Raising the Value of your IT Business in 5 Steps
More buyers are looking at acquiring IT companies and these 5 steps can help set yours apart.
Over the past 10 years, the IT industry has exploded. As more people use the internet to globally connect, a need developed for individual and commercial technology that even in the present, knows no end. As our society continues to move forward and develop new-age information technology, the demand for design, security, storage and connectivity increases; making IT services a booming industry in the American economy. Since 2003, the IT services field has grown over 37% and is expected to grow another 4% in 2015. Experts have predicted that by 2018, the IT Services industry will have created over 108,000 jobs in the United States and growth is only going to increase with trends moving toward cloud computing, e-commerce and offshore outsourcing.
If you own an IT-related business in the Southeast, one of the best possible times for you to sell your business is now. Not only is the Charlotte market thriving and favorable for sellers, but projected industry growth and opportunities are bringing more buyers into the market interested in acquiring an IT business. IT businesses are seen as low-risk to a buyer because of the unlimited opportunities, constant growth and trends forecasted for the next decade. IT Services encompasses a variety of IT business types, most of which are geared for extreme growth. If you own an IT business and are on the fence about selling, the formula below may give you an idea of what your business could be worth. Please remember that this formula serves as a guide, only a professional M&A intermediary can tell you the true value of your business.
- IT Services (includes industries below): 2.5 – 3.5 Adjusted EBITDA
- Network Project & Support Companies
- IT Consultants & Outsourcing
- Software Developers & Publishers
- Managed Service Providers
- Software Resellers
- Website Developers
- SEO & Internet Marketing Companies
If you think you still may be 6 months to 2 years away from selling your IT business, there are some steps you can take now that will help increase the value and ultimately, get you a better price and attract more buyers to your business.
First and foremost, organize your financials. In the IT sector, we often see that the business owner is wearing so many hats that they do not have time to focus on maintaining and analyzing financials. Set aside some time and get your financials organized. Using a program like QuickBooks can help you organize years of balance sheets and P&Ls in a relatively short time.
Once you take this step, there are several tweaks you can make that will help your business’s profitability. For example, one thing you can do is to stop running personal expenses through your business. Allow your business to show the true financials so that you can realize the best price for your business. You can also analyze your customer and supplier relationships to see where your sales are most heavily concentrated. If you are finding that one customer is responsible for 50% of your business, you may have a difficult time getting bank financing. Your financials will also tell you how your business is trending. Valuations are calculated on the previous 3 year’s financials with the most weight on the prior year. If your business has been trending upwards, this is a great time for you to sell and your sales price will most likely be higher.
Build a Team
Building a good team is important for any business, but when it comes time to sell, not having a team in place will scare away any buyer. Take a step back and review your staff. Do you have a management team in place? Do you have efficient support for every department? Can the business function without you? These crucial questions can help you determine where the gaps are in your team and how to fill them. This is a task you will want to work on several months to a year prior to selling a business so that everything is running smoothly when you are ready to exit.
As an IT business owner, you will need to consider your strengths and weaknesses when choosing a team and planning for the future. Are you a strong manager or more technical? If you are technical and your team mainly relies on you, you need to recruit some technical employees to fill your void. Keep in mind that your skills will be leaving the business when you do, and you need to set the business up so that the new buyer, whether technically-inclined or managerial, will be able to easily transition into the business.
For a company specializing in computer technology, you would be surprised how many IT businesses we valuate that do not have modern, optimized websites! It is critical for every business to develop a website and establish a digital marketing plan, but for an IT company to miss this mark is even worse. If a consumer searched your company on the internet, would they be impressed? Consumers are using the internet more than any other medium to check up on companies, so having a modernized website will only work in your favor. If feasible, you may want to look into hiring an SEO consultant or a web developer (if you do not have one on staff) to redesign your website and redirect some of your marketing efforts. Taking the steps to complete a marketing overhaul and web design is something that should be done months prior to selling. By working on this now, not only do you have a shiny, new website to show buyers, but you also have the analytics to show if traffic has increased.
Increase Product & Service Offerings
Depending on your company’s current offerings and financial state, you may want to consider increasing your product or service offerings. The product and services that can be offered by an IT services firm are endless, but when choosing what is right for your business, keep in mind that recurring revenues are king. IT companies with recurring revenues, such as through service contracts or managed maintenance agreements, sell at higher multiples and are very attractive to buyers. If you are a software developer or reseller, select software products and software subscriptions can help increase your multiple. Partnering with larger IT companies also has it’s benefits. By partnering your firm with a major service provider can also increase your multiples. Even adding one additional service, such as web design or security systems can increase the multiple and get you a higher sales price.
Another major turn off for buyers is seeing all client and supplier relationships funneled through the owner. If this is happening in your business, this is a critical issue that needs to be addressed, sooner rather than later. From a buyer’s standpoint, walking into a business where all revenue sources are familiar with the previous owner and not you is uncomfortable. Even if you don’t think you will be ready to sell for a few months, no harm can come from familiarizing members of your staff with key decision makers at client companies. Consider moving some of your staff into positions that will allow them to take the lead on key accounts, such as moving engineers into a project management role. This will foster a relationship between the client and your company as a whole, which will make it much easier for a new owner to transition into your role.
If you have been thinking of selling your IT Services firm for some time now, 2015 is going to be a great year for you to take that first step. Even if you aren’t sure if the time is right for selling, Viking Mergers and Acquisitions offers a no cost, no obligation valuation that can help you plan for your future. If you don’t think your business is quite there yet, we hope these 5 steps can help you prepare and take your business to a higher level.