Creating Value: Business for Sale: Putting a Price on an I.T. Company

Creating Value

Are you getting the most out of your business?

Occasionally in my posts, I like to take a look at businesses for sale, which can offer important lessons for both sellers and buyers. For this post, I have selected an information technology company that is based in the southeastern United States. It employs 14 and says it is on track to do about $30 million in sales this year.

As with my earlier posts on businesses for sale, I have no stake in the sale of the business, nor do I certify that any of the information about the business presented is accurate. The information provided came to me in the form of the public listing and through conversations with the selling broker.

This business specializes in providing the infrastructure and backbone equipment for data-processing centers. One third of its business is done with the federal government, one third with state governments and one third with private enterprises. That split allows it to have a smooth sales cycle. Often when one segment is roaring, another is slower than the owner would like.

The business came to my attention through its broker, Murphy Business and Financial Corporation. Generally, Murphy Business and Financial lists all businesses for sale on Bizbuysell.com. In this case, the broker, Matt Slappey, concluded that given the size of the business and its probable selling price, a better strategy would be to sell the company through a controlled-auction process.

A controlled auction is a sales process that encourages potential buyers to submit offers. The process is used to weed out buyers who are not qualified and to engage buyers who would be a good match. The goal is get potential buyers to bid against each other and increase the selling price. It works best when, as is this case with this company, several qualified buyers have expressed interest.

Broker: Mr. Slappey

Type of Business: Valued-added reseller of I.T. equipment.

Employees: 14 full-time.

Location: Southeastern United States.

Asking price: Buyers will make offers in controlled-auction process.

Fixed Assets: Few. No real estate.

Intellectual property: Knowledge of bidding process for government contracts. The company has a preferred relationship with several companies, including Cisco Systems, Dell Computer, VMWare and EMC.

Reason for selling: The owner is 62 years old. He expects to stay with the buyer for two or three years and wants to be able to leave by the time he’s 65.

Financials:

Business Overview

The owner started the business in 2006. He has a sales force that is based in several cities and backed by quality engineers who focus on the pre-sale process, installation, and customer training. Some 80 percent of the company’s sales come from hardware, 20 percent from service contracts.

The sales team is motivated through an incentive compensation system that rewards new sales. The company has developed strategies for winning government contracts. Suppliers recommend the company because it has built relationships with primary vendors.

The owner has developed strategies to identify government entities looking for the products and services that the company provides. He believes that the right buyer could accelerate the company’s growth.

Challenges

The company has little in the way of recurring revenue. A buyer will want to spend time in due diligence understanding the sales process and how the company finds new business. The company possesses important intellectual capital that it will be important for a new owner to learn. A buyer will need to develop a methodology to get this information from the owner and systematize the sales process.

Sales Strategy

One of the most interesting things I learned speaking with Mr. Slappey concerned the way he is handling the sale of the company. Along with using a controlled auction, he is also using an unusual method to collect his “success fee” on the sale. Most business brokers use what is called a Lehman scale to calculate the fee. Mr. Slappey is using a reverse Lehman scale, which means the more money he sells the business for over an agreed upon amount, the higher the percentage he will receive from the seller.

It is also worth noting that Mr. Slappey will receive his commission payments at the same time the seller gets paid. If the seller receives 100 percent of his money at closing, so will Mr. Slappey. If the seller receives 80 percent at closing and 20 percent over five years, Mr. Slappey will do likewise. This aligns incentives for seller and broker.

My Take

If I were the buyer, I would be very careful in negotiating the sale. I would want either to have an earnout or to place a reasonable amount of the sales price in an escrow account. I would be concerned that some of the current owner’s knowledge may not be transferable. I would also want to make sure that significant employees were tied to the company for a particular period of time and could not leave with customers or intellectual property.

What do you think? If you were a buyer, what would you pay for this business? If you were a broker, how would you position the sale? Do you think the seller should publish an asking price? What would you want to know before you were willing to make a bid?

Josh Patrick is a founder and principal at Stage 2 Planning Partners, where he works with private business owners on creating personal and business value.

Article source: http://boss.blogs.nytimes.com/2013/06/11/business-for-sale-putting-a-price-on-an-i-t-company/?partner=rss&emc=rss