Selling My IT Services Business — When Is the Right Time?
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 …