IT Services

The IT services industry is large and complex. It includes companies that provide consulting, design, management, and programming for computers and mobile devices, networks, and the Internet. The Austin Dale Group team has many years of experience working in the industry as owners, executives, advisors, and deal makers. Let us put our experience, our industry contacts, and our proven process to work for you, whether you are thinking of buying, selling, planning an exit, or enhancing the value of your company prior to a transaction.

Industry Trends

  • Telecommuting and virtual offices – The Coronavirus pandemic has accelerated adoption of telecommuting and virtual workplaces. IT service companies are seeing great demand to setup these capabilities for clients.
  • The battle against ransomware and hackers – The arms race is continuing between IT administrators and bad actors who would disrupt operations. High profile ransomware attacks on companies and municipalities have made IT administrators desperate for added security.
  • Shift to managed services and outsourcing – Service providers need predictable revenue streams. Customers want more reliable service, security, and predictable costs.  These complementary needs support widespread adoption of the Managed Services model, but not all managed service providers (MSPs) are valued the same.

 

Market and Valuation Trends

  • Recurring revenue is king – Multi-year recurring contracts with reliable corporate or institutional customers command the highest valuation multiples. One-time project revenue and equipment sales boost revenue and cash flow but are not as desirable for buyers.
  • IT Services continues as a hot market for M&A – The Coronavirus pandemic has caused a slowdown in M&A in some sectors, but there is still money available, so investors are looking for safe bets. Given the rise in telecommuting, virtual offices, and cloud migrations, IT Services appears to be a safe bet.
  • Valuation trends – Prior to the pandemic, valuations for IT service companies were strong, ranging from 0.5 to 2.5 times revenue. These numbers are dependent on the size, revenue mix, and growth of the company. The valuation curve goes up steeply for companies with greater than $5M revenue and $1M earnings. We will be watching closely to see how valuations change as the pandemic recedes.

 

What Buyers Want

  • Recurring revenue – Cash flow provides a strong foundation for growth.
  • Scale – Bigger is better. Economies of scale and higher valuation multiples help larger players.
  • Reliable customers – Good customers who have consistent demand for services and a good payment history, while avoiding too much revenue concentration with a small group of customers.
  • GAAP Financials – Recurring revenue needs to be recognized accurately. Cash-basis accounting can lead to big problems, particularly when lump payments are received for longer service periods.