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My Struggle With Small-Cap VARs

VARs or value added resellers, as the name suggests, are businesses that re-sell products and services after "adding value" to them usually to provide customized solutions for clients. In the information technology sector they may provide a suite of services such as combining their own customized software applications with platform software from other companies, bundling hardware and software products, reselling contracts for maintenance, networking solutions, as well as, providing training and expertise around using hardware and software tools to meet the specific needs of the client. CRN compiles a list of the top 500 solution providers (formerly VAR 500) in North America ranked by revenue.

I have looked at some small cap VARs for investment opportunities and my struggle with them has been to determine how unique is the service that they provide and what are the barriers to entry in this business? When I look at the big players in the solution provider world, I can see how customizing solutions at a micro level may not be their niche, or meeting a client's needs by bundling their own products or services with those of their direct competitors may be problematic. So this could offer one level of protection to the small VAR's business. But in terms of competition among small-cap VARs I struggle with what puts one far ahead from the rest. One distinguishing factor could be long standing relationships with the original manufacturers of products and services as well as the final customers of the VAR. For example, big players in the IT world collaborate with some of the smaller VARs to directly market their solutions to clients and provide an initial point of contact for customer service. Endorsements/Awards from these large business partners could bolster a reseller's reputation and any signal of a long term partnership could strengthen the company's and stock's position. But unless a company produces an original product or service protected by its own patent or copyright, how does it develop a "brand"? The answer probably lies in tracking a VAR to see how creative it has been over time in extending its service suite and footprint. I am still looking to find answers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I am a self taught individual investor and this article expresses my views based on my own research. I am not being influenced or paid by any organization to write this article.