Buying a VAR or hardware reseller in Canada

If a reseller’s business rests on its standing with manufacturers, ask each manufacturer whether that standing can pass to you. That makes the first question a personal one: can you, with your own finances, certifications and track record, be approved as the partner the seller is today? This page is about judging the opportunity and your own fit before price, financing or paperwork enter the picture.

Where the gross profit comes from

Ask where the gross profit comes from: more than one manufacturer or mostly one brand, renewals and support that return each year or a handful of large one-off projects, services customers pay for on their own, and how much rests on a relationship with one customer contact. Look at how many customers have bought more than once, how the profit divides between product and services, and how often big deals were won on price alone. Ask too how much of any revenue growth came from pass-through hardware, and what of it a new owner could keep.

Qualify with the manufacturers yourself

Plan to be assessed by each manufacturer as though you were a new applicant. Ask each manufacturer what it requires of a new owner, including whether its terms look at your credit standing, the technical certifications your staff hold and whether you can meet the volume that holds the tier. If the seller’s tier rests on certifications belonging to individual employees, your plan to hire and keep those people is part of qualifying. Ask the seller for early introductions to each manufacturer’s channel contact, and ask whether any manufacturer has ever hesitated over a change of owner.

What a seller may not volunteer

The questions below are worth asking whether or not the seller has raised them.

• How gross profit splits between hardware, licences and subscriptions, and services, across several years rather than the latest one.
• Which manufacturers and distributors supply the stock, and the tier held with each.
• Rebates and incentives earned but unpaid, and any terms under which they could be clawed back.
• Open returns, warranty claims awaiting a manufacturer and extended warranties or service plans sold but not yet fully delivered.
• Which customers’ renewals depend on one employee, and which large contracts come up for re-tender soon.

Make the seller part of the transition

A reseller can lean on relationships the seller built personally. BDC notes that in a deal where the seller is fully cashed out the buyer carries more risk because the seller is no longer involved, that buyers may insist on a reduced price if the seller cuts all ties, and that a seller can stay involved through vendor financing, an earn-out, a phased transfer or a role as an executive, board member or advisor. Ask the seller to introduce you to each manufacturer’s channel contact and to stay available while the approvals run. BDC also advises sellers to document standard operating procedures so a new owner can take over more easily; in a reseller that means how quotes are priced, how opportunities are registered with manufacturers and how renewals are tracked, and a buyer can ask to see them. A vendor take-back can keep the seller invested in your success while you show you can hold the tier.

Duties that come with the business

Some obligations arrive alongside the price. If the reseller holds personal information, PIPEDA lets the parties use and disclose it for a prospective transaction on conditions, and after closing the parties may use and disclose the information disclosed to them for the transaction without the individual’s knowledge or consent if their agreement requires each to use and disclose it solely for the purposes for which it was collected or permitted to be used or disclosed before the transaction was completed, to protect it, and to give effect to any withdrawal of consent, the information is necessary for carrying on the business or activity that was the object of the transaction, and one of the parties notifies the individuals within a reasonable time after closing that the transaction has been completed and that their personal information has been disclosed. Neither route applies to a transaction whose primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information. Business contact information used only to communicate with someone about their employment, business or profession sits outside that Part of the Act. On tax, the Canada Revenue Agency says the joint GST/HST election on the sale of a business cannot be made where the seller is a registrant and the purchaser is not, so confirm your own registration early.

If you are not a Canadian buyer

Under the Investment Canada Act, non-Canadians who acquire control of an existing Canadian business are subject to the Act, and must submit either a notification or an application for review unless a specific exemption applies. The Act also allows the government to review foreign investments of any size to ensure they are not harmful to Canada’s national security. Whether a given acquisition of a small reseller falls under the notification route, the review route or an exemption is a question for counsel with the actual facts.