How To Sell An IT Services Company

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Strategic vs. Financial Buyer – Which one is right for you?

How to evaluate the right fit?

Selecting the right buyer involves evaluating various factors. Financial capability is paramount to ensure they can afford the purchase and subsequent operation costs. Equally critical is strategic alignment, where the buyer should share your business’s vision and growth plans. Lastly, cultural compatibility should not be overlooked. The buyer should resonate with your company’s culture and values to make the post-sale transition smooth for both your team and customers.

How does the sale process work? 

Navigating the waters of a IT Services business sale involves many stages, each with its own significance and challenges. It’s in these phases where an M&A advisor’s expertise becomes important.

Phase 1: Negotiating the deal

The process typically commences with a ‘teaser’—a concise, anonymous document designed to generate interest from potential buyers without disclosing your business’s identity. This document highlights key selling points and attractive metrics while maintaining confidentiality.

Subsequently, the Information Memorandum (Info Memo) takes center stage. This detailed document offers a comprehensive overview of your business, covering aspects from company history, service descriptions, and market analysis to financials, key metrics, and future projections. The Info Memo serves as the primary tool for potential buyers to evaluate your business.

Post the Info Memo, a Q&A phase ensues, allowing interested parties to seek clarifications and additional information. Your M&A advisor plays a crucial role in managing this process, fielding questions and ensuring that all communication aligns with the overarching negotiation strategy.

A pivotal moment in the deal-making process is the Letter of Intent (LOI), a document outlining the buyer’s intention to acquire your business, along with proposed price and terms. While not legally binding, an LOI signifies serious intent from the buyer and sets the stage for more detailed negotiations.

Upon acceptance of the LOI, the buyer initiates the due diligence process—a thorough examination of your business covering financial, legal, and technical aspects. Financial due diligence assesses your company’s financial health, while legal due diligence examines contractual obligations and compliance.

Phase 2: Closing the deal

The concluding phase encompasses the completion of the Sale and Purchase Agreement (SPA) and the facilitation of secure payment methods, such as utilizing an escrow service. Collaborating closely with your legal team, your M&A advisor takes charge of ensuring the seamless execution of these steps, always prioritizing your best interests.

Throughout both of these stages, the M&A advisor assumes a central role. They contribute to the meticulous preparation of the teaser and Information Memorandum (Info Memo), ensuring both documents are not only compelling but also accurate. The advisor actively manages the Q&A process, aiding you in responding to inquiries in a manner that enhances the perceived value of your IT services business. Finally, they take the lead in guiding all negotiations, drawing upon their extensive market knowledge and experience to secure the most favorable terms possible.

Post-sale considerations

Following the successful sale of your IT services business, several crucial considerations must be taken into account to ensure a seamless transition and secure your financial future.

Transition period

Initially, many deals incorporate a transition period during which the previous owner provides essential support to the new owner. This phase typically involves training the new owner or management team, facilitating introductions to key clients or partners, and offering assistance in troubleshooting any challenges that may arise in the initial days post-acquisition. It is imperative to clearly define the length and nature of this transition support period in the Share Purchase Agreement to establish expectations and responsibilities.

Non-compete agreements

Another vital aspect is the inclusion of non-compete agreements, a common practice in the sale of IT services businesses. These legally-binding agreements serve to restrict the seller from initiating a similar business or collaborating with a direct competitor for a specified duration and within a defined geographic area. While these agreements safeguard the buyer’s investment, sellers must ensure that the terms of the non-compete agreement are equitable and reasonable, avoiding undue limitations on future career opportunities.

Tax implications

Lastly, the sale of an IT services business carries significant tax implications, necessitating meticulous financial planning to effectively manage the newfound wealth. Depending on the jurisdiction and the deal’s structure, sellers may encounter capital gains tax or other tax liabilities. Engaging with a tax advisor or financial planner is advisable during this phase to gain a comprehensive understanding of the tax implications, identify strategies to minimize tax liability, and receive guidance on investing and managing post-sale finances.

How to measure the value of your IT Services business?

Before you dive into the process of selling, it’s crucial to understand what your IT services business is worth. While methods, such as Discounted Cash Flow are also sometimes used, valuing a business based on the EBITDA multiple is the most common method in the industry.

IT services EBITDA multiples

In the valuation of IT services businesses, the EV/EBITDA multiple is overwhelmingly favored due to their typically robust profits and negligible upfront investment requirements. Occasionally, the revenue multiple acts as a supplementary measure, particularly when a company lacks a normalized profit level.

In our proprietary analysis, we took a look at more than 300 transactions in the IT services industry with disclosed multiples. Out of 324 deals analyzed using the EV/EBITDA multiple, the median value is 11.0x, staying consistent over the last 8.5 years within the range of 10.0x – 12.5x.

The size of a company stands out as a pivotal factor influencing the valuations of IT services companies. While professional services firms share similar business models regardless of size, their valuation multiples exhibit considerable variation. In our study, smaller companies (deals less than $5 million) show significantly lower valuations, at 0.9x revenue and 6.2x EBITDA, whereas figures for deals ranging from $50 million to $100 million are nearly twice as high.

Typically, larger professional services enterprises entail lower risk. They can cater to larger enterprise accounts, possess adequate staff or software for managing substantial projects, and boast more advanced development and HR processes. Their diverse customer base mitigates the impact of losing a major account on revenue. The team of a large company, a crucial intangible asset, is less prone to disruption from key personnel departures.