Selling an Information Technology Services Company

Selling an information technology company specialized in the IT managed services providers niche can be a long and complicated process. Even with a good exit strategy in place, you will face many hurdles, lots of paperwork, and potential setbacks.

Here are 12 steps to help you learn more about how I sell my IT services business and how to make running your IT services business more appealing than others on the market.

Preparing to Sell an IT Services Company

1. How Motivated Are You to Sell?

Before listing your established IT services business for sale, you have several questions to answer. Most of the questions apply to the construction market outlook and whether you should keep your business or list it. The questions to answer include:

2. Documents

One of the first things a qualified buyer will want to see is your documents. It can take a while to get these in order, so it’s best to start gathering and organizing long before you put your IT services business on the market for sale.

Some of the paperwork you will need includes:

This list is by no means exhaustive. You’ll need to prepare much more before putting your information technology business on the market. Once you find potential buyers, they may have requests for other types of documentation as well.

3. How Dependent is Your Information Technology Services Company on You?

Many boomer IT services business owners have trouble delegating tasks and wind up doing much of the work themselves. While no one knows your company the way you do, it’s important to make sure your staff can carry on with the majority of your business’s functions when you’re not there.

Here are some key tips on selling your information technology services company.

If you are the only one who knows how to do a large part of the business, you may turn off buyers. Most IT-managed services business buyers want a turnkey company, not an investment where they will have to spend hours training employees or taking over the bulk of the work. As an added benefit, by training your employees, you are ensuring that the business can function as you transition out.

4. Processes and Operations

Many IT services business owners have a system of running their company that is entirely in their heads. You know the ins and outs of your IT business and you are the one who keeps everything running. While this may work as long as you are with the company, a potential buyer will want to know what processes are in place.

Therefore, you need to create an operations manual for each of your processes. Work with your employees to develop this manual by getting everyone to detail exactly what they do. Potential buyers will be impressed with a company that’s ready to go as soon as the change of ownership happens, and your purchase price potential will be greater. As a bonus, if your employees are trained to do what you do, your business will carry on just fine, even if you have to be out for an extended period or if an employee leaves your company.

5. Get Everything in Order

If you have neglected cleaning and organizing your office location, it’s time to get it in order. Go over everything, from office equipment to paperwork. Get rid of anything you do not need and clean up everything else. Paperwork should be organized, and the tech office should be neat and organized. It may not be possible to get everything perfectly orderly, but make your best attempt (or hire someone to).

6. Check the Legal Documents

If your California tech company isn’t following local and federal laws, most buyers will turn away immediately. Read up on the laws and go through every step of your process to ensure you are in compliance. Also, make sure that all relevant employees understand the law.

7. Accurate Records Keeping

Go through your records and make sure that everything is up to date and completely accurate. A buyer will certainly do their due diligence, and if it looks like you’re not completely truthful, they’ll head elsewhere.

Go through your records of profits and losses and make sure they line up with what’s stated on your tax return. If your records and tax returns do not match, do not try to fix this issue yourself. You will need a CPA to reconcile the two, and you will also need a reasonable explanation for why there was an incongruence in the first place.

8. Financials

A buyer does not want to have an information technology services company that has a multitude of unresolved financial transactions. Make sure everything is current when it comes to money because no buyer wants to take on a business with a lot of pre-existing obligations.

Simply put, if you have any accounts you have not paid, take care of them as quickly as possible. If clients owe you, work to get their accounts current. If you owe anything in taxes, make sure to pay. Also, check to see if your business has any liens in place. Your finances should be clear and ready to go when you hand over your IT services business.

A qualified IT business broker in California is an expert in maximizing your business value before selling. Their expertise helps both buyers and sellers, and they are the best professionals to sell IT services businesses. The broker has several tasks to manage while working with IT services businesses for sale in California.

Qualifying Potential Buyers Through Buyer Analysis

One of their most important tasks is to look for buyers looking for growth through acquisition. Potential buyers often include next of kin, employees, single investors, Private Equity Groups, and other types of corporate investors. M&A trends show that several types of acquisition-oriented businesses also look to buy businesses in the tech industry. 

Fortunately, IT business brokers know how to privately share information about private information technology services companies for sale without divulging sensitive details about the company because of their experience. Sometimes, competitors end up wanting to buy IT service businesses that are for sale, so the need for confidentiality matters. 

Certified business brokers in California who specialize in valuing and selling IT services businesses can maintain confidentiality because some deals do not materialize. If you were to release sensitive details in documents and records, competitors would have that valuable information for free. It is wise to follow the advice of your knowledgeable business broker to protect your business’s intangibles. 

Your broker knows when to share financials with a buyer and when to ask a seller for their financials. They might ask the buyer to sign a Confidentiality Agreement or a Non-Disclosure Agreement before sharing any financial information with them. Before sharing the seller’s business finances, the business broker will vet the buyer by seeing their financial information. 

Get The Information Technology Services Business Ready For Sale

Along with vetting buyers, the qualified IT broker will also work with the business’s exit plan. They will create and execute the listing confidentially when requested by the owner of the existing contracting business for sale. Once the business is listed, the broker will also work on marketing and originating a deal or managing numerous offers and deals. 

The broker is heavily involved in valuing the business to achieve the most accurate value. They look closely at financial records and the efficacy of the intangibles. Once they have the value, they work on a buyer list to find the investor who is willing to make a deal on a profitable business for sale. 

The best brokers are focused on creating business value before selling the information technology services company, so they also work hard to maintain the plan’s goal. If something needs to change, your certified business broker will contact you to discuss a strategy adjustment. 

Originating the Deal

Your broker will also work hard to market the deal. Their expertise in mergers and acquisitions gives them a reliable list of vetted buyers who might be interested. 

The broker will also create a sales package including a Confidential Business Review (CBR) to generate interest for buyers who might jump on the opportunity at first glance. Through targeting and social selling, they confidentially discuss the value of investing in IT service businesses for sale in California. 

If any of those investors show interest in buying California businesses for sale, the IT business broker evaluates their offers. They offer the buyers a market-offer analysis with detailed information about technology industry trends. Your experienced broker works to get you the best deal while helping buyers understand the value of your information technology services company. 

Negotiating with Buyer Due Diligence

Sellers need to participate in due diligence to share necessary information about the business. Sellers need to show many documents to buyers so they fully understand what you are offering for sale. This due diligence shows that your construction business has been profitable and supports what the seller represents to the buyer. 

Before sharing the due diligence, many buyers sign a Letter Of Intent (LOI) as a non-binding agreement about the purchase price and the potential aspects of any deal. Once buyers sign the document, your broker will share a long list of documents that you need to provide. They include financial documents like:

You will also need to provide business documents like the seller’s claims about the business, including reasons for selling and details about the construction business’s reputation. You will also share documents about soft assets like intellectual property and trademarks. Other necessary documents include:

IT business brokers can give you advice about sensitive information in some documents. For example, your due diligence document package should not include private details about employees, vendors/suppliers, and customers. You should also only provide the necessary details about contracts with employees, other contractors, and clients after the sale of the business closes. 

Due-diligence document packages should include lists of assets like equipment, tools, fixtures, and vehicles. Your document package should also include the condition of the assets. If licenses are necessary, the list needs to include details about related business licenses. Your broker will also share the value of the business so buyers can check on the fairness of the asking price. 

A broker recognizes that buyers are hesitant to make offers when there are warning signs in the due-diligence packages. Buyers become uninterested when a due diligence document package does not include the reason for sellers wanting to divest and more. They also lose interest when they are not given financial statements, information about employees, and tax statements. 

Other warning signs for buyers include:

Negotiating the Definitive Purchase Agreement

Offering IT service businesses for sale in California involves several steps. The broker works closely with you and your legal advisor, especially while negotiating and finalizing the Definitive Purchase Agreement. This Definitive Purchase Agreement helps both parties reach their goals for the transaction and allows no room for error as it completely represents the legal wishes of each party. 

A good M&A Definitive Agreement is the lynchpin of a good transaction. Both seller and buyer exchange a large amount of information from different sources.  This is often over many months of conversations.  These exchanges are then condensed, with their interests, as best as possible into the Purchase Agreement. 

Items a typical Definitive Purchase Agreement may include:

1. Treatment of Shares, Options, and any other Securities; if appropriate to the transaction
2. Representations and Warranties
3. Covenants
4. Solicitation (“No Shop” clause)
5. Financing
6. Termination Fee (or “Break-Up Fee”)
7. Indemnification
8. Material Adverse Change (MAC) and Material Adverse Effect (MAE) Clauses
9. Closing Conditions

The Definitive Purchase Agreement can have potential pitfalls, so your information technology business broker needs to keep the communication open with the Buyer and their Deal Team as well as the Seller and their Deal Team.

The M&A Definitive Purchase Agreement also needs to include details about tax obligations and consequences, especially if shareholders are involved.

Avoiding Pitfalls if you have a Buy-Sell Agreement

What if the seller is two or more individuals?

Many IT service businesses have multiple owners or shareholders. Getting an agreement from a majority of the shareholders about selling the business and being willing to accept an offer can be challenging. One of the shareholders may not have any interest in selling the business at all or may want something specific most buyers will not be willing to agree to. If this is the case, hopefully, there is a Buy-Sell Agreement in place as this will outline what each shareholder needs to do.  A few years previously I had a transaction with 9 shareholders.  One shareholder with a minority interest initially refused to sell.  Eventually, they changed their mind but it was stressful while this played out.

If no Buy-Sell Agreement is in place and there is tension between the owners and shareholders, the pressure to decide the future direction of the business may be challenging.  This article provides additional information for an owner or shareholder on how to avoid buy-sell agreement pitfalls. To help their clients, construction business brokers should understand the importance of assumption of liability, so their buyers and sellers know who is responsible for any lingering claims. 

The agreement also needs to have information about indemnity clauses regarding operations. For Information Technology Companies, concerns about environmental liability, breaches of warranties, and other issues need to be factored into the indemnity clauses of a Definitive Purchase Agreement.

Buy-sell agreements can be confusing, so it is helpful to learn how to understand buy-sell agreements and how a buy-sell agreement can save a business.

Buy-Sell Agreement Benefits

A buy-sell agreement benefits both the buyer and the seller, as well as other stakeholders like vendors, employees, and partners. These legal documents act much like an insurance policy for the people involved in a business transaction. Buy-sell agreements can protect the people who start a new business or buy an existing business in the IT services industry. 

A legally binding buy-sell agreement also offers protection when bringing a new partner to the table and protecting the business if one of the stakeholders dies before money changes hands. A well-crafted agreement services the company by being prepared for changes in laws, technology, and other stressors and strains on the industry. 

Your IT broker understands the legal intricacies of buying and selling an information technology business in California. A unique aspect of California real estate law is that businesses must have escrow in place before the sale is completed. By specializing in local business mergers and acquisitions, Rogerson Business Services understands the intricacies of the state’s requirements. 

Negotiating the Terms

Your broker will negotiate the terms of the sale and include them in the buy-sell agreement. At this point, the buyer knows you have an emotional attachment to the business and have priced the deal with that in mind. They also know that the seller values the down payment and cash they will receive. 

As the deal moves closer to the close, the buyer knows that there are still opportunities to negotiate. At this point, the experienced broker is necessary because they do not have an emotional attachment to the business or its assets. They will keep the negotiation moving to get the terms set and the deal closed. 

Finalizing the Contract

The certified business broker will finalize the contract by checking that all required documents are completed and shared. They also check that all required legal documents are completed, so new liens will not be placed on the business. Once the contract is set, the sale can close. 

Closing the Deal

At this point, the certified information technology business broker has checked the documents, followed laws, and prepared the buyer and seller for the transaction and transition. The construction broker will facilitate the translation, so the transition is as smooth as possible. 

Once the deal is finalized and closed, the broker makes sure that proceeds are distributed properly to the seller. They also ensure that the buyer has access to vital information like employee records, customer contracts, and vendor details.