Selling My IT Services Business — When Is the Right Time?
Preparation counts, and timing depends on everything from strength of the M&A market to cultural fit, to the owner’s goals.
If you’re the owner of an IT services company, you probably receive several solicitations a week from strategic or financial buyers interested in acquiring your business. Should you consider any of those solicitations?
M&A veterans who’ve followed the market for more than 30 years agree that the market is as active as it’s ever been. Over the last quarters, we’ve seen a long string of records that seems to have no end: number of transactions closed, transaction volume and valuations.
There are several key drivers behind this unusual level of activity:
- Private equity firms eager to put freshly raised money to work (see ConvergeOne, Presidio and many other transactions).
- Traditional systems integrators under pressure to grow their services and recurring revenue business.
- Manufacturers preferring to deal with a few large partners.
- Transition to cloud, focus on vertical markets as a method of differentiation, IT talent scarcity.
- The need to scale and the opportunity to cross-sell.
It’s no surprise that one question we’re being asked in almost every conversation with business owners is: Is this the right time to sell my business? And how long will valuations continue to be as high as now?
Core Factors Determine Timing
We at Chapman believe that the owner’s personal goals (career, family, life planning) should be at the center when determining the right time to sell. Some of the questions to ask are:
- Are you still enjoying what you are doing?
- Did your job and the requirements change?
- Did your skills evolve and scale with the growth of the company or have you become a barrier to growth?
- Have you become more conservative when it comes to reinvesting and growing the business?
- If there are two or more partners, are you starting to have divergent goals?
- Is there something else you would rather do? Start another business? Retire? Travel? Teach?
- Are there any significant family and health aspects?
The personal goals should drive the decision about timing because the entrepreneurs can control their own goals and objectives while outside factors (the buyers, the market, the economy, etc.) are mostly out of one’s control. Basing a decision solely on expected future market conditions can backfire – it’s difficult to predict and time the market, as many of us have painfully learned.
Trying to time a transaction can be further complicated by the combination of the two following facts: first, the sale process can take time, anywhere between six to 12 months, and sometimes longer. And second, in recent years, the purchase price has usually been based on trailing 12 months performance (TTM), as opposed to the 2- or 3-years average or weighted average used a few years back. This means that if a seller waits to be at their peak performance before considering a sale and running a process, they risk having to close the deal on a lower valuation if earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue don’t continue to grow.
Market Factors Determine Valuation Expectations
Once the personal goals have been analyzed and are well understood, it’s time to take a look at the outside factors, the ones that will impact the valuation. The actual purchase price a company fetches depends on a variety and combination of factors:
- Internal (micro) metrics: These can include EBITDA, revenue and profitability, growth rates, customer relationships, recurring revenues and renewal rates, employee certifications, customer concentration, scalability, quality and depth of the management team remaining after the acquisition, other soft factors, competitive advantage.
- Fit with the buyer: Who will the actual buyer be? Each buyer will value different elements of the business differently. The cultural fit is critical. What for a given buyer might be a weakness, could represent a great synergy for another one — we have a long list of relevant examples from businesses we sold; not all buyers are active on the market all the time; many buyers need time to integrate previous acquisitions, work on new ones or focus on other goals and initiatives; does a given buyer value more size (revenue) and growth (more likely to happen in a growth market) or profitability (more typical in a down market); what is the seller bringing to the buyer (new technologies, territory, customers); and most importantly, what is the buyer bringing to the seller (other than money)? A buyer’s appetite for a given acquisition will increase with their perceived ability to impact the seller’s business in a very positive way, including increasing profitability.
- External (macro) metrics — the state of the market: What is the general confidence level regarding the economy, the level of consolidation in the industry, M&A cycles and interest rates, as most acquisitions are funded at least in part with debt, etc.
The actual purchase price and transaction structure will be determined as a combination of those three factors. Even if only one of them is changing, the valuation will change.
For instance, an IT services company based in Texas and with a strong IT security practice is considering a sale and is undecided if it should start the process now or wait a year, when it expected to have an EBITDA higher by 15%. This seller would be a perfect fit for a buyer interested in growing their footprint in Texas and, in addition, acquiring an IT security practice. This potential buyer would pay a premium for the right fit. As a result, our seller will fetch a higher valuation if it ends up being the one acquisition the buyer will make this year even if it has a lower ebitda, because the buyer is prepared to pay a premium to address his objectives. Once the buyer has a presence in Texas and an IT security practice, subsequent acquisitions matching those criteria will be less valuable — and another buyer with similar criteria might not be on the market next year.
Is This the Right Time to Sell?
There are fundamentally two approaches to deciding the time to sell a business. First, letting the personal goals determine the timing, and second, targeting a certain purchase price. The most successful transactions we’ve seen were the ones where the timing was triggered by the owner’s personal goals and then searching for and selecting the right buyer, one who best valued the company’s strengths and synergies. This consistently results in maximized proceeds.