Distributors often have a personal relationship with their larger customers and, as such, provide them with certain perks. And they often serve as creditors for the reseller channel in order to help VARs stay afloat in a low-margin marketplace.
Unfortunately, this could come back to haunt them. Take The RAM Group, for example. The Markham, Ont.-based VAR recently announced it had more than $12 million in debt and sought protection from creditors under the Companies' Creditors Arrangement Act. The VAR, which at one time had annual revenues of more than $125 million, has admitted that it's insolvent.
Court reports show that RAM owes about $3.9 million to secured creditors, including $1.2 million to Ingram Micro Canada. A secured creditor has legal rights to take back ownership of an asset if the debtor defaults on their payment. In most cases, the debtor grants these rights to the creditor in order to receive a loan to purchase the asset (much like a mortgage holder on a house).
Unsecured creditors, on the other hand, don't hold collateral and get paid voluntarily or through a court order. RAM owes another $8 million to unsecured creditors, including $2.8 million to Tech Data Canada. Ouch.
While RAM says it has $7.6 million in receivables, clearly this isn't enough to cover its $12 million debt. And unsecured creditors have to wait in line behind secured creditors to get their money back.
But it's easy to see why some companies weren't worried about securing their debts.
Until recently, most industry watchers had no idea RAM was in trouble. The VAR had been around for more than 20 years and was previously profitable, with nine offices in Canada and six in the U.S. Major vendor partners included IBM and Cisco. And it helped bring SAP's Business One suite to the small- and mid-sized market in Canada. Not exactly signs of a company in trouble.
There were some signs, though. Earlier this year, RAM laid off 35 people, and in June hired a company that specialized in restructuring. Obviously, some companies knew or suspected what was going on: on June 24, Tech Data and Cisco stopped selling products to RAM. Five days later, the VAR applied for credit protection.
While this was happening, NexInnovations finalized a deal to buy RAM's customer maintenance and support contracts for $2.25 million.
But it was already too late for Tech Data and RAM's other unsecured creditors.
So what does this mean for the reseller channel?
Clearly, distributors need to protect themselves by having policies and procedures in place to deal with debtors. Ingram, for example, views the financial statements of a number of its resellers as part of its normal business practice in order to provide advance notice of any problems.
It could mean that distributors make it harder for VARs to secure credit, which will particularly hurt smaller VARs. But it's also a chance for distributors to work more closely with their partners to increase efficiencies, while at the same time protecting their assets.
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