, which has seen about half of its growth come organically and the other half through acquisition, aims to grow to a $150 million business in three years and a $316 million business in 10 years. “It’s great to be considered a mega dealer, but staying humble and making sure you’re focusing on the fundamentals, the human fundamentals—treating people with kindness and respect—is central to our mission,” Jim said. “The world needs more of that.”
“You don’t have to be an analyst to understand that the print industry is in decline, so you need to have a good transition plan,” said Jeff Gau, CEO of Marco. “Ours is two-pronged: We put a lot of emphasis on being an IT company, not just a copier dealer, and we’ve established an acquisition strategy.”
This approach has helped propel the St. Cloud, Minnesota-based company, which started as a small typewriter shop, to a leading role in the imaging and technology services channel. Marco generates approximately $400 million annually and employs about 1,400 people. And, while its footprint has traditionally been in the Midwest, the company has been expanding farther east—most recently with the acquisition of Phillips Office Systems, a 140-person company with 10 locations in Maryland and Pennsylvania.
“If you build a strong organization, people are attracted to it,” Gau said.
That includes job candidates, who nowadays appreciate the focus on IT. Marco’s IT services business is now a $200 million practice, which far outpaces achievements by competing mega dealers, according to Gau. The company has been selling voice and network services since 1985, A/V technology since 2002, and managed IT since 2009.
Roughly 450 of Marco’s 750 engineers are on the IT side of the business. High-level certifications for businesses like Cisco and HP (beyond printers and copiers) make a real impression on customers: If the company can secure an IT deal with a particular organization, an output hardware deal is much more likely to happen.
“The world of IT provides a bigger growth opportunity, partially because it’s always evolving,” Gau said. “This certainly adds challenges and complexity, but with these come increased value, profitability, and sales. The IT business has seen substantial organic growth every year.”
Marco completed its first acquisition in 2005 and has since purchased 41 other organizations. The company financed its own growth until 2015, at which time it partnered with the private equity firm Norwest Equity Partners. “This has allowed us to continue to do what we were doing, but on a much larger scale,” Gau said.
|Jeff Gau, CEO of Marco|
Marco is a national company. Along with the purchase of Phillips Office Systems, the company acquired two dealerships in Michigan earlier this year. Going forward, Gau has his eye on more acquisition targets in states like Texas and he isn’t opposed to expanding west, either. Moreover, with each new business brought in under the Marco banner, IT services—through IT firm purchases or the use of current resources—are added.
“A lot of dealers say they sell IT services, but they only do so in one or two markets,” Gau said. “It’s hard to do it on a national basis.”
That said, the company has distinct IT and copier sales groups—largely because the different businesses require different strategies. There’s a president of the IT company as well as a president of the copier company (who happens to be Gau’s brother Steve). They have different leadership, management, technical people, compensation models, and metrics.
Gau would like to see the business grow at a rate of $75 to $100 million a year. He expects about half of this growth will be organic, while the other half will be achieved through acquisitions—that’s been the pattern in recent years. “Organic growth is better as that shows strength in the business,” Gau said. “You can buy yourself into a big company, but that doesn’t necessarily make you any good.”
Gau shared advice for other dealers, regardless of their size. First, they should be prepared to expand into new areas when the existing spaces are in decline and/or commoditized. While IT is certainly a growing space to move into, profitable areas tied to print include MPS, document software solutions, ECM, and both production and wide format.
Another recommendation is shifting to a services-based business versus a simple reseller of products. Not only do services steer the conversation away from price, but they’re more impervious to a recession. This was a lesson learned during 1991—the only year Marco lost money. “That’s when we learned that contracted services and recurring revenue were better than project-based sales transactions, because you had to hunt to eat all the time,” Gau said.
Today, 40 percent of the company’s business comes from recurring revenue (and 45 percent from services). Marco has perhaps moved full circle, so to speak, as the business originated with a recurring revenue model for typewriters involving ribbons as consumables and a maintenance contract for the device.
“The good news about me not being only a copier guy is that I don’t get hung up on what the competition is doing,” Gau said. “We need to focus on our own best practices, our own growth strategies, and executing on our strategies, and we should never worry about what somebody else is doing.”
Novatech, formerly NovaCopy, will be hitting two major milestones by the end of 2018: The company turned 20 years old in December, which is relatively young for a copier dealer of its size. More importantly, it will have officially become a member of the mega dealer community with more than $100 million in annual revenues.
As one of the newest mega dealers, Novatech’s growth trajectory skyrocketed when the company recapitalized with Trivest, a private equity firm specializing in founder- and family-owned businesses. Said Darren Metz, CEO of Novatech, “Before Trivest we were doing about one acquisition per year. Since the merger we have completed three more, with a goal to complete one per quarter.” Today, Novatech has about 400 employees, with 12 branches serving customers in Tennessee, Missouri, Texas, Mississippi, Georgia, Arkansas, and Alabama.
So, Novatech is now a “platform” organization, where it has established a foundation with scalable operational excellence and an integration strategy to acquire other organizations. “The current trend reminds me of the similar ‘rollups’ that occurred in the ’80s and ’90s when DANKA and IKON started out as single dealerships that subsequently attracted deep-pocketed, institutional investors and commenced a frenzy of acquisitions.
“Fortunately, we can learn from their mistakes, such as ensuring we don’t lose that small company culture and that customers’ needs come first,” he continued. “We are careful not to ruin acquired companies with misguided bureaucracy that focuses on internal cost reductions rather than externally on customer satisfaction.”
Metz joined Novatech three years after providing seed capital as a side project to another business—a pioneer in cloud computing that did not survive the dot com bust of 2001—he owned. At the time, Novatech generated less than $500K in annual turnover and was losing money. “I made some personal life-changing decisions that year because I believed in this company and the opportunities afforded by changing technology,” he said. “It was a very scary and uncertain time, but I bet the farm on Novatech.”
The company forged on, establishing core values like a family culture and serving the customer first, helping bring Novatech to where it is today.
“For example, when it comes to our company and cultivating company growth, I hired Andrew Heggem four years ago as a person for our national accounts order desk,” Metz said. “Later, I learned that he dropped out of law school previous to coming to Novatech but at the same time had taken a deep interest in learning about the company and the copier industry. As we started doing acquisitions, I asked him to help with three of them, which all turned out to be very successful. Eventually we sponsored his law degree and now he is our Director of M&A. He also helped out in the sale to Trivest—he’s just 30 years old.”
|Darren Metz, CEO of Novatech|
Over time, Novatech has branched out into a variety of new areas. The company is now heavily into production print, managed IT and network services, and large format. Also, “3D print is a $10 million annual business for us,” Metz said. “Some of these devices sell for more than $200,000 each and generate $10,000 per month in aftermarket revenue, which we believe is a strategic fit for organizations like ours that grew up in the BTA channel.”
According to Metz, 3D fulfillment is like production print, so any dealer that has been successful with “big iron” may have what it takes to succeed in 3D. Dealers must be able to handle complex devices and understand different audience needs. “It’s not about speeds and feeds, it’s about the application requirements of your target audience, which includes very smart engineers who expect high levels of technical knowledge,” he said. “Some customers may need precision quality versus others that need strength in materials. It’s knowing your customers, every detail of their business, and understanding what the important result of the product is. BTA members prepared to learn new application solutions and hire technical sales people can flourish in the nascent 3D industry.”
3D print represents about 10% of Novatech’s business—Metz expects double-digit growth in this space to continue. In 2018, production print accounted for 20% of Novatech’s revenue, managed IT/network services 10%, large format print 5%, and document solutions about 5%.
The other 50 percent is the traditional A3 and A4 print business, which Metz expects to gradually decline over time. “With a 3 percent compound annual decrease in print volumes combined with decreases in unit volume and average sales price per units, we are not optimistic about the 10-year view of our traditional office copier business,” Metz said. “By 2025, we can foresee office printing volume and office printing industry revenue at half of what they are today.
“For dealers that have made the shift to IT services and other sustainable products and services, congratulations,” he continued. “Dealers that still get the bulk of their revenue from legacy copier business may consider the numerous opportunities for liquidity and transformation support available from the current crop of consolidators in our space. Dealers in that frame of mind are invited to compare the success and business plans of Novatech with other strategic acquirers to see how our opportunity stacks up.”
The stronger message here is for BTA dealers to think seriously about diversification if they have not done so already. And for those that lack the expertise or desire to reinvent themselves as a managed service provider, merger opportunities with mega dealers may be worth exploring in 2019.
The Rise of the Mega Dealer (Part 3 of 3)
The Snowball Effect: Novatech in Gull Growth Mode