Selling Your Information Technology Business - Number One Value Driver
Why is this so important? The first answer is risk. Buying a business is risky. Any factor that reduces this risk is rewarded with transaction value. Forecasted sales, for example are at the high end of the risk scale and are heavily discounted in value. Historical time and materials revenues that are " most likely to be at about the same level" next year are somewhere in the middle of the risk scale and are valued accordingly.
The owner and key employees may leave after the acquisition and may take their customer relationships and accounts with them. Those customers locked into contracts are less likely to leave. The acquisition can temporarily inject uncertainty into the marketplace and cause disruption or delays in pending sales situations. The integration efforts will introduce execution risk into previously routine revenue generating activities.
The acquiring company wants the existing customers to stay put long enough to get comfortable with the new company. Contracts with plenty of time remaining are their security.
How can you use this knowledge to your advantage? Go on a mission to convert every time and materials revenue source you can to an annual contract. If you are a software company, for example, and you have customers that are not on an 18% - 20% annual maintenance contract, get those customers converted. A strategy might be a one time "get current sale" in return for signing an annual maintenance contract. The strategy that is pervasive and growing in
software is SaaS or software as a service. You exchange minimal up-front costs for a monthly combined purchase price amoritization and maintenance charge. At the three year mark the SaaS model becomes very powerful. The rate stays about the same even though you have recaptured what used to be the initial license fee.
It is a much stickier model, one that investors love. Services companies should review their T & M records with their regular customers and devise programs that convert those to annual fixed price programs. The growth of managed services providers has been explosive because they can deliver your company support solution for far less than you can internally. Equipment dealers come up with your own extended warranty programs. Services firms devise a concept where you provide departmental or
functional outsourcing for your clients.
On a value scale, contractually recurring revenue is a 10, expected historical revenue is a 6 and a sales pipeline is a 3. Move your 3's and 6's to 10's and recognize a big boost in your business selling price.
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Until next time!
Dave Kauppi is the author of "Selling Your Software Company - an Insider's Guide to Achieving Strategic Value, editor of The Exit Strategist Newsletter, a Merger and Acquisition Advisor and President of MidMarket Capital, Inc. MMC is a private investment banking and business broker firm specializing in providing corporate finance and business intermediary services to entrepreneurs and middle market corporate clients in a variety of industries. The firm counsels clients in the areas of merger and acquisition and divestitures, achieving strategic value, deal structure and terms, competitive negotiations, and Letter of Intent Consulting. Dave is a Certified Business Intermediary (CBI), is a registered financial services advisor representative and securities agent with a Series 63 license. Dave graduated with a degree in finance from the Wharton School of Business, University of Pennsylvania. For more information or a free consultation please contact Dave Kauppi at (269)231-5772, email Dave Kauppi or visit our Web page MidMarket Capital. Click Here For Our New Book on Amazon