Is it Time to Sell Your IT Services Business?
Among the questions that keep entrepreneurs awake at night, one is growing in importance: “Should I sell?”
More often than not, the answer comes down to what kind of business owner you are. If you’re a serial entrepreneur, the answer was baked into your decision to open the business to begin with. By the time your operations are large enough to deliver a lucrative exit, you’re focused on timing or even freeing yourself up for another opportunity. If you got into business for more personal reasons—say, to own your own business or to build a better mousetrap—the situation can be more complicated.
In either case, the question of selling your business is being pushed to the forefront in 2017 as convergence-driven consolidation is becoming the talk of the VAR, MSP and agent space.
Over the next few weeks, we’ll dig into the whys and hows of selling your business with some timely tips and discussions. To get the conversation rolling, let’s look at how events in the IT and telecom space line up with some traditional factors indicating it may be time to sell your business.
Why Now, and Why It Feels So Sudden
Few would disagree that players from all sectors of the IT space are invading each other’s kingdoms thanks in large part to the emergence and rapid adoption of cloud solutions. Unlike many past technological leaps, cloud adoption outpaced most forecasts and caught many—even those inside the industry—flat-footed. This was because the convergence of apps-on-demand, IT services and the bandwidth to make it all work empowered business units to adopt and develop IT solutions outside of their company’s IT departments. Since many research firms only interviewed IT leaders about cloud adoption, some forecasts were low. They argued that the cloud was more bark than bite while, in reality, its adoption was accelerating.
Since solutions providers—VARs, MSPs and agents—also were interfacing primarily with IT departments at that time, many in the channel also believed that cloud was being overhyped. Some channel partners knew cloud was gaining traction, to be sure, but if the speed of adoption caught you by surprise, rest assured you’re in good company.
Today, the world has caught up with this reality and the migration of IT spending toward the cloud is so widespread that knowing which forecast is accurate doesn’t matter from a business planning perspective. This shift in spend is massive and its impact on your business is inescapable. Walls that historically have divided the IT and communications space are coming down at the same time as the walls inside the companies they serve are collapsing. Technology sales opportunities are now open across organizations, not only through their IT departments. As a result, many think now is the time to walk through all those classic questions of timing, resources and desire that underpin whether or not to sell.
Timing, Scale and Scope
For serial entrepreneurs and investors, timing a business sale is a lot like timing real estate or stock market transactions. Trying to time a market’s peak is a fool’s errand, but aiming for a seller’s market is always desirable and there are some classic clues that can lead to opportunities for boosts in valuation. Entrepreneurs of all stripes can benefit from the timing and tactics of the build-and-flip set.
At a basic level, the early and middle stages of a consolidating market can mean opportunities for higher valuations because buyers are concerned first and foremost with scaling up. Better yet, being positioned to sell as major rollup activities start can be particularly advantageous because rollups are inherently more about scale than scope, which helps on two fronts:
- First, buyers sometimes are less picky about what lays beneath the top line as they leverage their larger scale economies to generate greater profit potential post-acquisition, making your current profitability less important than it would be otherwise.
- Second, when applicable, the strategic benefits of scope on top of scale have the potential to drive deals toward the higher end of the valuation spectrum.
Behind the quest for scale, economies of scope drive most other transactions. Here, the objective is positioning complementary services in order to:
- fill or expand a product set with cross-sales opportunities
- acquire better, or even replacement, technology for your own products
- deliver end-to-end solutions to a vertical
- expand geographically
- other complementary opportunities
Entrepreneurs sometimes confuse scope with diversification because scope transactions also diversify revenue streams. Scope transactions also add scale, for that matter, but they primarily are centered on complementary, not wholly diversified, revenue opportunities. So, for example, a deal in which an IT VAR buys a telecom agency is complementary because bandwidth fuels the rest of its product set. In our converging IT world, opportunities for companies to generate true synergies from scope transactions run the gamut of possibilities, particularly with the massive shift toward cloud spending and how that impacts players across the industry.
Brokers can help find the right kinds of buyers, but savvy serial entrepreneurs have learned to start rolling out targeted publicity efforts detailing wins and business development efforts highlighting the firm’s strengths 18-24 months before they want to sell, so buyers can find them and see the potential for deal synergies when scanning the space for opportunities. In fact, as buyers become more sophisticated, they look at those activities as signals that a firm is open to potential acquisition or merger.
What About the Other Side of the Deal?
What about becoming the buyer or consolidator yourself? Good question. Of course, there’s opportunity on the other side of the transaction. (We’ll be covering that in-depth next month.) The question often comes down to whether you have, or can obtain, the resources necessary to execute the deals yourself.
- Do you have the financial backing or wherewithal to make transactions happen? In many cases, this means taking on new personal financial risks or hands-on investors that entrepreneurs often find disagreeable after years in business.
- What about shifting management needs? Can you attract an “A team” to run your business for you as you scale up? If so, is it in your personality to stay out of their way and let them integrate and run your operations without second-guessing and bottlenecking them while you apply your business-building skills to finding the next deal(s)?
- At a personal level, is it appealing to sit atop a larger operation with all the process rigidity and standardization necessary to bring disparate organizations in line?
In other words, if you have the financial ability to acquire companies and the personal connections to bring in the best help in your space, can you stomach the shift in management duties that have lead so many entrepreneurs to claim they’re not having fun anymore? There are no right or wrong answers, only your personal preferences and/or an honest assessment of your skills and tolerances. However, if you answered “no” to any of these questions, you are more likely to do better on the “sell” side of a consolidating market than the “buy” side.
The Personal Stuff
Since every company is truly unique, the reasons that can drive a business owner to sell beyond larger market factors include:
- your exhaustion vs. passion ratio (e.g., the idea of pivoting to a service-based model and ostensibly starting over may not be high on your to-do list)
- shareholders and/or partners wanting to cash out
- lack of a succession plan (e.g., sometimes the kids don’t want to take over the family business)
- age and retirement considerations (maybe you’re just too damned tired and want to enjoy your golden years)
- divorces, health issues and other personal factors
Of course, there are more considerations than is feasible to list here, but all are unique to you, your business, your partners and your employees.
There are no Magic 8 Ball answers to the question, “Is it time to sell?” In practice, you can find examples of companies that rushed into consolidation frenzy when they had more time than they thought they did to grow and consider their options. There also are plenty of companies that should have sold before they did. Every business owner’s experience is unique.
Whether you’re already toying with the idea of selling or only starting to consider how the predicted changes in the competitive landscape over the next several years will impact your business, this column and forthcoming information can serve as a reference for your planning in 2017 and beyond.
Khali Henderson is senior partner with BuzzTheory Strategies, a marketing consulting firm specializing in the channel. She has more than 25 years of marketing, communications and content development experience in the technology industry.