5 Steps To Selling Your IT Services Company

Last month, we talked about how to make your business more valuable as you get ready to surf the consolidation wave. Now that you have increased your company’s value, it is time to begin the sale process.

Step 1: Hire a Guide

While not all transactions are completed through an investment professional, there are three major reasons to enlist help. First, and most importantly, selling a company takes a significant amount of time. Deals are hard to get done. We’ve seen many business owners try to take on this work themselves and fail on two fronts. Not only couldn’t they not get a transaction completed, they lost sight of their real value-add: keeping the business humming along while creating value. Adopted from the adage originally meant for lawyers, but also appropriate here: “A man who is his own M&A adviser has a fool for a client.”

Second, deal professionals can accomplish something you cannot, which is creating a market for your company. Ultimately, a company is worth what someone will pay for it, so generating competition for your company is critical in increasing its worth. You will have a difficult time creating a similar market, as it tough for a business owner to credibly open discussions with multiple acquirers simultaneously. Reaching once again to a lawyer analogy, you’d most likely give a lot more credence to a lawyer serving a lawsuit on you than to a business owner threating to sue you. Similarly, involving a competent intermediary can create an appearance of seriousness that you will likely not achieve on your own.

Finally, confidentiality is crucial in pursuing transactions. An intermediary can approach potential buyers on a confidential basis. You, obviously, cannot.

Realistically, in the lower middle market, most buyers actually prefer to have intermediaries involved. That’s because, many times, buyers are more sophisticated in completing transactions than sellers, so buyers value the fact that deals with intermediaries are often easier to complete than where sellers are going it alone. For all of these reasons, we’ve had multiple clients report that offers from the same buyer improved significantly once an intermediary got involved.

Step 2: Create an Information Package

Next, work with your guide to create a marketing package, often referred to as a “Confidential Information Memorandum” or “CIM.” This will be your only chance to create a great first impression with a potential buyer, so take the time to tell your company’s story, explain its operations and provide a meaningful financial summary. You’ll also want to excite potential buyers by providing a compelling value proposition: Why should they be interested, and how will they continue to grow the company?

Preparing this package will also provide an opportunity for you and your adviser to start doing due diligence on your company and flush out any problem areas. Understanding any weaknesses potential buyers may perceive in your business to and addressing those issues head on will ultimately make the transactional process easier. As an example, many business owners can benefit at this stage by hiring their own third-party financial professional to do a financial review to bring issues to light so you can fix them before a buyer says, “Wait a minute …”!

Lastly, buyers want to understand how they can make a difference in your business and add value. Customizing the pitch for various buyer classes can increase engagement from the outset.

Step 3: Market the Company Broadly

As we discussed in a past article, many buyers are seeking good IT services acquisitions in today’s marketplace. Some of those entities are obvious choices, but some may be more hidden acquirers. Consequently, it is important to market your company broadly while at the same time maintaining confidentiality protections. Ultimately, turning over every rock in the process will increase competition for your company and boost its value.

Step 4: Narrow the Field

Eventually, you and your adviser will start having significant discussions and meetings with potential buyers, with the ultimate goal of getting engaged to, and ultimately marrying, one suitor. Throughout this effort, you’ll likely see two types of documents: indications of interest (IOIs) and letters of intent (LOIs). Realize that both have virtually the same value – legally, very little since they are non-binding – but they are typical of a couple of stages in the process.

Ideally your adviser will pull together snapshots of potential acquirers’ interest in your business from the CIM, some one-on-one calls, and possibly a discussion with you included. These descriptions, or indications of interest, are typically pretty broad, but they do provide an outline of how the buyer is thinking about a potential transaction. You and your adviser will use these IOIs to decide with whom to proceed to the next levels of discussions.

After additional meetings and preliminary due diligence, you’ll enter into a letter of intent with a potential acquirer. Beware: LOIs are largely meaningless. They are not intended to be enforceable, and in fact, the only enforceable provision is usually that you will exclusively negotiate with that buyer for a period of time. But, they are common in this process and set the outline for the path forward with the buyer.

Step 5: Negotiations and Closing

Signing an LOI with a potential acquirer is the kickoff for an intense 60-to-120-day period of discovery, negotiating and relationship building. During this time period, the buyer will conduct financial, business and legal due diligence until you are ready to jump out of the nearest window. It’s a trying and stressful time. In fact, I know a transaction is nearing the final stages when a client calls me up and screams for 10 minutes.

Along the way, the lawyers will kick into gear and negotiate several inches of paper on your behalf, documenting the deal and all of its relevant parts in gory detail. At this stage, your adviser should be acting as the ringmaster of the circus, directing traffic so that you can continue to work on your business and not get (too) overwhelmed by the transaction.

Eventually, you’ll execute the documents, and the deal will be complete. Next month, we’ll look more closely at those documents and some common deal terms in the IT services space.

Cristian Anastasiu and Michael Schwerdtfeger are managing directors at Chapman Associates, a national mergers and acquisitions firm providing middle-market companies across various industries with the same resources, expertise and representation that is usually available only to much larger companies. Michael’s e-book “The Inner Workings of a Deal: Tips for a Successful Transaction” is now available for free download. Follow him on Twitter at MBSMergers.