We speak to a man who has been there and done it… from the business buyer to the eventual seller of his own company. Jamison West overhaul his business model from the traditional IT, time and material (trading dollars for hours), to the new Managed IT Services monthly recurring model. His new business gave him a 15% jump in EBITDA, from the original 4%, so he was averaging to a healthy 17%!
Jamison gained great insight into the whole sale/valuation process during his acquisitions of multiple Managed IT firms and then used this experience to consciously prepare everything in his business before he finally sold to a strategic buyer.
This episode is a perfect example on how to maximize the value of your business while simultaneously achieving the day-to-day efficiency of your business and TRULY moving from the hub to the spoke.
Why did he start acquiring businesses in the first place?
There are certain benchmarks in the Managed Service Industry for recurring revenue and overall company size that are benchmarked by a Managed IT Service peer group called HTG. This lead Jamison on a quest to grow organically, AND acquisition, in order to hit the numbers he thought he needed to achieve for a future buyer to pay top dollar.
The first two acquisitions helped add staff and mass to his firm and allowed Jamison in make strides in the direction he wanted to go. The third merger / acquisition proved to be a much bigger challenge due to culture and management, but the right intentions were there!
Why did he change business models from time & material to recurring revenue?
Jamison was charging more than a fair price for his time but quickly realized he was needed by multiple clients at once. Obviously he couldn’t be in more than one place at a time and his clients had a top stop on how much they were willing to pay. Therefore, there was a problem that was ready to be solved!
Not only was his time a limitation but the current situation came with serious highs and lows. In order to change the company’s emphasis from the revenue ups and downs of project work, Jamison flipped his business model and expanded so he could provide fixed-fee services and thus improve his own potential scalability.
Ultimately he realized that the clients were not just paying for the time he’s working, they’re also paying for peace of mind and immediate availability to any question that needed to be answered for the business’s technology. To do this he needed a lot of staff. Thanks to advice from his peer group of similar businesses, he decided to increase his price by 20%. He figured that if 20% of his clients left he’d only have 80% of the work to do with 100% of the revenue he had before.
How did it affect his valuation?
Like we said soon he had a business that was 17% EBIDTA rather than 4%! In terms of take home dollars, and the formula that his buyer used to acquire his company, it was worth a TON more. Jamison knew if he had locked in contracts that a buyer who collected money the first of each month would pay WAY more than if he had to resell new agreements / time and material each month.
Therefore, it was less risk for a buyer (especially a strategic competitor) to take Jamison’s company and their clients and bring them into their platform. They had more time, energy and resources that they could apply to keep those customers. With a contract in place it allowed them to prove their service, trustworthiness and ability to exceed the client’s expectations before the agreement came due.
How did he structure the deal to sell?
He used a specific industry broker that created a slightly different structure than the standart multiple of EBIDTA. It was actually a company who he’d used and dealt with when he was doing acquisitions for his own company.
To judge the risk he dissected the deal into 2 different buckets:
- The “guaranteed bucket” – this is the guaranteed section which would be structured with equity, downpayment and the guaranteed payments over time.
- The “high-risk bucket” – the high-risk would be taken up with the earnout and certain benchmarks that had to be hit to receive the payment. Almost a commission if everything went right. He thought of this like icing on the cake if it all went well!
What did he learn from previous acquisitions that helped him when it came to his own sale?
- He knew he had to secure his clients on very strong, detailed contracts so the buyer could be certain there was value in those contracts.
- He also set revenue targets where he knew certain types of investors were willing to spend higher multiples of EBITDA.
The maturity balance:
One of Jamison’s key drivers in his plan came from the operational maturity level (OML – created by Paul Dippell) of an Managed IT Services business. Jamison realized from this method that he should strive to bring on clients with the same, or within one level, of operational maturity as his own. The OML is on a scale of 1 – 5 and it had a variety of factors based on Key Performance Indicators and EBITDA requirements.
The OML model help vet out his potential clients, how much work they will be, and how much profit he could expect. It allowed Jamison to understand and size up the potential companies he wanted to buy AND what potential buyers he thought would be a great strategic fit to sell to. The risk of a bad deal was significantly mitigated based on the method of analyzing customers and competitors.
Why did he sell:
He hired and acquired an excellent COO, along with a high caliber management team, after his third acquisition. After his COO and he sat down and went into some deep budgeting exercises, they recognized they had a leadership team and company structure that cost too much and needed to be restructured.
Once that problem was solved, the business was in a much better place and Jamison knew the company numbers were in the range of what he originally planned for a potential sale. Not to mention, after years and years of working his tail off Jamison wanted more freedom to pioneer new concepts in the marketplace, not to mention to hedge his bets by taking some chips off the table to safeguard his and his family’s future.
What’s it like being an employee for a buyer?
He has lasted a year at the new company. In industry terms, they were on the top of the OML range with over 100 employees and lots of systems and processes… which is great for a company like that to make money and continue to grow! However, for Jamison, who is a creative and ambitious entrepreneur, it was difficult to be constrained by the systems of a mature company.
What’s he doing now?
Jamison has many different opportunities that are knocking on his door, from startup, to CEO of other multiple companies. He is in the middle of figuring out what his journey looks like in his second half! 😉
Wise words for the road:
[clickToTweet tweet=”“Value is in the eye of the beholder”” quote=”“Value is in the eye of the beholder””]