7 Do’s and Don’ts to Consider When Selling Your IT Services Company

With business valuations at historical peaks, the new administration poised to raise capital gains taxes, and more private equity firms aggressively hunting for recurring revenue from managed services providers, 2021 is shaping up to see the most MSP merger and acquisition activity to date.

All of this activity has some business owners wondering: “Is now the time to sell my IT services business?” Whether you think you’re ready to sell tomorrow or in three years, there are some guidelines worth considering sooner rather than later. Understanding the “do’s and don’ts” below will help prepare your business for a clean, value-maximizing sale, while avoiding the horrors of a broken deal.

We’ve worked with more than 100 cybersecurity and IT services providers in the last 12 months as we work towards building a one-stop-shop security and IT services provider. Based on our discussions with business owners and deep dives into their businesses, we’ve picked out some common themes and shared buyer criteria that may be helpful for various stakeholders in the IT services community to consider as they explore exit opportunities.   

DON’T Just Ignore Calls from Brokers and Private Investors

Even if you’ve never really thought about selling your business, set aside a little time—maybe as little as 30 minutes a month—to hear out an interested investor. You don’t need to let them grill you. Rather, you should ask them up front: “what differentiates you as a capital provider.” More importantly, use the conversation to learn how investors will look at and value your business, what makes your business attractive, and what you can improve upon if you want to fetch a higher price when you do decide to exit.

DO Start with the End in Mind

Do you want to cash out entirely and go sit on a beach? If so, engaging with a technology services provider or a private-equity-backed “rollup” that is consolidating a batch of similar smaller firms may be your best option. There’s a higher risk around integration hiccups and culture clash, but that doesn’t matter so much if you no longer have a significant stake in the business.

Some independent “search funds” will also look to buy your business alone, and replace you as CEO, which may be attractive if you want to ensure your customers and employees are treated right. But you have to make sure they have the money to do the deal before you spend too much time with a search fund.

Would you rather take some chips off the table but retain an equity stake to take another bite at the apple? In that case, you want to find an investor that views you as “the platform.” This can be a private equity firm, or an independent sponsor. You’ll get more upside and more operational control as the platform (and often, a higher valuation multiple—good leadership is hard to find!), but you’ve got to trust your investor-partner here and buy into their vision. 

DON’T Be Afraid to Have This Conversation Up-Front

It’s critical and it informs everything else—from which potential buyers you’ll spend time with to who (if anyone) you’ll hire to help you run any future sale process.

DO Be Honest About Where Your Business Falls Short

Investors don’t expect you to have a perfect business when they show up on the first day after investing. In fact, that’s often precisely why they are investing—because they have identified key initiatives for improvement or growth levers that have not yet been pulled. By proactively highlighting your weaknesses along with your strengths, you’ll build trust with the potential buyer, thereby speeding up the process, increasing the likelihood of closing a transaction, and smoothing the post-investment integration path. Paradoxically, identified areas for improvement—you can call them out as “avenues for growth acceleration” or something fancy—may even help buyers get comfortable paying more for your business. 

DON’T Misrepresent Labor Costs and Gross Margins

We’ve seen some business owners (not always intentionally) juice their gross margins by under-allocating labor as a cost of goods sold for managed services. Experienced buyers will see right through this, and as we just discussed, establishing trust is critical to increasing the likelihood of a quick process and successful acquisition. If buyers sense you’re playing games with labor cost allocations, they’ll wonder where other warts might be hiding.

DO Emphasize Cloud and Security Capabilities and Certifications

Duh. If you’re reading this blog, we probably don’t have to explain this, but buyers will pay an extra turn (or two) on their valuation multiple for in-demand capabilities like cybersecurity and cloud management that enable penetration of growing markets.

DON’T Waste Time Providing Customized Information to Buyers

You have a business to run! You can send the same package to multiple buyers—they won’t be offended, and it doesn’t hurt to make sure that they know that they aren’t the only company you’re considering. Provide the basics needed to get to valuation and structuring conversation. Then, try to have that conversation before you start diverting more resources to the process. Initial calls and relationship building are great but spending too much time on a failed sale process can be distracting and even destructive for resource-constrained business that relies on human talent to succeed.

Zack Miller is a partner at Worklyn Partners, a New York-based investing and operating company that invests in cybersecurity and IT services businesses.