Evaluating the Merits of an IT Services Business Acquisition
Matt Bodnar
October 17, 2024
Welcome back to Deal Mastery Insider. Today we are going to look at a fast-growing MSP IT Services business. Unlike last week’s overpriced and challenging sewing business, I think this deal is much more interesting as a potential acquisition. Let’s examine why I like the look of this deal at first glance.
Deal Mastery Insider – IT Services Acquisition Evaluation
The Business Overview
This IT services company, listed on Business Exits, is asking for $8 million, with an EBITDA of around $1.9 million and a revenue stream of just under $4 million.
EBITDA: ~$1.9 million
Revenue: $4 million
Asking Price: $8 million
Multiple: 4.1X
While high margins suggest operational efficiency, they can also conceal a business with heavy owner involvement and a cost structure that is too lean for a new buyer to be able to run without added costs.
Key Features Worth Noting
Remote Operations & Scalability
A notable feature of this business is its remote operational model. As remote work becomes more prevalent, this business aligns with current trends and provides scalability without significant overhead costs. The presence of a potential CEO supports a smoother transition and operational continuity.
Market Position
Managed Service Providers (MSPs) are currently in high demand, driven by tons of roll up activity in the space. Typically, an IT business with $2 million in income can command a market multiple of 6X or more, making the 4X multiple in this case appear advantageous.
Customer Concentration
A significant risk factor is the 60% revenue concentration from a single client. This is likely why the business is priced more attractively and would be a big focus for me in diligence if I looked at this deal.
Historical Performance and Future Outlook
Founded in 2018, this business has demonstrated consistent growth, with a positive outlook through 2025. The company has exceeded its historical earnings on a trailing 12-month basis. However, due diligence is necessary to assess the sustainability of the current profitability level and if that trend can keep pace.
Structuring the Deal
Considering the financial outlook, here is a potential deal structure I would look at if using something like the new SBA pari-passu program:
Purchase Price: $8 million
Deal Expenses: $250K (for legal, quality of earnings, etc.)
Total Deal Size: $8.25 million
Assuming an SBA pari-passu loan covers 85% of the deal:
SBA Loan: ~$6.8million
Seller Financing/Deferred Consideration: 10% (~$800K)
Equity Investment Needed: $650K
Risk Management & Growth Strategy
Diversification
Addressing customer concentration is critical. A strategy to diversify the client base through organic growth or acquisitions of smaller IT firms could reduce dependency on the key client.
Capital Reinvestment
Service-based businesses often require less capital reinvestment. Most reinvestment would focus on staffing, which can expand as new contracts develop.
Conclusion
Overall I think this deal is interesting and one that I would consider digging deeper on. An attractive purchase multiple, management in place, potential for scale, and an opportunity to improve the exit multiple (by reducing concentration) all piqued my interest in this potential acquisition.
Let me know what you think of this analysis and this deal, I would love to hear your thoughts!
-Matt
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