What Buyers Really Look for When Acquiring an IT or Managed Services Business

Many IT and managed services business owners assume that strong revenue and healthy profit figures are enough to attract a buyer. In practice, buyers look considerably deeper. What they are purchasing is not a snapshot of current performance: it is a stream of future income. How visible, secure and scalable that income is will determine not just whether a deal gets done, but at what multiple.

As Mark Sykes, M&A Director at Hornblower Business Brokers, explains, "buyers are looking for visibility and scalability from day one." Understanding where businesses fall short is decisive for any owner thinking about a business sale, even years away.

Recurring Revenue: The First Metric Buyers Examine

In the IT and managed services sector, recurring revenue is the foundation on which valuations are built. Buyers assess it as one of the first indicators of business quality ^[1].

"Anything less than 50% of the total revenue mix will make people feel a little bit uncomfortable," Sykes notes. "Anything north of 65, even 70% of the revenue mix would be seen as highly desirable." A business that has allowed project or one-off revenue to dominate is signalling something about the underlying model.

The percentage alone is not sufficient. The more important question is how that recurring revenue is secured. Businesses relying on goodwill and long-standing relationships, without formal contracts, present buyers with a risk they cannot easily quantify ^[2].

Why Contract Quality Is Everything

The absence of robust contracts is one of the most costly oversights Sykes encounters when working with owners preparing for sale.

"The quality of contracts in this sector is absolutely central," he says. Many owners justify the absence of long-term agreements by arguing the service speaks for itself. That may be true, but it misses the point. "You will not convince the buyer to ignore the risk of transitioning ownership of a business," Sykes explains.

The minimum standard is a one-year contract. The strongest businesses go further. "The best and most valuable businesses in this sector take the bolder step to try and extend for three years," Sykes adds. Introducing contracts is rarely as difficult as owners fear, it's never as difficult as they imagine it's going to be. ^[3]

One trap to avoid: contracts with a one-month notice period. "It's meaningless, really. It just defeats the object." Low churn reinforces the picture further. A business on three-year contracts with demonstrably low client turnover presents a materially different risk profile to one relying on informal relationships.

Gross Margins and the Project Work Trap

Gross margins are another area where businesses frequently disappoint buyers, and the cause is not always obvious.

Building a managed services client base often requires taking on mobilisation and infrastructure projects early in a relationship. These involve significant hardware sales, which carry low margins. Pure support and remote management revenue, by contrast, is very high margin.

"There's a very fine and important balance with an MSP in not doing too much project work at the expense of everything else," Sykes explains ^[4]. A business that has leaned heavily into project delivery may present a margin profile that raises questions about the sustainability of its model. Businesses where recurring support dominates will be in a stronger position.

Customer Base Size and Revenue Concentration

The size of the customer base and how revenue is distributed across it attracts close scrutiny. A business with a small number of clients, where a handful of accounts represent a disproportionate share of revenue, introduces customer concentration risk that buyers will price into their assessment ^[5].

"If a business has a relatively small customer base, then almost inevitably it has high revenue concentration between the top customers," Sykes notes. "That increases the risk for any buyer." The concern is straightforward: the departure of one or two key clients post-acquisition could materially alter the economics of the business purchased. A broad, diversified client base is a clear indicator of resilience and scale.

Owner Dependency: The Factor That Most Often Derails a Sale

Owner dependency is the most common reason businesses fail to achieve the outcome they were expecting.

"Any business owner in this sector who is proud of the fact that they're still the main person in terms of customer interface is going to find themselves short when it comes to actually selling the business," Sykes says.

Buyers want the opposite. "They want to know that there's structured layers of staff within the MSP that will deal with all of those problems, even the big serious ones, and that the business owner doesn't have to get involved," Sykes adds. The simplest test: the business owner should be able to step away for weeks and still have the business running without interruption.

The issue is particularly acute because most IT founders came up through technical roles and remain closely involved, often because they are the best person in the business to do so. From a buyer's perspective, this creates a clear transitional risk: if relationships and knowledge sit with someone about to leave, the business is less robust than it appears.

Internal Processes and Operational Discipline

Buyers will also examine how well the business is run operationally. Well-documented processes and clear systems give acquirers confidence that the business will hold together through a change of ownership. Buyers who see disorganisation in the back-office assume they will inherit it.

Due diligence will surface gaps quickly. The ability to demonstrate clearly how the business operates, without the owner needing to be present, is a signal of genuine institutional value.

How to Prepare: Practical Steps Before Going to Market

"You can't fix any of these things overnight," Sykes says. The businesses that achieve the strongest outcomes have begun building predictable, contracted, scalable revenue stream well in advance. Two to three years is a realistic preparation horizon.

The priorities fall into three areas. First, succession planning: if no one in the business genuinely shares day-to-day accountability, start building that capability now. Second, contract discipline: audit the revenue base, understand what percentage is genuinely recurring, and begin strengthening any weak or missing agreements. "If you're two years out from an intended sale and you've got a lack of contracts in your customer base, start working on that now on a three-year basis," Sykes advises. Third, process documentation: ensure the business can demonstrate its systems clearly to any buyer, on any given day.

"The impact on value that all of them, or to be frank, any of them would have over that period will make it well worth it," Sykes adds. The businesses that achieve the strongest exit outcomes are not the ones that begin thinking about value on the day they decide to sell. They are the ones that have been building for it.