Seller valuations are very healthy right now. In the IT space, for example, many companies are selling for around 8-9x their LTM EBITDA (Earnings Before Depreciation and Amortization). But the truth is that not everyone can command that type of valuation for their business in upfront consideration. The question when you’re selling a business then is: How can a good company with a solid track record — that is not on everyone’s radar — get more visible deals and a valuation closer to the industry average?
First, determine your value
In leading the buy or sell side of over 36 transactions, I believe it’s important to first have realistic expectations about the value of your business.
For example, if you have a solid track record of performance – both earnings and revenue growth – you should receive a multiple of your last twelve month (LTM) earnings that is above and beyond the book value (shareholders’ equity) in “upfront consideration.” This could be paid in cash, stock, promissory note, or combination thereof.
Know the competition
The next thing to do is determine where your company stands in the midst of the competition. There are tens of thousands of small and middle-market companies in this country with $500 million or less in annual revenues. Many are good companies with solid track records. But they do not appear on many acquirers’ radars simply because there are so many of them to choose from.
IT companies in particular can get lost in the mix because the IT industry has almost always been highly fragmented. And in the IT industry, many different types of companies are lumped into the “general” IT category, and some of those businesses are more attractive than others (i.e., they have higher growth rates and margins).
Identify ideal acquirers
The next step is to identify ideal financial or strategic acquirers, which can help you better position yourself at the front of the pack. When evaluating these acquirers, it’s important to look for ones who:
- Are experienced and seeking to add to their existing capabilities/offerings or expand their geographic presence
- Are looking for good, experienced leadership to help them get to the next level
- Have a philosophy of a “buy-in” versus a “buy-out”
- Know your business (at least at a macro level)
- Care about you, your staff, and customers and are willing to offer incentives to retain key employees
In addition, it is important to identify acquirers who are looking for synergies but at the same time do not want to hurt/interrupt your business by forcing their tools, methodologies, policies, and procedures too early in the integration process. Ideal acquirers are additive and complimentary to the success you’ve had for years.
Ideal acquirers are also truly looking for a “win-win” – the 2+2=5 or something greater, and of course their egos are in check. This means they do not believe their way is the only way and they are open to alternative solutions, strategies, or tools. This can give you comfort in a performance-based earn-out and the opportunity to significantly increase your upside valuation.
This vetting approach might take selling a business little longer, but to find the right acquirer with the right philosophies at the right valuation can be well worth the wait. In the meantime, it’s important to make sure you are focused on running your business right in the short term and long term, which will be evident in your P&L.
If you’re looking to sell or merge your company to achieve the next level of success, an M&A expert can help you get the most from the time, money, and sweat you’ve invested through the years.
Steve Pomeroy is the founder of Big Change Advisors, an M&A consulting firm in Los Angeles focusing on middle market companies in the IT services space. Since 1992, Big Change leaders have completed over 36 transactions including M&A, Capital Sourcing, and Public Offerings representing over $800 million in total transaction value. Big Change Advisors donates a percentage of all fees to help serve the homeless through the Los Angeles Mission. To request a free consultant, contact us.