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IT Company Valuation

When it comes to fixing a fair value of your IT business, owners often make the mistake of forgoing a formal IT company valuation. Many owners feel that because they may have built their company from the ground up and are familiar with virtually every aspect of the business, they are the most qualified to determine its value.

Unfortunately, this is not often the case and an erroneous business valuation can cause you to lose out on potential opportunities to maximize your business’s value.

With an expected increase in the number of mergers and acquisitions, alongside the major markets for IT services rebounding, understanding the fair market value of your business can be essential for establishing stable, future growth that investors or buyers can rely on.

A formal IT company valuation is one of the ways that you can position your company in line for success, as it can provide you with a firm foundation you can rely on for planning your business’s future.

Basics of an IT Company Valuation

Between 2011 and 2016, there is predicted to be a 3% annual increase in revenue for IT companies.₁ Reaping the potential benefits of this industry growth, however, means knowing exactly where your company currently stands in terms of market value.

For an IT company, you and your company’s goodwill–the skills, expertise, and reputation which separate you from your competitors–offers you the most value. It would be fair to say that if another person suddenly replaced you tomorrow, performing the same exact work, they could not expect to collect the same amount of revenue you do now.

Because of this, the revenue you collected from the preceding years is often not enough to accurately predict the value your business. Your goodwill and the specifics of your company are going to be what creates most of your value.

Consider these two factors that will have a significant impact on your company’s value.

1. Contracts – The number of contracts you have with future cash implications (retainers, annual payments, etc.) is an important indicator when determining an IT company’s value.
2. Intellectual Property – If you deliver something unique to a large market that has tremendous need, then your company will be worth significantly more. Additionally, having a competitive advantage with a patent that ensures other companies cannot easily duplicate your offering can be incredibly beneficial.

These are some of the two basic elements that can affect the value of your company. The revenue your company generates is always going to be important, but your internal and external factors are going to have substantial effects as well.

External Drivers and Key Success Factors

With more than 362,000 IT businesses around the globe, separating your company from competitors and achieving above-average growth requires knowledge of a great number of factors that influence business value.

Take a look at the list below of some of the external drivers and key success factors identified by IBISWorld that can have a dramatic effect on an IT company valuation. ₂

External Drivers

1. Corporate Profit – Large investments require the kind of corporate profits that give companies the confidence they need to greenlight new IT projects and upgrade equipment. Corporate profits are expected to rise over the next 5 years, providing new opportunities for IT companies.
2. Demand from Finance and Insurance – Demand from key customer markets such as banking, finance, insurance, and other related industries are expected to decrease, posing a threat to industry growth.
3. Technology Adoption – The rate of adoption for IT systems goes hand-in-hand with the need for IT companies’ services and this is expected to increase between 2011 and 2016.
4. Private Investment in Computers and Software – There is expected to be an increase in investments in new and existing software solutions, generating plenty of opportunities for IT companies.

These drivers will evenly affect every IT company on the market. Despite them being largely out of your control, understanding how they affect your business can allow you to maximize your company’s value through strategic business planning.

There are numerous factors that you can control, however. Listed below are four of the most critical factors that can influence your company’s value.

Key Success Factors

1. Highly Skilled Workforce – Your ability to hire and retain skilled labor is essential in this industry.
2. Access to New Technology and Techniques – In an industry focused on the cutting-edge, being able to access new technologies and adapt to new standards is something every company must do.
3. Effective Cost Controls – Establishing a strong reputation requires you to be able to stay within budgets.
4. Project Management – Open lines of communication and the ability to balance your client’s needs with your abilities and timeframe is very important.

Rules of Thumb

For business owners interested in a rough estimate of what their company is worth, a professional IT company valuation will be excessive.

Instead, IT company valuation rules of thumb can be used to get a ballpark figure.

Listed below are a list of IT company valuation multiples compiled by industry expert Tom West.₃

1. 100% annual sales plus inventory
2. 3 times SDE plus inventory
3. 3 times EBIT
4. 3 times EBITDA

Bear in mind that using these rules of thumb may misrepresent your company’s actual value. These IT company valuation methods are used by industry analysts to determine what the average value of a company like yours would be. Basing any sort of business decision off these figure returned by these formulas could be disastrous.

Looking Forward

The IT industry can expect increased growth over the next five years. Mergers and acquisitions are increasing as major market players continue to absorb companies in niche areas.

As high corporate profits return, this will also result in increased IT budgets that can bring about more business for IT firms.

Anticipating these new opportunities, you can position your business to reap the maximum amount of benefits through strategic planning that starts with a clear understanding of your company. This will allow you to identify areas of your business that can easily be leveraged to increase value and create strategies for maintaining continuous growth down the road.

Contact Us Today

Your IT company has created countless connections for companies and you’ve implemented smarter ways of transmitting on information between individuals and enterprises.

Now, you need to establish new lines of communication regarding your own companies future. An IT company valuation will provide you with an accurate insight into what your company is worth, which can be used for developing an exit strategy, estate tax planning, or preparing for your next decade of business.

Whatever the reason you want to know the financial details of your business, it pays to act now.

Here at SPARDATA, we consider it a privilege to work with business owners like you because we understand how important your business is to you. That’s why we aim to help you remain in control of your business until the day you’re ready to hand it over to your successor–whether thats months, years, or decades from now.

So if you’re ready to speak to a valuation expert or you have any other questions, you can call us at (800) 895-4100. You can also click here to schedule a free IT company valuation consultation to learn more about the ways that we can help your company.

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_{1 IBISWorld. (2011, March). IBISWorld Industry Report 54151. Retrieved from IBISWorld Industry Market Research database.
2 Id.
3 West, Thomas L. 2010 Business Reference Guide: the Essential Guide to Pricing Businesses and Franchises. [Worcester, MA]: Business Brokerage, 2010.}