Growth By Acquisition (Part 2) – Let’s Talk Valuation

Today, in Part 2, we’ll focus on something that I get asked about all of the time… valuation and what to look at when figuring how much a business is worth. This is a very common question and the truthful answer is not as simple as you would hope. So I will do my best to give you an idea of how a business is valued the right way in an M&A scenario inside of the IT Channel.

First, a caveat. I need to explain what I mean by M&A. Although an individual or group of investors can buy an existing business, I’m referring to valuation for an M&A transaction consisting of an existing company putting together a deal with another existing company to bring the acquired company into the fold through an asset purchase transaction. The other scenarios (investor or an individual with no existing company) have similarities in what you will read below, but are different enough to warrant not including them in this post.




With that said, let’s talk first about what sellers (the entity being acquired) should have in mind. As much as you don’t want to hear it, the value of your business is ultimately what another entity is willing to pay for it. Another thing to understand is that models and multiples are just ballpark items you can use to have an idea of what your business MAY be worth to another entity. It may actually be worth less or quite possibly be worth more to them.

Keeping the aforementioned things in mind, know that the following will be of high value in some way, shape or form to any buyer:

• Perceived Level of Risk
• Intellectual Property
• Unique Capabilities
• Revenue Model (which also ties to risk level)
• Cultural and Technical Fit (also ties back to risk level)
• Net Cash Flow

You can check with someone familiar with M&A valuations in the IT industry to help you out with “ball park” multipliers to have a general idea of what your Net Cash Flow is currently worth based on the type of revenue model for the services you provide (reseller vs time and materials/projects vs a mainly recurring revenue (such as MSP or hosted services)). And I encourage a potential seller to have an idea of their business value to another entity, but it really is a ball park.

Ultimately, the buyer determines what they are willing to pay and the structure around the deal as a whole. You, as the seller, get to listen to why the offer is what it is and decide to take it or not. Of course you also have the option to negotiate any part of the offer should you have a valid point to argue or bring into a different light for the buyer’s consideration.

If you are a potential seller, read on about how a buyer should be thinking so you can see the big picture.

So let’s move on to the buyer thought process on business valuation. When you are looking to acquire another business, your reasoning for doing so can be many things (see Part 1 of this post series). But your ultimate goal is to look at another business and see how bringing it into the fold of your business is going to boost your bottom line and value as an investment. So the thinking should be not the value of what is, but the value of what will be with this new company bolted on to your existing company.

It’s truly a return vs risk scenario coupled with deal cost vs deal price. So a great deal with a higher value will have low risk and high return. You should be more than willing to pay for that opportunity regardless of what the “multiplier” turns out to be as long as the cost of the deal doesn’t make it a bad idea.

Get multipliers out of your head since they are after thoughts in M&A except for dealing with enterprise value to determine stock price and a stock related transaction. Stock certainly could come into play if stock in the buyer’s company is in play for a deal, but regardless this is an entirely different conversation that we are not going into here. I would be happy to talk to you about it in another venue.

Let me give you a different take on how to look at what would be a good value for a transaction. Although some rather complicated accounting math like discounted cash flow (DCF), internal rate of return (IRR) and the like are necessary to check the deal, a good deal is all about if I pay X in Y manner, what does my return on that investment look like over Z time? I can’t get into the details behind X, Y and Z here, but that’s what it’s all about.

You’re investing in the assets of another entity to get a return on that investment. You’re looking at it not so much as what are the revenues, expense and profits as THEY run it, but what does all that look like when integrated it into YOUR company and how much can you afford to pay for it and still see the return desired.

Hopefully you have a better picture about how all of this works in terms of where deal value comes from when it buying and integrating another company. Next we’ll talk about some common deal structure options for financing the payment of a deal from buyer to seller and continue on from there.


To Your Business Success-

George J Sierchio

Growth By Acquisition (Part 1) - What is it and who is it for?

Growth by acquisition is a terrific topic to talk about for anyone that owns a business in the IT Channel regardless of the current or future company size. This could mean both being on the buy side and the sell side of a transaction in order to spur quick growth on top of organic growth. It’s a pretty broad topic so I have decided to distribute this educational information in pieces with this being Part 1.

Today we’ll focus on why growth by acquisition and M&A activity in general is so prevalent in this IT Channel and why a company would decide to grow by buying a smaller business or selling to a larger one and growing with them.




The first thing you need to understand is that M&A activity, whether you happen to notice it around you or not, is common in the IT consulting and services space. Why?

Well, for starters this industry has a very low barrier to entry, meaning it doesn’t take much capital to hang out a shingle and start a business. Because of this there are an overwhelming number of IT service providers in the US and Canada ranging from 1 to 100 person shop and a decent amount of 100+ shops as well. Especially in heavily populated areas, you can throw a rock and hit a couple of IT businesses focusing on servicing the SMB market. That leads to organic growth issues for big and small companies as markets get saturated with players.

There are also a slew of things these companies can provide like managed services, project work, high level consulting, design work, programming, hosting, etc. Put these factors together and you get an industry that is known as being highly fragmented.

So the above is why growth by acquisition is normally popular in the Channel, but the last 5 years or so it got a little boost due to the popularity of managed and hosted services using recurring revenue models. Leveraging economies of scale that come with adding on recurring revenue that someone else has built is a smart move versus the pains of organically growing these areas.

Since about 2009, M&A activity has been especially high and will continue on that path for the next few years. This is due do to the down economy and presents itself in two ways. First, organic growth for most established companies slowed a bit since the economy tanked. Good companies are holding steady or growing a little in revenue/profits, but the rate of that growth has been stymied compared to their norm. This economic trend makes growth by acquisition an even more appealing concept from the buy and the sell side.

In addition, very well run companies are sitting on money that is doing nothing for them in traditional investment avenues. M&A presents a way to use that money as an investment into the business that is risk controllable and has a much better shot of gaining big returns as well as doing it in a short period of time.

So who would growth by acquisition be good for? Here’s a quick list for both the buy side and sell side perspective to see if it would be right for your business:

- Outperform Organic Growth that has slowed, has stagnated or could still be doing well

• For sellers: Join forces with a rapidly growing organization

• For buyers: Do in less than a year what ok or even good organic growth may take 3+ years to achieve

- Get access to new Talent and Capabilities

- Make In-Roads into New Markets

- Achieve Economies of Scale

- Lifestyle Improvement

- Career Enhancement for buyers or sellers in terms of reducing the number of hats you need to wear by now being involved with other smart people that can do the jobs you don’t want to do or aren’t good at.

- Buyers can rapidly get to a company size where a lucrative exit is possible

- Sellers may be thinking

• Take some money off the table without completely selling the business in order to get a bigger payout when the new joined entity reaches growth goals

• A full exit of the company. Keep in mind most M&A deals involving buying companies with revenues of under $5MM are not usually intended to be full exits for the sellers but to build a better management team as well as grow revenues and profits. Unless you are already well into retirement age you probably won’t be seeing retirement like money on a smaller company and the buyer probably doesn’t want you leave anytime soon. Lastly, although another topic, in most cases it takes a good 3 years to see a full payout of a purchase.

So there you have it in a nutshell. Growth by acquisition should be on everyone’s mind as a business owner in the channel. It’s not for every owner or every business entity, but it certainly is a strategic vision to think about.

Any questions, you know where to find me. Until next time…


To Your Business Success-

George J Sierchio

Communicate to Grow Your IT Business

One of the great dividers between growing and stagnant IT consulting & service providers (MSP, integrators, developers, etc) is communication. In part this is due to the fact that the majority of smaller technology companies are run by technology people that are generally not all that interested in, or good at, communicating. Whether that be written or spoken. That’s not a knock, just a fact gathered from working with many service providers over the years.

That can readily be seen by how hard it is to get a tech to fill out a ticket or timesheet correctly and timely. Many technology driven people take that from their tech days right into the operation of their company, even after they see the light of day that they need documentation and verbal communication within their business to do something as simple and necessary as billing a client.




The need for technology utilization is growing and will continue to grow. Even the simplest and smallest of business rely more and more on technology to get things done, cut costs, and automate. The good news is it’s not going away so you’re in a good business, albeit a constantly changing one. The bad news is that as more technology comes into play with fewer barriers to entry to use it, more things become a commodity in terms of buying, implementing and maintaining that technology. That means more and more of what an IT service company used to do is becoming obsolete or cheapening to the point of being a commodity. And the commodity game is not one you want to be in.

Gaining clients and the money the follows are in the delivery and supply of knowledge and management. NOCs and help desks can be outsourced by a client or your business for your client. Onsite break fix and installation techs can be readily found by a client and by you without even hiring one as an employee. Monitoring can be heavily scripted and automated and then shoveled over to the previously mentioned NOC/help desk to take care of and escalated to the cheap techs that can be hired at will. Maintenance related items are a commodity.

What can’t be outsourced easily are the relationships that come from consulting, planning/design work and managing all of the pieces of technology and people that come together to operate a business. You can’t deliver this stuff hiding behind a workstation. It requires higher level skills and actually interacting with people.

This is where the real value comes from inside of a managed services program. Vendor management, disaster recovery planning, monthly reports, quarterly business reviews, annual technology planning, network/process design and implementation, etc. Without these items and the people with communication skills to make it happen… you are selling a commodity… you are selling on price. That’s one of the reasons why communication is a big separator of companies.

But there’s more…

We just scratched the surface with service delivery and some client management mixed in (reports, QBR, annual plans), but there’s also communication needed in positioning, lead generation, and some more client management.

Blogs, articles, newsletters, special reports, whitepapers, videos, speaking, networking and possibly even social media are important to positioning your business as a knowledge leader and the go to people in your specializations. Nobody will know what you do if you don’t actually tell them via speaking to them or published (web or physical) writing. I’m not saying YOU have to do all of this, but your business needs to. Either someone internally to your company or an outsource service has to be positioning your company and attaching a way to capture leads generated.

That’s positioning and lead generation, but then there’s some more client management to be had that involves communication. I find that a lot of IT companies do not do a good job of letting their clients know up front via a meeting, and better yet a letter or agreement to back it up, as to
•how the client is involved in service delivery (what are the client responsibilities for you to do your job on a project, break fix deal or MSP plan),
•when you will do it and the associated price tag (normal business hours, OT etc),
•how to properly contact you for service,
•what priority the client falls under (high priority, etc),
•how payment is invoiced and when it’s expected to be paid,
•what happens when payment doesn’t come as expected,
•and the fact that, yes, prices will not stay the same forever

I can’t tell you how many people I cross that don’t charge more for out of normal business hours, weekend and holiday work. Many also have not raised prices in two plus years. And it’s all due to a lack of communication, which is much more difficult to do after the fact versus putting it in place up front.

The last piece of communication that seems to be lackluster for most is a mix of marketing and client management. I actually categorize this as client management as it's all about keeping your existing clients, but using your written communication such as newsletters and blogs as well as setting up meetings or lunch dates is crucial to marketing to your existing clients. The QBRs and annual technology meetings are terrific for setting up necessary projects and getting insights to possible new technology that may be needed. Taking that a step further, you also need to also be proactive on what you can offer and not wait for these set meetings.

You have a new service, a new LOB app comes out, alternative methods of the same service you are providing are developed (like a cloud-based services), good things/bad things happening in technology, etc. These things need to be communicated to your client base for a number of reasons.

First, to let them know you are thinking about them and what is best for their use of technology. Second, so that you become, and stay, the main source of anything IT (or anything that plugs into a network for that matter) related to them. For example, even if a particular cloud service is not relevant to your client in your eyes, it doesn’t mean they see it the same way...yet. If they don’t know you know about it or would know about it, they just don’t think it’s something they should ask your opinion on. Hence, the door is open to a competitor that can answer their questions. Not a good thing for you.

This is what the pool of solid, well paying clients wants from a company like yours. Not just good techs to outsource to, but also being their IT manager and CIO all wrapped up into one. Communication in all the forms described above is the way to do that and be part of the group of IT consulting & service companies that are steadily growing, maximizing profitability and building business value. So pick out something from this post and start working on it one at a time. If you want to talk about it, you know where to find me.


To Your Business Success-

George Sierchio
The Consultant’s Coach