Cristian Anastasiu

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:

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:

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:

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.

Cristian Anastasiu is a managing director at Chapman Associates, a middle market mergers and acquisitions firm. Since 1990 he has participated in more than 40 transactions involving sellers with revenue in the $5 million to $100 million range in areas such as IT services, software applications, managed services, IT staffing, cloud technologies, SaaS, IT security, networking, data center and other technology and engineering areas. His experience includes acquiring and integrating companies for Cisco, where he also was director of worldwide sales. Follow him on LinkedIn.