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.
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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.