CHANNEL PARTNERS have their hands full just taking care of the day-to-day tasks required to run and grow their businesses. There’s a lot to do, but even when sales are rising and the company’s prospects look bright, there will come a time when it makes sense to pull the cord. Every owner needs an exit strategy.
That day may be years away, but it’s never too early to start planning the sale and all the steps required to make it a smooth transition. While the primary goal for most IT entrepreneurs is maximizing their selling price, they need to address several factors to ensure that can happen.
At the heart of an exit strategy is the valuation process—in effect, what is the company worth to those interested in buying it? To that end, channel partners can influence the price they receive at a later point by offering the most valued services today.
“You need to think like a buyer,” says Rayanne Buchianico, co-owner of SellMyMSP, a Boca Raton, Fla.-based accounting, tax, and business systems consultancy that helps smaller IT companies plan their exit strategies.
“Buyers want to buy profitable companies, so it stands to reason that you want to focus on profitable services,” says Buchianico. A good rule of thumb, she suggests, is to investigate and determine which services are most lucrative for the business and which will offer the most future potential.
“The most profitable services are those that may be sold in volume without increasing the amount of work inside the company,” Buchianico observes.
Cash Flow Is Key
That list currently includes hosting, managed services, and security. “Once those are set up, the maintenance tends to be minimal,” Buchianico explains. “You can charge for the initial install as well as the monthly recurring service to make sure everything is properly maintained and up to date.”
She strongly advises channel partners to focus on driving incremental monthly recurring revenue, so that whether an IT services business owner is on vacation, out sick, or asleep at the wheel, his or her bank deposits continue to grow. Potential investors and buyers scrutinize those income streams.
More specifically, firms with “higher percentages of recurring revenue see higher valuations,” according to John Austin, a partner in the Austin Dale Group Inc., a value enhancement consulting firm located in Austin, Texas. In practical terms, an IT services firm with 40 percent of its income derived from managed services, cloud services, or other monthly support contracts will typically be twice as valuable as a company generating 20 percent of its revenue from those offerings.
Buyers are risk averse. Long-term recurring revenue contracts give them more confidence in their prospective purchase. A healthy cash flow also allows for a more seamless ownership transition. That steady income gives the buyer a cushion, with time to assess business processes, employees, and customers without needing to make urgent changes.
Other factors that drive a premium price are a firm’s intellectual property and patented processes, according to Bob Dale, also a partner in the Austin Dale Group. “A company that has developed a SaaS or other proprietary service receives a higher valuation,” he says.
With so much emphasis on recurring revenue, break/fix services and one-time transactions need to be reduced and eliminated when possible. “When companies want to buy other firms, it pays to minimize the amount of random revenue,” says Austin. If a service doesn’t revolve around a client relationship, including break/fix and hardware sales without support contracts, it detracts from the company mission and could negatively impact its valuation (see “Not All Services Are Created Equal” for additional services to avoid).