7 Things to Remember When Selling Your IT Services Company
These guidelines are worth considering, regardless of whether you’re looking to sell your IT services company in the next three years or tomorrow. Knowing the “dos and don’ts”, can help you prepare your business for a smooth, profitable sale. The new administration is poised to increase capital gains taxes and more private equity firms aggressively searching for recurring revenue from managed service providers. 2021 will see the highest level of MSP mergers and acquisition activity.
Many business owners are asking themselves: “Is it the right time to sell my IT service business?” No matter if you think you can sell your business in three years or tomorrow, these guidelines will help you make an informed decision. The following “do’s & don’ts” will help you prepare your business to sell quickly and efficiently, while avoiding the horrors that can come with a failed deal.
In the last 12 months, we have worked with more than 100 IT service and cybersecurity providers as we strive to create a one-stop shop security and IT services provider. We’ve identified common themes and buyer criteria that we learned from business owners. These are useful for all stakeholders to consider when they look at exit options.
Don’t ignore calls from brokers and private investors
Even if you have never considered selling your business, it is worth taking a few minutes each month to meet with potential investors. You don’t have to allow them to question you. You don’t have to let them question you.
Do not start with the end in mind
Are you looking to cash out completely and relax on the beach? If so, engaging with a technology services provider or a private-equity-backed “rollup” that is consolidating a batch of similar smaller firms may be your best option. Integration hiccups, culture clash and other risks are more likely. However, this doesn’t mean you have to give up a significant stake.
Independent “search funds” may also be interested in buying your business and replacing you as CEO. This is a good option if you want to make sure your employees and customers are treated well. Before you spend too much time with a fund, make sure they have the money.
Would you rather have some chips but keep an equity stake so that you can take another bite of the apple? You will need to find an investor who views you as “the platform”. This could be a private equity firm or an independent sponsor. As the platform, you will have more upside and operational control. You also get a higher valuation multiple. Good leadership is rare. However, you must trust your investor-partner and believe in their vision.
Do not be afraid to have this conversation up-front
It is crucial and informs everything, from which potential buyers you will spend time with to whom (if any) you’ll hire for help in your future sales process.
Do not be ashamed to admit where your business is lacking
Investors don’t expect that you will have a perfect business the first day after you invest. Often, investors invest because they have identified key growth or improvement opportunities that have yet to be taken. You can build trust by highlighting your strengths and weaknesses, which will help speed up the process and increase the likelihood of closing a deal. This will also smoothen the integration process after the investment. Paradoxally, buyers may be more comfortable paying more for your business if you identify areas for improvement.
DON’T FALSELY REPORT Labor Costs and Gross Margins
We have seen business owners, sometimes unintentionally, increase their gross margins by under-allocating labor costs for managed services. Experiential buyers will see through this. As we have discussed, trust is crucial to a smooth process and a successful acquisition. Buyers will wonder if you are playing games with labor cost allocations.
DO Emphasize Cloud Security Capabilities and Certifications
Duh. This is obvious.