If you have attended any recent webinars or a session at a technology conference about selling your company, you have probably heard that companies with less than $3M in revenue may not be very attractive to a buyer. After all, the smaller the company, the larger the risk. Meaning, companies less than $3M in revenue usually have one or two customers that represents 20% or more of their revenue. So, if just one customer goes away, the company could have a significant loss in revenue. It may also mean that there is one key employee that holds the company together or supports the firm’s IP or specialized solution. If they leave, the company will suffer.
From a buyer’s perspective, it takes just about as much time, effort and cost to buy a small company as it does a larger one. It is the same legal contract, the same due-diligence list, and basically the same amount of legal fees, but for much fewer dollars.
In the last year, I have represented a few companies in the technology services space under $3M who, due to long-standing friendships, I agreed to act as their M&A advisor. I knew the owners well, I knew they had well-run companies, and I understood their business well. Each had some unique attributes that I felt would appeal to certain buyers. So, while they were small, I felt strongly I could find a buyer that would offer an attractive price. In each case each seller received an offer for millions – yep, that means more than just one million.
During this process, I found these three compelling reasons why buyers will acquire companies under $3M in revenue:
1. Human Capital
Let’s face it, qualified consultants are so hard to find. With technology placement firms charging upward of 25% as a fee for finding a consultant, these fees can add up fast. Specifically, companies who have consultants who know Azure/AWS deployment, webservices (integration between cloud products), strong development skills, or really niche consulting skills can fetch premium offers. For example, cannabis is a hot niche industry and they must adopt certain financial rules and if they fail to remain in compliance with strict state and federal regulations will find themselves at risk of steep penalties or even shutdown. These factors create an enormous need for consultants who know and understand this industry which consists of farming, chemical manufacturing, food production and retail. Also consulting firms who have a track record for moving, deploying or supporting applications on Azure or AWS are in such high demand they are virtually impossible to find. Having such niche consultants on staff creates value and increases the sales price of a company. Companies instead decide to buy, versus hiring a team.
2. Geography
With the advent of the cloud, you would think that a technology firms’ geographic location would be less applicable, since many implementations are now done remotely. But it turns out geography still has value. Larger consulting firms looking to expand into a geographic area tend to want firms they can acquire to give them a larger reach. CPA firms are also getting into the technology game and want to add local technology talent to their firms, to cross sell and upsell clients. Almost every deal for a technology consulting firm has at least one CPA firm interested in making the acquisition. Companies who are in a fast-growing untapped geographic market also represent tremendous opportunities for the seller especially for companies that provide a large amount of consulting services across multiple products. It turns out, product buyers of high dollar implementations still like to see the consultants on-premise, even if deploying in the cloud. Buying a firm is much faster and quicker than trying to grow organically.
3. High Recurring Revenue with High Gross Profit Margins
This aspect continues to attract buyers no matter what the company revenue is. Recently, we had a company with less than $2M in revenue fetch an offer of more than 2X top line revenue. Why? All customers were under a 3-year contract, it was a cloud offering, the recurring revenue represented 99% of total revenue, and the gross profit margin was over 60%. And no one particular customer represented over 12% of their revenue. The revenue generated per employee was 5x higher than a normal consulting firm. Buying in this instance provides long lasting value and opportunity to up-sell existing consulting clients into a recurring model. Okay, so maybe your recurring revenue is not at 99%. We have seen companies with less than 50% recurring revenue still garner interest, especially if the gross profit margin remains high on the offering.
If you are a smaller firm, and want to sell in 2020, know that there is likely a buyer out there for you. Yes, you will attract more buyers the larger you become, but if now is the right time for you to sell, know that there are buyers who will want to look at your company if you can demonstrate one of the three traits mentioned above. And if you are a smaller firm that wants to remain small, but continue to grow in valuation, then spend the next couple of years growing that recurring revenue.
Not sure what your firm is valued at today? Be sure to take our Value Maximizer Assessment™ which will give you not only your current potential business value but will also show you areas where you can increase your valuation. To receive your special code to take the assessment, email engage@rosebizinc.com with “Under 3M” in your subject line and we will send your code for free for reading this post.
What gross profit margins and operating percentages do MSPs or VARs really need to attract a buyer?