When you sell your MSP with The Host Broker, our processes assure that your business is going to receive enough interest from potential buyers to return fair market value (or greater). In today’s blog, we’ll demonstrate by looking at milestones in the selling process from a numbers perspective.
For our new listings, we create a one-paragraph summary of the business which acts as a teaser for interested buyers. It identifies the nature of the business, the geographical scope, some high-level financial metrics, the seller’s reason for exiting, and anything else that is unique about the business. We distribute this blurb across multiple channels:
While it is difficult to come up with a precise tally, when you add up the estimates for each channel, it is safe to say the number of potential buyers reached when you list with The Host Broker is in the 1000’s.
When a buyer is interested in receiving more information about a listing, their next step is to request and sign a non-disclosure agreement. Once signed, we then send them a package containing more information about your business including a Company Overview document, balance sheets, and profit & loss statements.
For a typical MSP listing, we’ll have several dozen potential buyers who sign the seller’s NDA.
After a buyer has reviewed the package, if they are interested in moving forward, the next step is usually to arrange a discovery call with the seller. Sometimes, a buyer may have questions they’d like answered prior to having a call. In any event, the call gives both parties an opportunity to become acquainted and to ask each other questions about operations, key clients, employees, company culture, or anything else that is important to them.
Ultimately, most MSP listings result in 10-15 phone calls between interested buyers and the seller although this can be increased or decreased based on how rigorous the qualification process is.
After a call with the seller, the buyer will decide whether or not to put forward an offer. Often this will take the form of a Letter of Intent. An LOI is a non-binding agreement which establishes expectations for the key deal terms such as the valuation, payment terms, exclusivity, non-compete clause, access level to materials during due diligence, what is being purchased and more. The LOI typically has an expiration date. Some buyers will instead put forward an informal offer detailing the valuation and payment terms, then will graduate to a formal LOI upon request from the seller.
Most owners of MSPs who list with The Host Broker end up with 3-6 LOIs to choose from, again depending on how stringent the qualification process is.
By going through the selling process, sellers end up with several competing LOIs to choose from and can be confident they are being offered a fair price for their business. But price isn’t the only consideration. Sellers also consider which LOIs have the most favorable payment terms, their rapport with the buyer, whether the non-compete clauses align with their future plans, whether their employees/clients will be well-served by the potential buyers, and more.
Factoring all that in, the seller chooses one LOI to sign, and proceeds to the due diligence period.
During the due diligence phase, the chosen buyer gains access to and reviews key documents including financials to verify their accuracy. Legal and operational reviews are conducted. If needed, this is also when the buyer may secure financing, and their bank may have additional requests for documentation. Negotiations and adjustments rarely, but sometimes may occur based on the findings.
This phase is a thorough examination of the business working towards finalizing a purchase agreement and may take 2-4 months.
Once due diligence is complete and both parties are satisfied, their attorneys take over to negotiate the purchase agreement. It usually requires multiple rounds of iterations to align the purchase agreement with the buyer and seller’s intent and to ensure legal compliance.
Finalizing the purchase agreement typically takes several weeks, but once agreed to, is signed, and the acquisition is official!
Selling your MSP with The Host Broker guarantees exposure to thousands of potential buyers through various channels, results in multiple competitive offers, and culminates in one purchase agreement that is satisfactory for both parties. Contact The Host Broker to explore whether selling your MSP is a good fit for you.
So much attention is paid to the valuation in M&A for IT services businesses but sometimes the importance of other factors isn’t fully appreciated. Buyers should realize that sellers also judge offers by the deal terms, payment structure, timeliness of the sale, and whether the sale is an asset or share sale. Additionally, having a level of trust between buyer and seller, having a cultural fit between both companies, and addressing the seller’s role post-close are crucial factors for putting forward an attractive offer. The combination of these factors, which we’ll discuss in today’s blog, may influence a lower valuation offer to be seen as the better offer from the seller’s perspective.
The deal terms refer to the specific conditions of the sale and have a significant impact on the perceived strength of an offer. Deal terms can include structures such as bonuses or earnouts, which are performance-based payments. Earnouts are often preferred by buyers when there is risk associated with the acquisition. For instance, if the business has a key client that makes up the bulk of revenue, an earnout can help mitigate the risk of that client leaving; or maybe the business has customers in countries where there’s a tumultuous business climate, and an earnout mitigates the of regulatory risk. On the flipside, because earnout payments are based on the future performance of the business, they may also be an attractive option for sellers who believe their business will continue to grow post-sale.
Payment terms refer to how the buyer plans to pay for the business, whether it’s a lump sum payment on close or installment payments over time as well as the frequency of these payments. Sellers likely prefer a lump sum payment on close, but installment payments can allow a buyer to get to a higher valuation, aid with cash flow, in addition to providing some security by maintaining a degree of leverage.
Another important factor is whether the sale is an asset sale or a share sale. In an asset sale, the buyer only purchases specific assets of the business — most importantly the customer list and annuity stream (goodwill) — but also potentially equipment, inventory, or even real estate. In a share sale, the buyer purchases the entire company, including all assets and liabilities. Asset sales are typically less complicated and less risky for buyers, while share sales can make taking over operations much simpler but may come with lower valuations. There are also tax implications, with sellers usually benefiting from a share sale and a buyer usually benefiting from an asset sale. Most transactions we broker are asset sales due to the simplicity and generally lower costs.
From the onset, sellers want to feel confident that the buyer is trustworthy, reliable, and committed to completing the sale. This trust and confidence can be established through sincere communication, transparency, and trying to build a rapport with the seller. While negotiations typically start with an online meeting, eventually taking the time for an in-person meeting (if feasible), can go a long way. Buyers who make the effort to get to know the seller, understand their goals and motivations, and demonstrate a genuine interest in their business may put themselves ahead of a competing offer at a higher valuation.
Read our blog about why ‘First Impressions Do Matter’.
Culture fit refers to the compatibility of the buyer’s organizational culture with that of the business being sold. A lack of cultural fit can complicate the sale and post-sale transition, resulting in a drop in employee morale, productivity, and retention which has the knock-on effect of creating customer churn. Buyers are well advised to assess the existing culture of the business, identifying areas of compatibility and incompatibility, and present a plan to bridge any gaps.
Cultural integration is a two-way street, and the seller also has a responsibility to be open to the buyer’s culture and values and to work collaboratively to achieve a successful integration. By working together, the buyer and seller can ensure that the sale of the IT services business is a positive and productive experience for all involved, and that the cultural fit is aligned for long-term success.
Sellers are often emotionally attached to their business and want to be involved for a period post-sale to ensure that it continues to be successful after they leave. In other cases, they might be motivated to retire, or to focus on other business endeavors, in which case they would view a lesser role appealing. In either case, sellers are interested in knowing what their involvement and compensation will be post-sale.
Discussions should be had about the transition period, the seller’s involvement in the business, and any potential consulting or advisory roles. Buyers can also communicate their plan for integrating the seller’s knowledge and expertise into the business. By addressing these concerns upfront, buyers can build trust with sellers and establish a positive relationship that can lead to a stronger offer.
A timely sale is important to most sellers. In addition to being prepared and organized, buyers can also ensure a timely offer by having funding secured in advance. This helps to streamline the process and ensures that the buyer can move quickly once an agreement has been reached. If a buyer is unable to secure funding or is otherwise delayed in the process, it can cause frustration and uncertainty for the seller and may cause them to prioritize other offers.
While there’s no doubt the valuation is very important, these other factors we discussed in today’s blog are also key considerations for sellers when evaluating offers for their IT services business. Favorable deal terms, rapport and trust with the buyer, culture fit, employee retention, the seller’s role post-close, and the timeliness of the offer all play a role. Buyers who take these factors into account when making offers are more likely to successfully close deals. The more favorable elements a buyer can integrate into their offer, the more likely their offer will be compelling, and there is the real potential to be a successful bidder despite a lower valuation.
Mergers and acquisitions (M&A) are complex transactions that require a great deal of preparation, negotiation, and collaboration between the parties involved. One of the most critical aspects of any M&A deal is making a good first impression. Unfortunately, many buyers overlook the importance of a first impression, assuming that the valuation and payment terms are all that matter to a seller. However often the seller’s perspective is that they want a good home for their clients, their employees, and themselves if they’re staying on post-acquisition.
In this blog post, you’ll learn the importance of a good first impression in M&A transactions as well as provide tips on how to make a positive impression on the seller.
The first impression sets the tone for the entire transaction. If the buyer comes across as disrespectful, unprepared, or uninterested, the seller may feel hesitant to move forward with a transaction. So it is important for the buyer to make a positive impression on the seller and demonstrate their professionalism, respectfulness, and interest in the seller’s business. By following these tips, buyers can establish a positive relationship with the seller and increase the chances of a successful deal.
Whether it’s in person or virtual, being punctual shows that you respect the other person’s time and are serious about the transaction. It also demonstrates your reliability and professionalism. If there are unexpected delays or issues, communicate them promptly and clearly to the other party. Being on time is a simple but important way to set the tone for a successful M&A transaction.
Dressing professionally for video calls is an important aspect of making a good first impression in an M&A transaction. It demonstrates that you take the transaction seriously and respect the seller’s time and effort. To dress professionally, choose clothing that is appropriate for a business setting, avoid distracting patterns or colors, and consider your background and surroundings. Also, ensure that the lighting and audio quality of the video call are suitable. Although these may seem obvious, the following are all based on experiences we’ve had. Taking calls in moving cars or coffee shops with background noise is annoying and frustrating for others on the call. Constantly dealing with your dog barking or kids yelling is equally annoying. Wearing hoodies, exposing armfuls of tattoos, smoking or drinking alcohol while on the call, should also be avoided.
Avoiding politics or controversial issues is important during an M&A transaction and discussion process, as these topics can be divisive and create tension between the buyer and seller and these days are very polarizing. It is crucial to keep the conversation focused on the business and transaction, rather than personal or political beliefs. By avoiding controversial topics, the buyer can create a comfortable and productive environment for the discussion of the transaction. The conversation should focus on the business and its strengths, areas for growth or improvement, the buyer’s company and culture, and how they plan to integrate the acquired business into their operations.
Complimenting the seller on their business indicates that the buyer values the seller’s efforts and accomplishments and has conducted thorough research on their business. Specific and genuine compliments can help to establish a shared understanding of the business’s potential and facilitate productive discussions about the transaction. The buyer can also ask the seller about their goals for the business and their vision for its future to ensure that both parties are aligned in their goals for the transaction.
The buyer should highlight their own company’s strengths and what sets them apart from other companies, emphasizing their values and approach to business. The buyer should emphasize their approach to treating employees to demonstrate their commitment to maintaining a positive work environment and employee well-being after the transaction. This can be achieved by discussing specific employee benefits, programs, and company culture, while also showing interest in the seller’s current approach to employee well-being. By highlighting these aspects and outlining how the acquired business will be integrated, the buyer can build a positive relationship with the seller and set the stage for a successful and smooth transition.
Positive body language demonstrates confidence and friendliness, which can help to put the seller at ease and establish a positive rapport. It’s important to maintain good eye contact and a friendly smile throughout the meeting or video call, as this shows that you are engaged and interested in what the seller has to say.
During any business meeting or negotiation, it’s crucial to be attentive and respectful towards the other person. This means actively listening to what they have to say and asking relevant questions to show that you are interested in their perspective. By being attentive, you can better understand their needs and concerns and address those concerns proactively. Additionally, showing respect towards the other person can help build trust and establish a positive working relationship.
After an initial meeting with a seller, it’s important to follow up with a thank-you note or email to show appreciation for their time and interest. This helps establish a positive relationship with the seller, to clarify your interest level, and to ask questions. Then if there are follow up questions asked by the seller, it’s important to answer promptly to demonstrate the buyer’s seriousness and how easy it will be to work with them. Following up effectively can help build trust and establish a strong foundation for a successful M&A transaction.
Making a good first impression is crucial for any M&A transaction. A positive first impression sets the tone for the rest of the deal, and it can make all the difference in establishing a productive working relationship between the buyer and seller. It’s important to be punctual, dress professionally, avoid controversial topics, compliment the seller, speak to your corporate culture, use positive body language, be attentive and respectful, and follow up promptly after the initial meeting. By following these tips, buyers can create a positive environment for the transaction and increase the chances of a successful deal. A good first impression demonstrates the buyer’s professionalism, respectfulness, and interest in the seller’s business, and sets the stage for trust which is key for a smooth and successful transaction.
As the IT services industry continues to grow, mergers and acquisitions (M&A) have become a crucial strategy for MSPs, hosting companies, and other IT service providers to expand their capabilities, their team, their customer base and to remain competitive. However, the likelihood of a successful transaction largely depends on selecting the right advisor. M&A advisors help companies find potential acquisition targets and/or buyers, negotiate deals, and manage the transaction process. The wrong advisor can lead to mistakes, missed opportunities, and ultimately, a failed transaction. Selecting an M&A advisor with industry experience, professional skills, and a large business network is essential. In this blog, we’ll discuss the questions to ask and things to consider when selecting an M&A advisor for IT service providers.
Many M&A advisors are generalists, and the IT services market isn’t easy for a generalist to wrap their head around. So you’ll want to work with an advisor who has experience in the IT industry and has an understanding of your business model, pertinent financial metrics, and the services you provide. Ask about the advisor’s experience in the IT services market and their knowledge of the latest trends, developments and valuations. Ask about the advisor’s experience in closing deals, their success rate, and their track record in the IT services industry specifically.
M&A deals can vary greatly in size and complexity. Ask about the advisor’s experience with deals of a similar size and complexity to yours. You want to work with an advisor who can handle the specific challenges or nuances of your business.
M&A deals can be risky. You can invest a lot of time and money in a deal only for it to fall apart. Ask about the advisor’s approach to risk management and their experience in dealing with potential risks. Look for an advisor who can help you manage the risks associated with your deal and protect your interests.
M&A deals require a high level of confidentiality, not only with the advisor, but between the buyer and seller. Ask about the advisor’s approach to client confidentiality and their track record in this area. Look for an advisor who has a plan for confidentiality to be maintained throughout the transaction.
An M&A advisor’s network is crucial in finding potential buyers or sellers. Do they have other brokers they work with? Do they have a large contact list or mailing list to reach out to? Look for an advisor who has a broad network of contacts in the IT services industry and can provide you with access to potential buyers or sellers.
Look for an advisor who is transparent about their fees and who can provide you with a clear understanding of the costs involved in the transaction.
When selecting an M&A advisor, it’s important to ask the questions we have highlighted in this blog as they are among the key factors that will impact the likelihood of a success transaction. Consider the advisor’s experience, expertise, and network, as well as their approach to risk management, confidentiality, and fee structure.
Selecting an M&A advisor is not a decision to be taken lightly. IT service providers should take the time to carefully consider their options and choose an advisor who can provide them with the best chance of success. By asking the right questions, IT service providers can select an M&A advisor who can help them achieve both their personal and business goals..
Contact The Host Broker today to schedule a time to ask us all these questions and more.
Selling your business is both a milestone and a life-changing decision. On the one hand, there’s a clear path to lasting financial security after years of hard work and stress. On the other hand, selling at the wrong time or in a wrong way might not give you the results you want, neither financially nor psychologically, or personally.
Are you ready to sell your IT service business? Here are a few considerations to take into account.
The first step in preparing your company for sale is applying a few optimizations to make it more attractive for potential buyers.
For example, if you offer multiple services for multiple clients, can you rank them in the order of growth, revenue, and profitability? Since your company is valued based on the multiple of growth and profitability (but averaged out across all services), fixing problematic areas will help you increase the final selling price.
In case you can’t spur profitability or growth for some services or accounts, it might be beneficial to cut them, increasing your multiplier.
When you break down revenue by services or clients, you’ll see that some bring in healthy revenue but are barely profitable in the end.
The likely culprit is COGS — the cost of providing the service is close to the revenue you generate from those services. A typical MSP might find that longtime clients are still paying the same fees while the cost of delivering the service (e.g. labour, infrastructure) has significantly increased. This is the perfect time to have a conversation with your clients and look to implement auto renewal agreements with a price escalator.
Another reason for high COGS relative to revenue is miscalculation, particularly with new services. Unless new services are showing healthy margins and growth, you might want to consider whether it makes sense to keep them or alternatively increase the price in order to increase the valuation.
Owners of smaller but growing MSPs are often not only CEOs but also engineers, account executives, customer support specialists, and occasional bookkeepers — all while paying themselves a bare minimum to survive.
The question to ask yourself is “what would it take to replace you?” The buyer might have to hire a new CEO and other staff at market rates to get the same output. What would it cost them?
You should include the market rate salary necessary to replace your role in your region as part of the adjustments needed to calculate an adjusted EBITDA figure.
In addition, consider whether all your MSP’s processes are clearly laid out or are you mostly keeping them in your head? An important part of the transition is documenting every process the buyer needs to repeat your success.
Reasons to sell a company vary greatly, from personal including divorce to other debt to burnout and of course retirement.
If you control the timing, you should sell at the sweet spot — when your MSP produces healthy profits while continuing to grow. The other side of the equation is “how much do you need?”
While more is better, if you need $4M to retire on the beaches of Thailand, and your business can already be sold for over $7M, is it just inertia that keeps you going?
Conversely, if your business is just picking up steam, consider growing it for another year or two.
The key idea is to know your number, so you can calibrate accordingly.
The buyer will value your company based on the multiple of your revenue, EBITDA, or in the case of MSPs, adjusted EBITDA. The multiple is dependent on many factors including your growth rate, location, specialization (if any), percentage of recurring revenue and customer concentration among other factors.
In general, a healthy growing MSP can expect to sell for 3-6x EBITDA. Wondering what a more precise valuation of your company might be? Get in touch with us at The Host Broker and we’ll provide you with one — free of charge.
There are lots of ways to structure a deal, from a lump-sum cash payout, stock in a Newco or buyer’s firm to an earn-out to seller financing.
Tax implications are an important part of the process. While getting the whole sum in cash today seems like a good idea, paying tax at the highest marginal tax bracket and giving away half of it to taxes might not.
A CPA can advise you on what works best in your situation with regard to minimizing tax obligations and working backwards from a targeted amount if known. You should know what you’re looking for (need for retirement if relevant) before starting negotiations.
If you have other shareholders in the company, getting alignment before starting the sale process is essential. In many cases with a partner, you will be obligated to buy them out if you are not both aligned.
Having a clear idea of a desired selling price and conditions including any requirements to remain working for the buyer are important to think through.
The partner who leads the selling process should also make sure to openly and transparently communicate the progress with others.
When you’re used to waking up thinking about your business, mulling over problems while having lunch, and going to bed with new ideas in mind — adjusting to the new reality might be difficult.
All business owners need a clear direction post-sale. Even billionaires aren’t immune from this.
What are you going to do when you’re no longer operationally involved in your company? What other goals do you have?
A natural impulse for those who are used to working all the time is to get right back into the game with a new company. However, a non-compete agreement might prevent you from starting another MSP for a few years. So have a plan B.
It’s a good exercise to ponder the questions above before you start approaching potential buyers. Not only will you look at your company with more clarity, you might be able to increase its selling price and avoid living in an aimless depressed state after the deal is done.
But there’s much more that goes into a successful sale, from choosing the best buyer to negotiating to getting your books and operations in order. That’s where an experienced broker with a track record of successful deals can be invaluable.
Thinking about selling your MSP? Just reach out to the Host Broker for advice and get a helpful guide throughout the selling process.
When it’s time to sell your IT service business, you want to find a deal that’s fair to everyone — great compensation for you, growing future profits for the buyer, and a fitting new environment for your team — without wasting a lot of time.
Some buyers, however, don’t think that way. Whether they are not serious about the deal, want to aggressively negotiate down the price, or try to lock you into an exclusivity clause to keep their options open, you should be able to spot typical buyer red flags and avoid them to find a great new home for your business.
Tip: Want to sell your IT business without setbacks? The Host Broker will connect you with thousands of trusted buyers of IT firms and walk you through the process step by step, avoiding common pitfalls.
If you meet with a potential buyer and they don’t have constructive follow-up questions, you should be concerned.
Lack of questions might mean that the buyer didn’t prepare for the meeting, willing to waste everybody’s time. It might be a sign that they are disorganized and don’t have a proper process in place. It hints at lack of commitment.
Asking questions already answered in the provided documentation, such as “how many employees do you have?”, is no better. It shows that the buyer hasn’t reviewed even the basic information about your business.
What are some good questions to ask to avoid getting things off on the wrong foot? A few examples questions that demonstrate that the buyer is thinking about next steps could include:
Buyers who don’t pay close attention to what matters to the seller should cause suspicion.
If the seller says that their employees or customers mean more to them than the final price, a reasonable buyer would provide assurances about cultural fit and taking care of the existing customer base.
Instead, if the buyer becomes picky with employees’ lifestyle benefits or some customers not paying enough, it’s likely they will change these things as soon as they take over.
Other important elements of the deal are know-how, certifications, and geographical presence.
If your business works with specific technologies (e.g. Citrix, Oracle, VMware), the buyer should be aware of that and concerned with being able to maintain the same level of service.
If your business services clients in a particular industry (e.g. government or healthcare), the buyer should make sure they have all the necessary certifications, clearances (ex FedRAMP) etc to continue that work.
If your business has clients that require on-premise work in different geographical locations, is the buyer able to support these customers as needed?
No one wants to sell to an incompetent buyer who would run the business into the ground a few years in. The buyer’s lack of familiarity with industry terminology is one of the easy-to-spot red flags that they might not be the right choice.
When an MSP sells to another MSP, industry terminology is rarely a problem. However, if a buyer comes from a different space — finance, oil and gas etc thinking it would be exciting to diversify and own an IT business, you should think twice.
It’s hard to understand the implications of running servers, maintaining infrastructure, making the right technological hires, and supporting customers when you know very little about the industry.
Besides the disruption poor industry knowledge can bring to customers and employees, it can also have a serious effect on the seller if there are earn-out clauses or seller financing involved.
There is no shortage of potential buyers who do next-to-no due diligence before submitting an offer or LOI. The reason is that they don’t want to miss out on a deal and try to beat their competition to it with the idea that they will negotiate the deal down later if they miss something.
The buyer then starts their due diligence only after getting the seller on a no-shop or exclusivity period.
This creates a asymmetry, since the buyer can still find reasons not to go through with the deal they don’t like (e.g. not liking the exposure to a particular industry), but the seller is likely going through the process in good faith and ultimately wasting their time.
If the deal is not signed, the seller has to start the whole process all over again.
It’s always a good idea to check the buyer’s references and see how their past acquisitions have turned out. Even if they haven’t done a deal before, checking the quality of their references is an important step.
If the buyer has done deals in the past but can’t provide a single reference and is making excuses — a critical red flag.
If the potential buyer always tries to find something wrong with the business and asks confrontational questions that put the seller on the defensive, there is little chance for a trusted relationship to develop.
Examples of contentious behaviour could be nitpicking negative Google reviews, saying that revenue projections are hard to believe (without providing evidence), questioning the competence of employees after reviewing ticket history etc.
When the buyer doesn’t believe they are buying a great business, they are more likely to prove themselves right post-purchase.
When you meet with potential buyers, listening to what they say, how they behave, and what questions they ask (or don’t ask) can be a strong indicator of a good or poor fit.
Watch out for:
Avoiding red flags in negotiations comes with experience of seeing bad acquisitions play out. But you don’t have to go through it if you rely on an experienced IT service business broker.
The Host Broker can put your business in front of thousands of qualified buyers and guide you through the whole process. Contact us to ask any questions, and we’ll give your business a fair evaluation — for free.
Selling a business is an important milestone that happens only once for most entrepreneurs. Make sure to take heed of the red flags above, and you’ll avoid many common mistakes.
Any business owner who tracks their books knows how valuable EBITDA (earnings before interest, taxes, depreciation, and amortization) can be. EBITDA measures core (or operating) business profitability, before debt, taxes, or asset maintenance come into play. Even though EBITDA is not part of GAAP, it’s almost universally included in income statements because it helps external parties better understand how a business is performing. Knowing EBITDA answers a critical question — is this a fundamentally good business?
If EBITDA is negative, for example, it tells you that the business has serious operating issues. It might be spending too much on marketing to attract new customers, having too few customers to cover fixed costs, or even not charging enough to offset variable costs for each customer.
That said, positive EBITDA doesn’t mean a business is profitable, especially if it spends a lot on CapEx to operate.
Still, EBITDA is routinely used in the business community to compare company valuations, usually expressed as a multiple. A growing technology company might sell for anywhere from 3 to 10x EBITDA. Large companies with a significant moat (e.g. proprietary technology) might expect even higher multiples of between 10 and 15x or more.
While EBITDA tries to get to the core performance of a business by subtracting non-operating expenses, there still might be some non-recurring expenses that muddle the picture. Subtracting those can help clarify business performance even further — in a metric called adjusted EBITDA.
Adjusted EBITDA drills down further to analyze the core operating business by adding back additional one-off expenses or subtracting non-operating income – COVID-related loans for example. The expenses can vary widely and include debt write-offs, employee bonuses, legal expenses, COVID-related spending, etc.
Unlike EBITDA, adjusted EBITDA varies for every company. Knowing how to calculate it properly (and reasonably) for your business can be the difference between being valued at a lower or higher multiple in an acquisition or investor negotiations.
That’s why adjusted EBITDA is crucial for IT service providers that are looking to sell their business or bring in external investors. Getting the adjusted EBITDA right can increase the company’s valuation by a whole multiple (or more) — meaning hundreds of thousands or more added to the purchase price.
Although adjusted EBITDA is different for each company, there are still common adjustments that tend to be used by most IT service providers.
Note: EBITDA adjustments can both increase and decrease the value of your company. While they are more likely to do the former, it’s important to be clear truthful, and reasonable, so others can see how your business really works.
Here are just a few typical EBITDA adjustments you’ll see ISPs make.
Additionally, the COVID-19 pandemic has added lots of one-time expenses that could obscure the true health of the business:
As mentioned above, while adjusted EBITDA is not a strict accounting metric, it helps outsiders (e.g. financial analysts) evaluate the core of the business without unusual gains or expenses. Adjusted EBITDA growth over a few years, for example, shows that the core business is in a good place and makes forecasting easier.
In turn, this gives potential acquirers a solid base from which they can calculate the company’s valuation based on growth and future returns, without being distracted by extraordinary events, such as the COVID-19 pandemic.
Since EBITDA and adjusted EBITDA are common industry metrics, they are often used for benchmarking and comparing different IT firms. If one company’s adjusted EBITDA margin is 40% and another one’s is 30%, we know that the former is more efficient and can take a closer look at its financials.
It’s easy to be swayed by one-off gains and happily book large increases in profitability. But why rely on lottery tickets and external events?
Adjusted EBITDA helps keep the business grounded, growing its core operations, which results in more realistic and resilient measurements over the long term.
Not sure where to start with adjusted EBITDA? Contact the Host Broker, and we’ll guide you through the process — and even give your business a free evaluation.
Know more about your business and how it performs compared to your industry peers by connecting with us today!
The decision to sell your IT business is never easy. When you’ve spent years building something from the ground up, you want to make sure that your business continues to thrive, even without your day-to-day involvement.
Whether you’re thinking of selling because you want to retire, change industries, or have access to more opportunities post-merger, you only get one chance to do it right. That’s why having a partner you can trust during this process is critical.
Working with a business broker who specializes in your industry means relying on the expertise of someone who understands your business and can guide you to the best outcome, navigating all the nuances based on the experience of closing hundreds of successful deals in the past.
The Host Broker has been connecting buyers and sellers in the IT services industry since 2005. We’ve successfully completed hundreds of transactions for hosting companies, MSPs, ISPs, data centers, IaaS and SaaS providers, IT security firms, systems integrators, and more. As a result, we have an unmatched expertise when it comes to selling or buying companies in the IT sector. The best part — our services are free for sellers, since it’s the buyers who pay our fee.
When you’re thinking of selling your IT company, you might wonder if trying to find a buyer on your own or calling up a generic M&A broker is a good idea. It’s not.
Here are the top 7 reasons why collaborating with an IT business broker will help you land better results for your business.
Unlike generic M&A brokers who advise on anything from grocery chains to gas stations, we specialize only in IT. That means we know the industry inside out.
We know what it’s like to build an IT business from scratch. In fact, our sister company eBridge Marketing offers a wide range of digital marketing services for IT companies worldwide.
We have up-to-date experience with new technologies and understand how they change the dynamics of the market. What’s more, our knowledge is cumulative and our industry insights get better with every complete deal.
More often than not, selling your business to a larger company comes with a lot of stress. M&A advisors and lawyers from the other side will try to overwhelm you with jargon during due diligence and pressure you into accepting a low-ball offer as a result. These are just the realities of business.
Our experience allows us to quickly estimate fair valuations and help you negotiate deals that undervalue your business. And if you’re not sure what EBITDA, TTM, TEV, LOI, APA and SPA are — you don’t have to stress, we’ll walk you through the whole process step by step.
The business world is too large for any one company to keep track of. If you think that you can get the best price for your business by sending emails to a few local companies you like, think again.
Expanding the pool of potential buyers and introducing more competition is one of the best ways to maximize the acquisition price.
At the Host Broker, we’ve been building up a marketplace of global buyers and sellers for nearly 20 years. Our buyers have the capital and the desire to acquire high-quality IT companies — it’s the ideal place for any seller to be.
Selling your business is not just about the price — it’s about finding the right home for your life’s work. Asking the right questions is key to finding the perfect buyer, making sure the deal goes through, and being confident in how your business will continue to operate in the future.
Whether it’s general, financial, or operational questions, we know exactly what to ask to get the full picture you need to make a decision.
All acquisitions are complex processes with hundreds of moving parts, which means that lots of things can go wrong at any given moment.
That’s why working with a broker who can take all the necessary precautions can be so helpful. You don’t want to end up in a situation where a deal you’ve been working on for months falls apart because of something that wasn’t clarified in the beginning.
In facilitating acquisitions, and connecting buyers and sellers, we’ve been building a thriving marketplace of our own for nearly two decades. For us, reputation is everything. We don’t cut corners to make a quick buck and don’t try to cram as many transactions in every quarter as possible.
We are focused on the outcome and are only satisfied when both the seller and the buyer are happy with their deal.
As an IT business broker, we are paid by the buyers and our services are free for the sellers. That means you can get all the advice, guidance, and help outlined above, and keep 100% of the proceeds from the sale as well.
When you work with the Host Broker, you significantly expand your potential buyers’ market, improve the chances of getting a better price, decrease the likelihood of the deal blowing up, and get to sell your business to the buyer you really trust.
Start exploring the opportunity of selling your business today by getting a free evaluation. Contact us or call us at 1-888-436-5262 if you have any questions or want to know what the process of selling your business might look like.
If you’re an owner of an MSP, web hosting company, or other types of IT service and you’re looking to sell your business, there are a lot of factors to consider. Here are 18 questions you’ll want to put forward to potential buyers before signing a letter of intent or purchase agreement:
Do you have any questions of your own about selling your IT service provider? Please contact us today.
One of the questions we see most often about M&A is: what the M&A process is like? To answer, we created this Comic Book which gives an overview of what the process is like from a Seller’s perspective. We had fun writing and illustrating this M&A Comic Book and hope you enjoy reading it as well.