Selling an Information Technology Services Company

Selling an Information Technology company specializing in the IT Managed Services Provider (MSP) niche can be long and complicated.  Even with a good exit strategy, you will face many hurdles, 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?

You have several questions to answer before listing your established IT services business for sale.  Most questions apply to the outlook for the IT industry 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.  Getting these in order can take time, so it’s best to start gathering and organizing them long before you put your IT services business on the market and available for sale.

Some of the paperwork you will need includes:

This list is by no means exhaustive.  Preparing before putting your information technology business on the market would be best.  Once potential buyers find it, they may also request other types of documentation.

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

Many Baby Boomer IT services business owners may have trouble delegating tasks and doing much of the work themselves.  While no one knows your company the way you do, ensuring that your staff can continue with most of your business’s functions when you’re not there is essential.

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

If you only know 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 spend hours training employees or taking over the bulk of the work.  As an added benefit, training your employees ensures 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 process.  Please work with your employees to develop this manual by getting everyone to detail precisely what they do.  Potential buyers will be impressed with a company 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 do 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 in perfect order, make your best attempt (or hire someone).

6.  Check the Legal Documents

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

7.  Accurate Records Keeping

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

Review your Profits and Loss statements and ensure they align with 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 an Information Technology services company with many unresolved financial transactions.  Ensure everything is current, as no Buyer wants to take on a business with many pre-existing obligations.

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 financial statements should be clear and ready to go.

A qualified IT Business Broker in California is an expert in maximizing your business value before selling.  Their expertise helps buyers and sellers; 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 find buyers seeking growth through acquisition.  Potential buyers often include next of kin, employees, single investors, Private Equity Groups, and other corporate investors.  M&A trends show that several types of acquisition-oriented businesses also seek to buy businesses in the tech industry. 

Fortunately, IT business brokers know how to share information about privately-held Information Technology services companies for sale without divulging sensitive details about the company because of their experience.  Sometimes, competitors want to buy IT service businesses, so the need for confidentiality matters. 

Certified Business Brokers in California specializing 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 financial information with a Buyer and when to ask a Seller for financial information.  Before sharing any financial information, the broker might ask the Buyer to sign a Confidentiality Agreement or a Non-Disclosure Agreement.  The Business Broker will also 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 work on the business’s exit plan.  When requested by the owner of the existing contracting business for sale, they will create and execute the listing confidentially.  Once the business is listed, the broker will market it and originate or manage 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 willing to make a deal on a profitable business for sale. 

The best brokers focus 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 from buyers.  Through targeting and social selling, they will confidentially discuss the value of investing in IT service businesses for sale in California. 

If any investors show interest in buying California businesses for sale, the IT Business Broker evaluates their offer.  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. 

Managing Due Diligence

Sellers must 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 you must 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 only provide the necessary details about contracts with employees, other contractors, and clients until the business sale closes. 

Due diligence documents should include a list of assets like equipment, tools, fixtures, vehicles, and their condition.  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 whether the asking price is fair. 

A broker recognizes that buyers hesitate 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 not given financial statements, employee information, or 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 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, 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 IT Business Broker needs to keep communication open with the Buyer, Deal Team, and the Seller and Deal Team.

The M&A Definitive Purchase Agreement must also 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 most shareholders about selling the business and being willing to accept an offer can be challenging.  One of the shareholders may not be interested in selling the business or want something specific to which most buyers will not agree.  If this is the case, hopefully, a buy-sell agreement will be in place as this will outline what each shareholder needs to do.  A few years previously, I had a transaction with nine 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, deciding 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 assuming 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 learning how to understand buy-sell agreements and how a buy-sell agreement can save a business is helpful.

Buy-Sell Agreement Benefits

A buy-sell agreement benefits the Buyer, the Seller, and other stakeholders, such as vendors, employees, and partners.  These legal documents act like insurance policies for the people involved in a business transaction.

A legally binding buy-sell agreement protects the business when a new partner is brought to the table and if one of the stakeholders dies before money changes hands.  A well-crafted agreement also prepares the company for changes in laws, technology, and other industry stressors and strains. 

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 closes.  Rogerson Business Services understands the intricacies of the state’s requirements by specializing in local business Mergers and Acquisitions. 

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 has priced the deal accordingly.  They also know that the Seller values the down payment and cash they will receive. 

As the deal moves toward closing, the Buyer may try to continue negotiations.  At this point, an experienced Business Broker will keep the negotiation moving to set the terms and close the deal. 

Finalizing the Contract

The Certified Business Broker will finalize the contract by checking that all required documents are completed and shared.  They will also check that all required legal documents are completed so that no new liens will be placed on the business.  Once the contract is set, the sale can close. 

Closing the Deal

The Certified IT 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 ensures the proceeds are appropriately distributed to the Seller.  They also ensure that the Buyer can access vital information such as employee records, customer contracts, and vendor details.