Market View - may 2012
Making your IT company more valuable to a Buyer -
Part I: Maximising Value

This article is based on the writer’s than twenty-five years’ experience as an M&A practitioner focussed solely on the IT mid-market. “Maximising Value” applies particularly to nearly all such businesses.

A second article will focus on making it more likely the transaction will close.

1. The Financial Drivers:

PROFITS

  • Track Record of Sustainable Profitability
  • If not Profitable viewed as a Rescue

CASH GENERATION

  • Cash Flow Positive, not only P&L profit
  • Ability to generate cash in the long term

FINANCIAL VISIBILITY / RISK TO REVENUE

  • The longer the period of contracted revenue, the higher the price
  • High repeat revenues indicate customer satisfaction and hence less risk

TOP LINE GROWTH

  • Consistent Growth brings more value
  • Current Economy is becoming tougher

KEEP MANAGING THE BUSINESS

  • Keep making the budgets and forecasts

BENCHMARKING

  • Track similar deals
  • Track performance data of like companies

Good quality profit is the key item. Not clever accounting but generating decent profits over time and demonstrating they are sustainable. This is usually reflected in good cash generation. When a buyer sees losses his mindset changes: his thinking becomes that of a rescuer seeking a hard deal rather than a Buyer.

Financial Visibility. The more secure the future income is the less risk and that means the Buyer is more confident and therefore more comfortable paying a higher price. Managed Services and SaaS businesses provide a good example for they usually have lengthier contracts.

Contracting for long term periods and not having short notice periods provides comfort in that the Buyer feels confident about the future revenue. The opposite is not only poorer quality business but lowers shareholder value so fight hard against poor contract terms. For example an otherwise well-run company we know is strongly aligned to a major software manufacturer but is reliant on a 30 day cancellation clause with that supplier. For many would-be Buyers that will curb enthusiasm and hence dampen value. Others may not wish to engage at all.

Higher prices are paid for demonstrable growth and with more growth to come. It proves the offerings are relevant and competitive. It validates the strategy. In selling a business the past is important, the current position even more so but what the Buyer is really paying for is faith and potential in the future.

It is most important that during the period of taking your company to market that you Keep Managing! Keep your eye on the business and keep hitting the forecast numbers. A very common reason for Buyers chipping away at the price is that the selling management do not meet their targets during the sale process and negotiating period.

Benchmarking is not done often enough and rarely by smaller companies but it can be invaluable. It helps to position and justify price expectations. Build up information.

2. Market Enhancers of Value

INTELLECTUAL PROPERTY

  • IPR, knowledge, skills, partners and suppliers
  • Clear ownership of IPR

CUSTOMERS

  • Good, strong and direct relationships
  • Recognisable customer names

DEVELOP BUYER RELATIONSHIPS

  • Premium price more likely
  • Deal more likely to be done

BRAND

  • Effective sales and marketing programmes
  • Make market aware of you

Look after your Intellectual Property and ensure you have evidence of creation or ownership where relevant. Look after your partners and suppliers.

Recognisable customer names. People seem to be influenced by good names. Also the level of access influences value. C-level contact is more valuable and sometimes crucial to some Buyers.
Develop Buyer relationships. A Buyer who knows you whether they are a partner, someone you have done business with or someone you have taken the trouble to develop a relationship with is more likely to pay a premium price for businesses they know well and know how to leverage. Moreover, it will help to get the deal done too as the parties will have personal knowledge of have established a level of trust.

Brand is important. Employ a good PR firm where appropriate and affordable but anyway get out your press releases. Make your senior people available. Ensure your website is an asset.

People add value

MANAGEMENT

  • Strong team below owner(s), a real key
  • Important for growth plans for most Buyers

STAFF

  • Skill of technical, sales and support staff

OWNER/MANAGERS

  • Owners enthusiastic to exit make Buyers 'nervous'
  • Buyers often don't want Owners around long
  • Once you sell, you no longer own the business
  • Show commitment

Management is an interesting and subtle area especially in a single owner managed business. Buyers want to see a strong tier two team and that instils confidence and they value it. Invest in your team.

Once you sell you no longer own. Seems obvious but strangely that is often acknowledged. Many owners, soon to be ex-owners, think they will stay and manage in the same way. That won’t be the case. Acknowledge this and it will help you decide how much and for long you may wish to remain with the business.

Buyers do not like Owners showing too much enthusiasm for exit; it can make them suspicious and cautious. They can be seen as a barrier to change so the timing of their exit can be crucial. Even how they express their thoughts on exit early in the process will be noted by the Buyer. Owners are often wanted too, and some stay on for years. Most leave after a reasonable period but many who stay can do well. Another factor is the integration of ex-owners, who are now financially secure well off so may be viewed as being difficult to manage.

Commitment - Show commitment to the Buyer to help reduce handover risk. Deals may often have an earn-out element to retain and incentivise management to stay.