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So one question for IT channel companies and solution providers considering a sale is what can they do to increase their appeal to private equity investors or, for that matter, any potential buyer?
One answer is this: The value of a company to a potential buyer is based on its future value, not on its past performance. Therefore, every company considering a sale should engage in a deep and thoughtful exercise of forecasting its performance after an acquisition or investment, rather than basing it solely on current conditions and what is known now.
This may seem like an obvious thing to do, but in our experience as M&A advisors to midmarket IT companies, it is something that is rarely done.
That's because it's difficult. It requires starting with the expected infusion of new capital, deciding how it might be invested in the business and then modeling the company's future.
For example, one company might use new capital to buy more capital equipment that would enable it to deliver new services. Another might use it to open new markets or hire more salespeople. Another might use to make a series of acquisitions that would enable the company to change its revenue mix to include higher-margin services.
The rewards for this type of exercise can be substantial. We recently advised an IT company in a sale where its expected valuation began at four times last 12 months (LTM) revenue. After working with the company to build a solid two-year forecast based on the revenue it might achieve with an infusion of capital, it was acquired at six times LTM revenue.
The message is this: Sellers should not force potential buyers to "do the math" on future value themselves. From the outset and throughout the process a seller should do everything possible to put its best foot forward -- and that takes work.
Marty Wolf is founder and president of martinwolf | M&A Advisors. Marty has been directly involved in the divestiture of six Fortune 500 divisions and has completed more than 115 transactions in the IT services sector. A frequent commentator and guest blogger for leading business and IT media outlets, Marty also acts as a counselor and trusted adviser to CEOs of select IT firms.
PUBLISHED SEPT. 24, 2013