hosted-managed-services-servers-it
News: Press releases & Industry News
24
MAY
Industry News

Thinking of selling your tech business? Here are a few things you need to know

IT Services & Outsourcing, News

Earlier this week, I presented a keynote address to the IT Europa Managed Services and Hosting Summit in Amsterdam. 

The title of my presentation was billed as 'Mergers and Acquisitions: Building Value in Managed Services Businesses', but as I looked out to a sea of faces assembling after lunch, and following a few conversations with early arrivals as the room filled up, I knew that they weren't here just from a desire to enhance their general business knowledge. 

Rather, the question on people's minds in this particularly entrepreneurial segment of the IT industry was definitely 'so, what's my business worth?'.

Simple yet complex

A simple question to ask, but very complex to answer. Undeterred, I waded in and explained that two of the key issues underlying any successful transaction are timing and positioning. 

Timing can take many forms: for instance, a sale can be fundamentally affected by the value of NASDAQ – its ups as well as its downs, which tech M&A deal values and volumes follow closely. 

In any market, it is always difficult to call a peak in values, but you can be sure that the best time to sell is when your company is in great shape and growing – not when ill winds are blowing. Post-sale cognitive dissonance shouldn't be a barrier. As JP Morgan once said, 'I made a fortune getting out too soon'. 

Sell early? 

But if this feels uncertain, one thing is for sure: the multiples realised by all technology businesses decline rapidly from foundation to six-to-eight years old and follow a rather horizontal long tail thereafter. 

This is a crucial consideration. An early sale may make sense: to sell yourself short – for instance, realising 3x $6 million instead of 9x $3 million – can involve a few more years of hard graft. More work for less money? I didn't get many takers for that. 

Economic and business cycles

The fact is that M&A is part of a normal economic and business cycle, but it’s essential to the tech cycle – driven by a combination of required growth, rate of change, competitive pressure and large companies that have limited ability to innovate internally.

Companies need to acquire to remain competitive and fuel growth, and activity peaks when disruption accelerates. This could be technological, regulatory, or when new or high growth markets emerge. And we are seeing all of these applied currently in markets as diverse as autotech and fintech, with a consequent impact on valuations.

Financial drivers

These technological drivers are being compounded by unprecedented financial drivers, I pointed out. The aforementioned NASDAQ is near an all-time high, interest rates are still low, share prices are still high and tech companies are generating mountains of cash, which they need to spend.

Meanwhile, financial investors have built up massive funds and are active in tech; and now, new entrants are moving into the tech sector from traditional industrie, taking a bigger chunk of the overall action every year. The good news, then, I reassured the audience, is that the tech M&A market is in very good shape currently if you are a seller. 

What sort of business are you running?

So far so good. But I reminded the assembled audience that there is another crucial factor to consider: positioning. In short, what sort of business are you running? That’s an important one, as the difference between being positioned as a generic managed services supplier and an industry specialist can make a huge difference, in both the potential for exit and the price paid in a transaction.

For instance, disclosed generic IT Services company trailing 30-month median EV/EBITDA exits have been hovering steadily around the 10x mark in recent quarters. Yet those suppliers involved in Enterprise Software have claimed up to 17x with other sectors at points in between. This underlies the importance of serving a clear sector or having some defensible IP or product as part of the package to take to market.

Achieving best value

However, paying attention to timing and positioning isn't the only way to achieve best value. Buyers want to be certain that they are securing an asset that will increase in value.

As a seller, that means ensuring every business process is documented. Also, during the process it’s imperative not to lose sight of the day-to-day running of your company – no buyer likes surprises, they just increase perceived risk. Always meet your budget or you will have a negative impact on valuation or kill a deal altogether.

And it’s the case, I explained, that the majority of European technology companies sell to other European technology companies, not the West Coast behemoths to which many believe their company will be irresistible.

Buyer list

So, as for assembling a useful buyer list, I advised the audience to look closer to home and for left-field buyers and tangential sectors, and review buyer lists during the process as more is revealed about contemporary market dynamics.

Your potential buyer could be one of your existing partners or customers. And a 'known quantity' could be particularly helpful in considering integration planning – a strategic necessity that should be thought about from the outset.

It isn’t all about price

It is vitally important to ensure the transaction process is structured to create an auction environment ultimately. But both sellers and buyers need to understand it isn’t all about the price.

It’s important to negotiate the best overall transaction for your company, I emphasised, and that may involve issues such as responsibilities towards employees and the local community, as well as the suitability of the potential purchaser of the company to realise your original vision for your firm.  

Setting expectations

And, clearly, a company is only worth what anyone is willing to pay for it. It’s also vital to be realistic in what you should expect to realise. Nevertheless, it’s important for sellers to set buyer expectations early… but not too early. Just when to do so involves experience and judgement. 

Lastly, and on that last point I noted, particularly as most business owners are involved in a transaction for the first time, it makes sense to ensure that you have experienced advisors (of course), and specialist lawyers. I would say that, wouldn’t I? But you can be sure investment in this area will pay for itself many times over!

This article was published by:

Jonathan-Simnett

Director

Jonathan Simnett

Jonathan has been involved in the enterprise technology business for over three decades, managing and turning around existing business and helping management and their investors in fast-growth technology segments to grow, manage change, enter markets, transfer technologies, acquire, merge and sell. He’s worked with large and public infrastructure and system integration companies including: AT&T, Avaya, BroadSoft, BT, C&W, Cisco, HP, Global Switch, GMC, Huawei, Informix, Infosys, Intel, Myriad Group, Novell, IBM, IGT,  Nortel, OpenReach, Pace, TCS, and Sybase.


In addition, he has also worked with fast growth and venture-backed companies taking many to trade sale/public offering including: Calyx, Cambridge Cognition, CloudApps, Concateno, e2v technologies, Ecotricity, Engensa, free2give, Getjar, Holition, Intuwave, Interoute, Logicalis, Medelinked,  Multiven, Natural Machines, NMQA, Qinec, Socialbakers, Thorn Medical and Zomm.

He holds a Master’s degree in Science and Technology Policy from The University of Manchester, attended the Stanford Graduate School of Business and blogs on technology innovation, marketing and management  at "The World According to WestFour".