How To Value an IT Business
If you are a business owner who is interested in selling your IT support business, the first question you likely ask yourself is “how much is it worth?”.
As there are so many factors that influence the value of an IT business such as profits, assets, location, staff, and customer contracts, without knowing all these details the most honest answer is “it depends”.
When looking to sell your business, the best place to start is with a valuation, this takes into account all of the important financial fundamentals whilst also considering the more unique aspects to provide you with a concrete figure.
If you are interested in valuing your IT business, our latest blog post explains why valuations are so crucial, what metrics are used to value your business, and most importantly, how you can get an accurate valuation.
Why Valuations Are So Important
Having a valuation undertaken is a useful activity for a number of reasons, particularly if you are considering selling your business.
- Without your own valuation, you are unlikely to attract any serious buyers.
- Not having a valuation can leave you open to being taken advantage of and puts you on the back foot when it comes to negotiations.
- Having a valuation carried out doesn’t mean you are obligated to sell your business and valuations are useful for other business activities such as securing investment, mergers, acquisitions, or expanding the business.
- Provides an accurate picture of your businesses’ financial health which can be useful for future planning.
What Is Used to Value a Business
During a valuation, several fundamental metrics will be used to start to develop an accurate figure, these include:
- Asset Valuation – IT companies often own a high level of tangible assets such as PCs, servers, laptops, and other networking equipment. These assets will be considered within the valuation of the business.
- Entry Valuation – The entry valuation considers the estimated cost to set up a similar business to the one being sold. In an IT business, this would include the cost of building up your customer base, purchasing the assets you own and recruiting or training staff to the same level as your own.
- Earnings Multiples – Earnings multiple are often used within the stock market to indicate how cheap or expensive a particular company is. Within the context of a business valuation, the price to earnings ratio (PE) is calculated by dividing the price offered by the post-tax profits of the business. Growth sectors such as IT generally command a higher earnings multiple compared to other sectors.
- Discounted Cashflow – Discounted cash flow relies on cashflow estimates to generate projections of how much money the business might make in the future and estimate the value of the business.
Other Factors That Impact Valuation
As well as these fundamentals, several business and industry specific factors will play a part in the final value that is calculated. For example, intangible assets such as how strong the brand is are often taken into consideration.
In the IT industry, this can include the location of the business, what staff you currently have working for you and the training they have, your customer base and the contracts they are signed into, the services you offer and the competitors that operate in your area.
As a growing industry, we have found high demand for IT support companies, allowing business owners to acquire significantly higher valuations than comparable businesses in different industries.
If you are considering selling your business in the future, there are several tasks you can carry out to maximise its value before selling such as getting your accounting in order, reviewing customers contracts, and reviewing spending.
For more information, be sure to read our blog on maximising the value of your business before selling which includes suggestions for maximising value in the short and medium to long term.
Ready To Have Your Business Valued?
Ultimately, the value of your business is determined by how much a buyer is willing to pay for; but having a professional valuation can make a significant difference to the final price, as well as making negotiations easier.
As part of our approach to selling businesses, we carry out a free business valuation, produce a sales memorandum and even give you tax advice to ensure you have everything you need to feel comfortable when selling your business.
Additionally, our expert team helps source and shortlist motivated buyers through highly targeted and robust marketing campaigns before presenting you with 3 buyers that we think can offer you the best return for your business.
If you are interested in finding out more about selling your business but don’t know where to start, get in touch with our team to arrange a free, honest chat about your options. Call today on 0117 379 0117 or fill out a contact form and we will get back to you.