The Entrepreneur’s Dilemma – Selling When Things are Going Well
By Chris Weingartner
Aug 01 2023
A common refrain we hear from owners of MSPs is that they’re hesitant to consider bringing on a partner or selling their business when things are going well. We completely understand, as life is easier when you are growing, customers are happy, and margins are strong. However, we’ve also seen the opposite, when a Managed Service Provider tries to sell when the music has stopped and the outlook isn’t as rosy.
Selling a business when things are going well and profits are strong is generally considered a favorable approach for several reasons:
- Attracting higher valuations: Buyers are more interested in businesses with a strong track record of profitability and positive growth trends. A company that is performing well is perceived as less risky and has the potential to yield higher returns for the buyer, leading to a higher valuation.
- Negotiating power: When your business is thriving, you have more negotiating power during the sales process. You can leverage your strong financials and market position to negotiate better terms, such as a higher purchase price, more favorable payment structures, or reduced contingencies.
- Wider pool of potential buyers: A successful and profitable business will attract a larger pool of potential buyers. Competing bidders may emerge, increasing the likelihood of finding the right buyer who is willing to pay a premium for your company.
- Reduced due diligence concerns: A business with strong financials and solid performance is likely to pass due diligence with flying colors. Buyers will feel more confident about the health and sustainability of the business, reducing concerns and delays in the due diligence process.
- Easier transition: Selling your business while it’s performing well can result in a smoother transition for both you and the buyer. The new owner can benefit from the established success and momentum, making it easier for them to take over and continue driving growth.
- Market timing: Economic conditions and market trends can impact business valuations. Selling during a favorable economic period or when your industry is experiencing a boom can increase the attractiveness of your business to potential buyers.
However, it’s essential to strike a balance and not wait too long to sell. Markets can be unpredictable, and business performance can fluctuate. If you wait until the first signs of decline or challenges, the perceived risk may increase, and potential buyers might be hesitant to invest. Buyers and investors are sophisticated, experienced groups who turn over every stone in due diligence. If business momentum is slowing or performance slipping, it will have a material impact on your ability to command a strong valuation, and potentially even close a transaction. While you may have hesitation to consider a transaction when things are going well, our experience strongly shows that you command a higher multiple on EBITDA when selling into a period of strong performance.
Ultimately, the decision to sell your IT Services company should be based on a thorough evaluation of your personal goals, financial needs, and overall market conditions. It is our job at Founders to drive a market process where buyers know they are in a competitive environment and must put their best foot forward. If you are considering bringing on a partner to grow quicker or merging with another entity that will enable you to take some chips off the table, we’d love to discuss our experience driving competitive auctions and what valuations and options are likely available for your business.
If you are an IT Services business or MSP thinking about undertaking a transaction, we’re happy to hop on a call to discuss the best timing to go to market, or any other questions you have. Please don’t hesitate to reach out to Chris Weingartner (cweingartner@foundersib.com), Founders’ Managing Director who covers the MSP sector.