Questions IT Service Company Buyers Should Be Asking

Questions IT Service Company Buyers Should Be Asking

By Steve Mezak, Next Coast Brokerage

As a buyer, it is easy to focus on the financial aspects of acquiring another company. What is their revenue & profit? How much debt does the seller have? Can I buy at a fair or lower price than other recent deals? These are all good questions.

But there are three other areas that can be overlooked when deal making is concentrated only on the financial aspects of an acquisition. IT services and software company buyers often have goals that include rapid team expansion, lowering costs and building new technical skills, after a successful integration of the acquired company, often in less than a year. The good news is, these goals can be achieved on time, and while the seller obtains financial satisfaction in the process.

Play it Smart

Given specific criteria like target company size and country locations under consideration, there are still many questions to answer to minimize the effort of sourcing qualified targets and increasing the chances of a successful acquisition.

There are three key areas that must be explored:

  • Business model
  • Skill verification
  • Scalability

There are two major business models for IT service companies hired for digital transformation and custom software development – staff augmentation and autonomous teams. Staff augmentation or team extension is where the IT service company recruits the developers who are then directed by the customer.

They become part of the customer’s technical teams and work remotely. The autonomous team model is a more complete service where the customer interacts
primarily with the remote team leader (and the entire remote team when needed). The outsourced team takes more responsibility to deliver custom software,
often from user experience (UX) design to testing and deployment of the software in the cloud.

Verifying Claims

Acquiring a company with the same business model is typical because it is more likely the target will support the same kind of client engagements. But an autonomous team buyer could acquire a staff augmentation company to provide developers for their teams and at a lower cost than hiring in North America.

Verifying the skills of the IT service target requires a complicated set of questions. For example, if the target’swebsite says they are expert at AI and machine learning, how can you know for sure?

Of course, it is easier to perform this check if the acquirer has the same expertise and knows what to ask. If not, then careful reference checking should be performed with the target’s customers using the desired technical skills. Also, the level of professional expertise among the team’s staff is often on full display by reviewing the company’s published content and thought leadership.

Finally, the scalability of the target is its ability to continue to grow and recruit additional developers in the market where they are located to meet the needs of the acquirer. Questions about how candidates are sourced, interviewed, and selected should be asked.

Prepare your senior managers so they are not blindsided

During the sales process think about which managers may be called upon to speak with the buyer, such as the CFO, CTO, VP of Sales/Client Services etc. The last thing you want in your business is to have managers/employees spreading negative rumors about the company being sold. Be honest with your core team and let them understand the importance of keeping things confidential.

Growth Strategy

Are they mainly recruiting from local universities or other IT employers in the area? A focus on university recruitment is fine but needs to be accompanied by
training programs to give new developers the skills needed to work on a remote team with English as the primary language.

The acquirer must do their homework to define their goals and important criteria required to make a good acquisition. A clear definition of success using these three key areas will eliminate the wrong targets and, through these steps, identify the real jewels.

Otherwise you may settle for what looks like a good financial deal in the beginning only to spend more time and energy than necessary after acquisition.

Steve Mezak, Vice President M&A Consulting, Next Coast Brokerage

Contact Steve to learn more about your company’s readiness for acquisition.