6 Essential Considerations When Selling Your IT Business

1. The Importance of a Transaction Attorney

Selling your IT business is a complex process, filled with legal challenges and potential complications. A transaction attorney serves as your expert guide, ensuring you navigate due diligence smoothly and manage legal aspects of the M&A process efficiently.

These legal professionals specialize in areas like corporate, securities, tax, antitrust, and employment law, tailoring their services to your transaction. The right attorney will expedite negotiations, reduce risks, and act as a mediator in disputes, keeping you clear of legal troubles.

Key Considerations When Choosing a Transaction Attorney:

• Size of the Transaction

• Location of the Transaction

• Industry Experience

• Advisory Recommendations

• Track Record

  
  

A strong transaction team—comprising an attorney, advisor, and accountant—significantly boosts your chances of a successful sale.

2. Am I Ready to Sell My Business?

Preparation will directly relate to the success of your transaction. Consider the points below as markers for being prepared to sell your business:

• Market Conditions

Assess the current economic climate and market trends. Are you keeping pace with demand? Are there missed opportunities to meet client needs?

• Financials

Buyers value clean financials, often using Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Can you show historical data and prove growth?

• Business Structure/Operations

Evaluate your operational setup. Are your processes scalable? Can key responsibilities be delegated beyond you, the owner?

• Partnership Standing

Consider your certifications and the process for implementing new products. How do you manage updates and client releases?

• Growth Plan/Exit Strategy

Regularly review and revise these areas to better position your business for potential buyers. Do these strategies account for M&A activity?

By incorporating these elements into your quarterly or annual checklist, you can determine whether you are prepared to put your business up for sale.

3. What Does Selling Your Business Mean?

Selling your business doesn't necessarily mean immediate retirement. M&A advisors can help you explore multiple options. Take these two scenarios into consideration:

• Scenario 1: Partnering with a Private Equity Firm

  In this approach, the business owner works with a private equity (PE) firm to boost the company's growth and value. The initial step involves the owner selling a majority stake—typically around 75%—to the PE firm, while retaining a significant minority share (in this case, 25%). Here’s what the process might look like in more detail:

  1. Partnering with the PE Firm: The PE firm brings capital, expertise, and resources to help grow the business further. This might mean expanding service offerings, entering new markets, or scaling operations to increase revenue and profitability. The owner, who remains in the CEO role, can leverage these resources without needing to give up operational control entirely.

  2. Shared Goals and Rapid Growth: With a PE partner, the business typically pursues a targeted growth plan, often focusing on maximizing profitability in a defined time frame (often 4-5 years). The firm’s goal is usually a profitable exit within this period, which aligns with the owner’s interest in maximizing the value of their remaining 25%.

  3. Secondary Exit Opportunity: When the PE firm is ready to exit—often by selling to another PE firm or a strategic buyer—the value of the company may have significantly increased. This “second bite of the apple” offers the owner the chance to cash out on their remaining 25%, which could now be worth considerably more than the initial sale amount. This structure can be a powerful wealth-building strategy for owners willing to stay involved in the business and participate in a growth-driven environment.

• Scenario 2: Selling to a Strategic Buyer for Expanded Services

  This scenario involves an owner selling their business to a strategic buyer—a company with complementary services or a shared client base. Instead of seeking rapid financial returns like a PE firm, a strategic buyer might focus on long-term alignment and integration. Here’s how this option might unfold:

  1. Finding a Strategic Match: The business owner seeks a buyer with shared values and a compatible culture. This can mean looking for a company that has overlapping or complementary services, enabling an easy integration that enhances the overall offering to clients. Such alignment can make for a smoother transition and a positive work environment for employees.

  2. Enhanced Service Offerings and Client Relationships: By combining forces, the business can diversify its offerings and potentially enter new markets. Clients may benefit from a broader suite of services, while employees gain career growth opportunities within a larger organization. This arrangement is ideal for owners who value the legacy and cultural continuity of their business and want to offer long-term benefits to employees.

  3. Structure of the Deal: In this scenario, the owner receives 60% of the purchase price in cash at closing, securing a substantial upfront return. The remaining 40% is structured as an “earnout,” incentivizing the owner to meet performance targets over a specified period, typically three years. Earnouts can be financially rewarding, as they’re designed to compensate the owner if the business meets or exceeds performance goals. Staying on for this period also gives the owner a role in the company’s continued success, helping to retain key relationships and guide strategic direction.

  
  

These examples illustrate just two of the options available to owners. Both scenarios offer unique advantages depending on the owner’s goals, appetite for risk, and preference for involvement post-sale.

4. Do I Need a Business Broker or Advisor?

Many business owners focus on daily operations and neglect long-term exit planning. In fact, 66% of investment bankers report that less than a quarter of sellers are fully prepared before engaging them, often leading to failed transactions. Early preparation is key.

Engage an M&A advisor early to build a roadmap that positions your business for a successful sale. The earlier you start, the better your advisor can understand and communicate your business's unique story.

Selecting the right advisor or broker is crucial. They will have a part in communicating your story, your confidentially, deal efficiency, and more. Ultimately, they will be able to put you and your business in an auction setting for competitive offers. Competitive offers will drive the best outcomes, so choosing advisors capable of attracting those offers is pivotal to your success.

5. What Is My Company Worth?

One of the most common questions we hear from business owners is, "What is my company worth?" Most companies are valued based on a multiple of Adjusted EBITDA.

EBITDA stands for earnings before interest, tax, depreciation, and amortization. The easiest way to calculate EBITDA is to add back non-cash expenses like depreciation and amortization to your operating income. Adjusted EBITDA further accounts for non-recurring items like:

• Non-operating income

• Unrealized gains/losses

• Non-cash expenses

• Litigation expenses

• Donations/Goodwill

Need help calculating Adjusted EBITDA? Contact our team today.

6. The Role of a Virtual Data Room (VDR)

A virtual data room (VDR) is critical in any M&A transaction, enabling you to securely share information with potential buyers during due diligence. Here's how to successfully set up and manage your VDR:

• Choose a reputable cloud storage provider (e.g., DropBox)

• Define access and permissions (Who has access?)

• Organize documents (e.g., Financials, Legal Documents)

• Test usability and access

• Monitor usage

• Close the data room and revoke access post-transaction

Effectively managing your VDR protects your information and contributes to a successful transaction.

Have questions about data rooms, data hygiene, or M&A? Find time to meet with our team here.

By emphasizing these key elements and assembling the right team, you’ll be better prepared to navigate the complexities of selling your business.