31 Oct Service Level Agreements in M&A Transactions
Do you have the proper documentation if you were to sell your service business? Every IT managed service provider (MSP) and cloud company must have detailed service level agreements (SLAs). SLAs set the expectations and obligations between the provider and each client. They cover what services are delivered and how problems are handled.
Common types of agreements include:
- Master Services Agreements
- Service Specifications & Service Level Agreements
- Managed Services
- Backup & Disaster Recovery Services
- Remote Application Hosting
- Project Proposals & Statements of Work
- Short-Form Agreements for services provided to lower-revenue customers
If your company is a potential target for a merger or acquisition, having contracts that are fully executed (signed by both parties) and that are readily accessible, ideally in electronic format, is highly desirable. In fact, gaining access to these contracts may be a necessity for the buyer.
When you have the proper service level agreements in place, it makes the process of due diligence much easier. It may even increase the value of your company because it raises the buyer’s confidence in your future revenue stream. As a result, risk to earnings is decreased.
Here’s another point to consider: if you’re currently developing or updating these agreements, make sure they are assignable by you to another party, such as a buyer or merger partner, without requiring your client’s written permission. Also, if you develop intellectual property (IP) in the performance of the services agreement, which party will own the IP? This is another element you’ll want to cover in your agreements.
If you have longer term agreements with your clients, there are some potential big benefits that can make your company not only more attractive, but also more valuable. For example, it is ideal if you have built-in annual rate increases. Let’s say you have a standard 3-year term. This allows you (or a potential acquirer) to forecast revenue and profitability over that period of time and anticipate upcoming technical staffing needs, sales and marketing expenses, and so on.
Service level agreements are important not just in the M&A process, but also in banking where your ability to borrow is tied to your assets and cash flow. If a client organization wants out of an agreement they can probably find a way out. After all, MSPs don’t make money by suing companies that no longer wants to do business with them. But your agreement makes it more difficult for your client to walk away, this factor ensures the relationship is “sticky.” Of course, your paperwork must be backed up by stellar service and professionalism
If you are planning to sell your company one day, failing to address these issues can cause delays, squander value, increase risk and even lead to disputes. The best time to begin developing services agreements is well before you start talking to potential buyers.