IT System Design & Migration with Records Mgmt
The current owner is not responsible for any billable hours, and only devotes 10 – 15 hours a week on this IT system design & migration company. With 2018 geared up to start with nearly $700,000 in contract revenue, the year is expected to resemble 2016 in Gross Sales and Cash Flow. As such, the company has been valued on a 4-year average Cash Flow.
A virtual office is run out of Omaha, and clients across the nation consult with this business to best manage their ECM software, design, and implement systems, and work to upgrade software and migrate data. Depending on a buyer’s needs, the seller is willing to transition for 2 - 4 years to keep the company strong and the clients in place.
Services are completed by employees either remotely or on site for clients. All employees are extensively experienced and trained in legacy systems, but still work to stay up-to-date on the industry changes. Additionally, a support team of 5 operate out of Asia, focusing mostly on development work.
At any given time, the company has between 4 and 5 open contracts, many of them with repeat clients. This is an excellent chance to take charge of an unsurpassed company with great growth potential. Priced at $1,650,000, a buyer should see a first year’s profit of $421,261 after debt payments.
- Years in Business: 10+
- Location and Service Area: Omaha, with clients nationwide
- Clients: Fortune 500 companies, state and local governments, and more
- Services: System design & implementation, upgrades, content migration, records management
- Reason for Selling: Retirement strategy
- Employees: 5 in Omaha, 5-man support team in Asia
- Seller Training Period: Seller will consult/work with the owner for 2 - 4 years
- Growth Opportunities: Hire salesmen and add more employees
- Current Owner’s Responsibilities: Seller works 10 – 15 hours/week paying bills, monitoring accounts and working on deals
- List Price: $1,650,000
- Gross Sales:
- 2016 - $1,380,698
- 2015 - $1,220,734
- 2014 - $1,123,571
- Cash Flow:
- 2016 - $694,256
- 2015 - $487,792
- 2014 - $450,046
- YOY Growth Trends: 2018 will be starting out with $650,000 to $700,000 in contract revenue, and should be similar to 2016 in Gross Sales and Cash Flow.
- Assets Included in Purchase:
- Equipment: $24,000 in servers, software, etc.
- Contracts: 2018 will be starting out with $650,000 - $700,000 in contract revenue
- Intangible Assets: Extensive software knowledge & experience; proven process; software certifications
*amounts may vary
Cash Flow Analysis
|Description of Financial Statement||P&L Statement|
January - November
|Tax Return||Tax Return||Tax Return||Notes|
|Net Income Shown on Financial Statement||$168,580||$555,198||$-130,398||$-111,721|
|Compensation to Owner||$0||$13,000||$265,000||$260,000|
|Other unrelated Salaries||$0||$29,000||$35,000||$25,000||Wife's salary|
|11% Tax on total W2 Salaries||$0||$4,620||$33,000||$31,350|
|Interest||$0||$1,187||$1,226||$709||Non-onward going expense|
|Meals & Entertainment||$4,073||$2,718||$4,217||$2,742||Personal expenses run through the business|
|Employee Benefit Program||$0||$0||$48,201||$0||Owner's personal benefits minus $6,700 to staff|
|Owner's Pension/Profit Share Plan||$14,412||$20,241||$173,604||$203,358||Personal cash account/profit sharing|
|Auto-Personal Use||$3,618||$2,705||$10,594||$14,261||Personal expenses run through the business|
|Gas & Oil||$3,703||$3,948||$0||$0||Personal expense run through the business|
|Owner's Long Term Care Insurance||$0||$2,500||$2,500||$2,500||Personal expenses run through the business|
|Seller's Cash Flow = Total Addbacks + Net Income||$244,936||$694,256||$487,792||$450,046|
|Profit Margin||35.30 %||50.28 %||39.96 %||40.04 %|
- 49% Profit Margin in 2016 with an 11.5% increase in sales from 2015
- 2-year sales growth between 2014 and 2016 equates to 18%
Barrier to Entry
- Historical software & industry knowledge
- This company is known for its ability to work on older systems and migrate old systems to newer systems
- As such, the company has developed its own adjustable migration systems to assist in this area
- Furthermore, most larger companies are staying with “legacy” systems for their utility and reliability, and will need special help with upgrades or troubleshooting
- Specialized products/area
- This is not an industry in which a business can start up and gain customers without already having sufficient knowledge and experience in the area
- Many clients are gained through industry contacts from IBM and FileNet
- Skilled employees
- Employees have years of training/experience and are cross trained to handle multiple arenas
- The seller and employees work to stay up-to-date on industry trends to gauge how to best handle software changes and stay ahead of client needs
- Partner relationships
- Company works with 5 to 6 partners across the U.S. and Canada for contract jobs
- Partners may be contracted by government entities or large companies for software work, but need the help of this company for more specialized or intensive services
- Lead Architect (1)
- Systems Analyst (2)
- Infrastructure Specialist
- Manages company servers
- Administrative Assistant
- Works 20 hours/week at $20/hour
- Handles day-to-day needs, manages employee paperwork, and assists vendors, partners and customers
Lead Architect and Systems Analysts are contracted out to clients, generally working on-site at client locations. Contracts vary in length, but many are negotiated for months at a time with options for renewal.
Additionally, while employees are contracted out, smaller projects are also taken for employees to work on outside of their contracted work.
Fees generally run between $110 - $180/hour. Fixed bids are also taken, and it is not unusual for a month’s work to bid between $40,000 - $50,000.
Seller does day-to-day accounting, i.e., making payments and issuing checks. The seller also scans in bids and bills, tracks expenses, and working with partners on deals.
- National Highway Traffic Safety Administration
- AAA Missouri
- Mutual of Omaha
- First National Bank Omaha
- John Morrell Food Group
- Kings County Washington
- Department of Justice
- Axa Financial
- Texas Department of Transportation
- And many more Fortune 500 and government entities
|Support || |
|Implementation ||Consulting |
- Hire more employees
- A buyer should consider hiring more skilled employees to take on more contract bids
- While the figures most likely will fall into the six figures, higher paid employees capturing more contracts should still profit nicely
- Hire salesmen
- There are currently no sales personnel on staff to actively seek out new contracts
- A buyer not wanting to handle sales could pay commission-only salesmen to help grow the business
- Even without adding staff, a buyer could still keep employees 50% occupied and mostly likely break even
- Stay in line with industry trends
- Continue to update and educate employees on newer systems so that they are prepared for implementation/services to clients
- Work with partners to gauge where the industry is going
- Not all system knowledge will lead to worthwhile jobs
The Firm Business Brokerage used a Cash Flow Valuation methodology to determine the Purchase Price of the business.
The formula used is as follows:
Cash Flow x Prescribed Multiple = Fair Market Value
Cash Flow is the sum of business net income plus any owner perks and any non-onward going expenses.
A multiple is prescribed by a 20 question, 100-point parameter ranking system that is used to analyze the current business health. Each question is based on a scale from 1 to 5: 1 being low, 2 below average, 3 average, 4 above average, 5 high. The average of the responses sum is the business’ prescribed multiple.
For this business, a 4-year average Cash Flow was used with a prescribed multiple of 3.52. With this information, the computation is as follows:
$469,257 x 3.52 = $1,651,784
The Fair Market Value found above positions the business List Price at $1,650,000.
Purchase Price: $1,650,000
10%Buyer Down Payment: $165,000
20%Seller Financing: $330,000
70%Bank Loan: $1,155,000
Seller Financing 5-year term at a rate of 4.50% equals a monthly loan payment of $6,152.
Bank Loan 7-year term at a rate of 5.50% equals a monthly loan payment of $16,597.
After business expenses and loan payments, a buyer with a 10% down payment of $165,000 would retain a profit of $421,261, which results in a 255% return on investment in the first year.
A lender is required to have a minimum 1.5 coverage ratio for any business loans extended. At a proposed Purchase Price of $1,650,000 with the terms listed above, the coverage ratio is 2.54.
Please note that the decision of whether to extend a loan on any sale belongs to the bank, and this document does not guarantee specific terms or verify that financing is available.
Offer Price: $
% Buyer Cash Down at Closing: $
% Seller Carry Back via Promissory Note: $
year term at a rate of %
% of Purchase Price secured by Buyer and Seller
Total Bank Loan Need: $
% of Purchase Price
Desired Loan Type:
Desired Bank Terms: year term at a rate of %
Total Business Assets, Inventory, and A/R: $
Total Undercollateralized Loan: $
|Monthly Payment to Bank:||$|
|Yearly Payment to Bank:||$|
|Monthly Payment to Seller:||$|
|Yearly Payment to Seller:||$|
|Total Monthly Debt Service:||$|
|Total Yearly Debt Service:||$|
Fixed Charge Coverage Ratio
The bank will require a minimum ratio of 1.5 to be lendable.
2016 Cash Flow
|Annual Debt Service:||$|
Buyer's Net Operating Income (NOI)
The amount of money the Buyer will retain as profit.
2016 Cash Flow
|Annual Debt Service:||-$|
Buyer's Return on Investment (ROI)
The rate of return on the Buyer's down payment.
|Document Title / Description|
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