M&A Knowledge for the IT Services Business Community.

Myth Busting

Get the Highest Value When You Sell

Rick Murphy
CEO & Managing Partner

As a company whose primary mission is to serve as a buy-side advisor to IT companies on their acquisition of other IT firms, we have a unique perspective about the process. Unlike the viewpoint of most sell-side brokers who are simply seeking to make a one-time-only sale happen, we want to help IT business owners maximize their value when they sell. Why? It’s our mission — and our passion — to help our buy-side clients grow their company over the long term, so helping the seller get the best value is actually helping our buyer get maximum value from the business over time, because the deal was successfully structured and done fairly for both sides.

I had the opportunity to present strategies for improving an IT company’s value at Marketopia’s 4U2GROW Conference during the ConnectWise IT Nation Connect 2021 show. Speaking with this group of IT business professionals, I discussed how IT owners can get the best purchase price for their IT firm, whether they are selling now or later, by explaining the purchaser’s prospective and how thinking like a buyer is deeply interconnected to maximizing purchase price.

Value isn’t the same thing as a “valuation;” it’s the perception of total enterprise worth that leads a buyer to believe the seller’s company is valuable and worth the purchase price the seller will accept. Why does this matter? Because the primary question prospective buyers are asking themselves is, “If I spend this amount of money to buy this company, when am I going to get my money back?”

So, if you are a prospective seller, you need to start thinking like a buyer, not a seller. But how do you straddle that line and ultimately close a deal that will make you both happy? Focus on the “opportunity” first, and “the money” last. Most advisors and lots of owners are all about “the numbers” first and the opportunity is an afterthought. Here at Cogent we see things differently:

  • We believe focusing on why the parties would want to make a deal at all (the “opportunity”) should come first and be thoroughly discussed over a number of meetings, so both sides can focus on what makes the deal work well after closing, while they discuss the numbers, purchase price and deal structure.
  • For owners of IT Service Providers, combining their companies has to deliver more than 1 + 1 = 2 or the transaction likely won’t work well (our logo means “1+1=4” by the way).

Once the parties have a good feeling for the opportunity, and on a granular level if practical, it is much easier for everyone involved to discuss the financial details because there is now context underlying the conversations. This helps us more easily solve the most frustrating and often elusive part of any transaction: a selling price that works for both sides. That’s why we think of ourselves as “Transaction Therapists,” helping both sides understand the “why” behind the deal.

As a buy-side advisory firm that has executed more than 140 transactions in the IT Services space since 2010, and still counting, we have learned numerous “inside-the-transaction” secrets that can help IT business owners master transaction conundrums. Even if you are not ready to sell today, there are strategic steps you can take now to boost your selling price later.

Some IT Myth Busting

  1. I’m just not sure it’s the “right” time to sell. I’ll wait until I grow some more so that I can get a better price.

    Cogent Insight: Our experience bringing hundreds of IT companies to the table has shown us that the IT Service Providers’ market is so frothy that any time might be a good time to sell, if the “opportunity” is right.

  2. As the owner, I set the selling price for my company (or my broker will).
    Ask yourself this, when has any buyer ever said, “let’s use the seller’s valuation!” A seller can set an asking price all day long, but it always comes down to one thing: What is a buyer willing to pay and how do they want to structure the deal?

    Cogent Insight: It’s the potential ROC (return on cash) of the combined entities over time, not a company’s valuation, that drives purchase price for transactions that have the best success after closing. An impressive yet realistic ROC picture, what we call “Forward Value,” can increase a buyer’s interest and underpin the best purchase price.

  3. I’ve been “investing” in growing my team. I know my staff is bit “fat” right now, but I’ll let the new owner sort that out.

    Cogent Insight: Overstaffing, even in just one operational area, can significantly deflate your company’s value. Aim to keep your operation no more than 10% “overstaffed,” (You’ll make more money now and when you sell.)

  4. We have some unprofitable customers, but I want to show a robust list of long-time customers when I sell.

    Cogent Insight: Regardless of when you are selling, now is the time to analyze your customer list and determine which customers are the most, and least, profitable. Then make sure you cull the unprofitable customers ASAP even if you have to take a top-line revenue hit. You will make more money now, and when you sell. (See the theme here?)

Still Waiting to Sell?

For those who aren’t yet ready to sell, right now is the best time to consider your relationships with customers and employees. No single employee, not even a top executive, should own a customer relationship alone. Don’t keep underperforming employees on the payroll just because they have tenure. Keep your talent roster lean and energized — the rest of your employees with thank you for it! Don’t be locked into top line revenue as the goal, get busy focusing on bottom line results. It’s ok to make profit, really.

For more information about how today’s complex M&A landscape relates to the MSP market, visit www.cogentmergers.com

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