Buying a systems integrator in Canada

The financial statements are not the best place to start. A better start is a list of what the firm holds that a new owner does not automatically inherit: vendor authorizations, client relationships, certified engineers and, in some cases, approvals tied to the owners themselves. The business is a bundle of permissions and people, and the numbers are only as reliable as the chance that the bundle stays together after closing. This page is about judging the opportunity: what a sound integrator looks like next to a fragile one, what you may have to qualify for personally, what a seller may not volunteer, and who else may be bidding. Verification once a letter of intent is signed is covered in systems integrator due diligence.

Sound or fragile: reading the revenue mix

Questions that help separate a sound integrator from a fragile one start with whether there is a meaningful share of revenue from support and managed work that carries on after each project ends, delivery on several vendors’ platforms rather than one, and clients it still serves years after the first install, and with whether delivery work is spread across more people than the founders and fixed-price projects finish close to their estimates. A fragile one may lean on a single large client or one vendor’s channel program, win work by quoting low, and have a backlog that is mostly verbal. The same revenue figure can describe either business, which is why the mix matters more than the total.

What you may have to qualify for yourself

Some of what makes an integrator valuable attaches to people as well as to the company. Vendor partner programs run on the vendor’s own terms, so ask each key vendor whether its program reviews a new owner as well as the firm, what re-validation involves and how long it takes. For government clients, ask the contracting body, and read the contract, to learn what screening or approval attaches to the firm and its staff and whether a change of ownership triggers it. Those rules depend on the contract and the department, and this page does not summarize them. A seller who cannot answer clearly has told you something.

If the buyer is not Canadian

ISED states that all non-Canadians who acquire control of an existing Canadian business are subject to the Investment Canada Act and must submit either a notification or an application for review, unless a specific exemption applies. It adds that the government can review foreign investments of any size to ensure they are not harmful to national security, and describes its concern as foreign actors gaining ownership or control of sensitive Canadian goods, technology, infrastructure or personal data for purposes that could be injurious to national security. An integrator that builds and maintains client networks can fall in that territory, so a non-Canadian buyer should raise the question early. What is the Investment Canada Act review threshold? covers the financial tests.

If the firm works in Quebec

Quebec attaches a French-language requirement to some business, and it is specific to that province’s Charter of the French language. The Office québécois de la langue française states that businesses employing a number of people in Quebec at or above a threshold set by the Charter must register with it and begin francization, and that a business at or above that threshold wishing to take part in a public tender, obtain a grant or contract with a Quebec government body must attach to its bid or application an attestation of registration, a francization certificate or another valid document from the Office confirming compliance. For an integrator with Quebec public-sector clients, that paperwork supports the contracts themselves. Ask to see it, and ask which Quebec contracts depend on it.

What the seller may not volunteer

A seller may not think to mention these. The Privacy Commissioner says PIPEDA requires organizations to keep records of all breaches of security safeguards involving personal information under their control, whether or not the breach had to be reported, and the Privacy Commissioner can ask to see them, so ask for the firm’s record and how each incident was assessed. Ask how delivery staff are engaged: the CRA says an employee generally works under the direction and control of the individual or business who hired them, so contractors who in practice work like employees may be a liability the buyer inherits. See am I liable if the seller misclassified an employee as a contractor.

Questions to put to a seller before you spend on diligence

• Which vendor authorizations does the firm hold, in whose name, and what does each vendor require when ownership changes?
• Which client contracts need consent to continue after a sale, and has any counterparty been told?
• How many engineers hold the certifications behind the firm’s main authorizations, and is anyone planning to leave?
• What is the estimate to complete on each open fixed-price project, and who prepared it?
• Has every security incident been recorded and assessed, and which were reported to the Privacy Commissioner?

Who else is bidding, and what that means for your offer

Ask who else may be bidding, and whether a larger integrator or IT-services consolidator would gain something from this firm that you would not, such as certified headcount, client references or government and enterprise contract relationships. BDC lists the buyer’s strategic interests among the things that can affect a final selling price, and says a strategic buyer is often willing to pay more because it sees synergies. If you are an independent buyer competing with one, consider which terms other than price you can offer: how smoothly consents are expected to go, how the team and clients are kept, and how long the seller will stay. What is key-person risk when buying a business? explains why that last point carries so much weight in a firm built on a few relationships.