12 Value Drivers for IT Service Companies
Free webinar on March 21
Do you know the key factors - or drivers - that are responsible for most of the value of an IT service company as viewed by an investor? If you are an owner or executive it's critical to know your value drivers, whether you're building your company for the long haul or plan to sell it in the next three years. Once you understand your value drivers you can rate your own firm, understand its strengths and weaknesses, and focus on areas that need the most attention. At this webinar we'll cover 12 of the most common value drivers - as perceived by outside buyers - for IT service companies, including MSPs, cloud computing solution providers, and SaaS solution providers. This can give you a valuable strategic and tactical tool in running your business, improving it, and eventually maximizing its value.
Even if you plan to keep your business for a long time, concentrating on these value drivers will help you build a company that is easier to grow and manage, and ultimately more valuable.
Date: March 21, 2012 (Wed.)
Time: 11 AM to 12 PM CST
Target Audience: Owners and executives of small to medium sized companies, especially IT service firms, including managed service providers, cloud computing solution providers, and SaaS solution providers.
Click to register, seating is limited.
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2011 IT Private Equity Deal Review
After a strong start in 2011, U.S. private equity deal activity in the information technology industry experienced a fairly dramatic slowdown during the second half of 2011. Nevertheless, the industry still had a strong year with 223 deals closed during the year, worth more than $25 billion of invested capital, the highest totals since 2007. And there are many additional private equity deals in the works that haven't closed yet. A lot of private equity firms have lots of cash to invest and are searching for companies with good growth opportunities, so the IT industry is attracting a lot of attention.
The software sector dominated PE investments in the IT industry with 55% of the deals, followed by services with 18% of the deals. The service area is getting hotter, especially with the consolidation that is accelerating in the managed services area and the attractiveness of cloud computing and software as a service (SaaS). This is driving up valuations and the number of deals is expected to increase for the next two years.
Source: pitchbook.com |
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 Welcome to the March edition of our newsletter. Spring is coming (at least in Texas). It's a great time of year to start preparing your garden. And it's a always a good time to focus on what drives value in your business. We learn a lot about "value drivers" by talking to buyers and investors. In fact, one can "reverse engineer" a business based on knowledgeable market feedback and thus make it more attractive and valuable.
We'll be discussing some of the main value drivers for IT service businesses in our March webinar. Eve n if you plan to keep your company for a long time, concentrating on these value drivers will help you build a company that is easier to grow and manage, and ultimately more valuable. We hope to see you there, or talk to you soon. Happy growing!
John Austin & Bob Dale
info@austindalegroup.com
512-327-0427
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A "Pig in a Poke"
Once a buyer has negotiated a deal and secured the necessary financing, he or she is ready for the due diligence phase of the sale. The serious buyer will have retained an accounting firm to verify inventory, accounts receivable and payables; and retained a law firm to deal with the legalities of the sale. What's left for the buyer to do is to make sure that there are no "skeletons in the closet," so he or she is not buying the proverbial "pig in a poke."
The four main areas of concern are: finance, management, specifics of the business, and marketing. Buyers are usually at a disadvantage as they may not know the real reason the business is for sale. This is especially true for buyers purchasing a business in an industry they are not familiar with. The seller, because of his or her experience in a specific industry, has probably developed a "sixth sense" of when the business has peaked or is "heading south." The buyer has to perform the due diligence necessary to smoke out the real reasons for sale.
Finance: The following areas should be investigated thoroughly. Does the firm have good cash management? Do they have solid banking relations? Are the financial statements current? Are they audited? Is the company profitable? How do the expenses compare to industry benchmarks?
Management: For a good quick read on management, the buyer should observe if management is constantly interrupted by emergency telephone calls or requests for immediate decisions by subordinates. Is there a lot of change or turn-over in key positions? On the other hand, no change in senior management may indicate stagnation. Are the employees upbeat and positive?
Financing: Buyers should make sure that the "money is there." Too many sellers take for granted that the buyer has the necessary backing. Sellers have a perfect right to ask the buyer to "show me the money."
Marketing: Price increases may increase dollar sales, but the real key is unit sales. How does the business stack up against the competition? Market share is important. Does the firm have new products being introduced on a regular basis?
By doing one's homework and asking for the right information and then verifying it, buying a "pig in the poke" can be avoided.
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Off-Balance-Sheet Items
Although off-balance-sheet items are not obvious to the acquirer, if they are not disclosed by the owner up front, the acquirer's confidence in the owner will be shattered when, and if, they are disclosed in due diligence.
The best policy is to be up front with the acquirer early in the process about a number of issues, including the following off-balance-sheet items (most of which will be discovered in due diligence):
- Prepayments or deposits from customers
- Work-in-progress billing, frequently exercised by large capital goods manufacturers and/or companies with government contracts
- Contract obligations, such as predetermined pricing over the next several years
- Lease obligations, such as escalation clauses or a contractual restriction from subleasing
- Legal threats by customers, vendors, or employees that have not yet materialized
Many times off-balance-sheet items are innocently overlooked by the seller. Imagine this scenario: The owner of a sporting goods store was trying to sell his business. Not knowing whether or not the pending sale would be consummated, he ran the business as usual. To promote a new line of bicycles, the seller placed a discount coupon ad in the local newspaper. Over the next few weeks the seller focused on the sale of his business and failed to inform the buyer of the discount coupons. The day after the sporting goods store was sold, customers started to redeem their coupons with the purchase of bicycles. This undisclosed liability amounted to $5,000. In our scenario the seller would agree to repay the buyer to keep him happy, but the point of the story is to show that off-balance-sheet items can be overlooked unintentionally.
If this "surprise" had revealed itself prior to the sale closing, the buyer would probably have been concerned about what other surprises the seller was keeping hidden.
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Staying Power (part 5 of 5)  How to retain key employees during the M&A process Nothing can turn a sweet M&A deal sour faster than a key employee leaving the company before the transaction is final. This kind of loss can reduce a company's selling price, hinder integration plans, turn a star executive into a formidable competitor and even shut down a deal altogether. But bonus plans and other incentives can motivate key employees to stay and help reduce the odds that this common M&A mishap will happen to you.
It's important to ask employees what they want and prepare to be flexible in what you offer them. One employee may want an employment contract with a one-time bonus structured to prevent an undue tax burden. Another may prefer a bonus in the form of a defined benefit plan that is funded with after-tax dollars and later can be rolled over into the employee's 401(k) or IRA. Other employees may be satisfied with nonfinancial incentives such as vacation time, a reduced schedule or the option to telecommute for a specified time period. Clarifying their roles and performance expectations and ensuring that changes in compensation policies and processes, bonus arrangements, benefits and share schemes don't affect them adversely will also help you retain key staff.
Not all employees receive retention bonuses, but it's still important to reassure rank-and-file workers that they're part of the team and crucial to the future success of the new organization. Early communication about the deal is essential, including the rationale behind your decision to award certain employees bonuses. A management representative - possibly from HR - should be available to answer questions and address concerns about the merger and its implications.
There's no simple formula for establishing an effective retention bonus plan. So start thinking early in the sale process about how you'll keep your experienced and knowledgeable team members in place. The ill-timed loss of even one key employee could mean the difference between a successful deal and one that falls apart before you reach the finish line. |
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