What is a systems integrator worth in Canada?

A systems integrator combines hardware, software and networking from several vendors into one working solution for a client. That makes it hard to price from the top line. Two integrators with the same annual revenue can be worth very different amounts, because revenue here is a blend of things a buyer may value unequally: engineering time, resold equipment, recurring support, and projects that may or may not make money once they are finished. A valuation can work from earnings recast to show what a new owner would actually inherit, and for an integrator an important part of that recasting is separating what repeats from what does not. BDC notes that the multiple a valuator applies varies greatly with the industry and market conditions, so this page explains the mechanism and leaves numbers to a qualified valuator.

Resold hardware: separate the revenue from the profit

Where an integrator resells the equipment and licences it installs, ask how much of reported revenue is resale and how much gross profit that resale adds. It helps to ask for gross profit by stream, meaning engineering services, resale and support, and to value each stream separately. Ask whether resale margin depends on a pricing tier the vendor grants the firm, and whether the vendor’s partner agreement lets that tier change when ownership does; if it can, that is a reason to weigh it more cautiously than margin earned on engineering time. Look at how the books record resale, whether at the full invoice value or net of the vendor’s cost. Two sets of statements that treat it differently cannot be compared until they are put on the same basis.

Signed backlog is worth what can be delivered and kept

Signed integration projects are evidence of future revenue, so they deserve testing. For each item in the backlog, ask whether it is a signed contract or a verbal award, and whether it has committed milestones or can be ended by the client on short notice. Ask what happens to each project if the ownership changes, because some contracts need the client’s consent before they continue with a new owner, and that consent is not the seller’s to promise. Backlog that sits with one client, or one public body, also attracts the discount BDC describes: it says a seller will not get full value where there is customer concentration risk. Should I worry about customer concentration? covers how buyers read it.

Vendor status held by the firm, and by its people

The vendor authorizations that let an integrator buy at partner pricing are worth something only if they survive the sale. Where the status belongs to the firm and is backed by several certified engineers, it is easier to treat as an asset. Where it rests on one or two named individuals, or on a relationship with a single sales representative at the vendor, it is a risk, and the cost of rebuilding it is a fair thing to weigh. Vendor programs are governed by the vendor’s own partner agreement, so the answer is in that document, not in general practice. A firm that can show its status was renewed through staff turnover may give a buyer something firmer than a promise that it will carry over.

Delivery cost: employees, contractors and fixed-price projects

An integrator that staffs projects with a mix of employees and contractors has a cost base that depends on the mix. The CRA says an employee generally works under the direction and control of the individual or business who hired them, and that a self-employed worker carries on their own business and is free to choose how to carry out the contract. A firm that keeps long-term contractors in roles that look like employment carries a classification question a buyer may price. Fixed-price projects can be the bigger concern. A job quoted too low can look like healthy revenue while it is being delivered and like a loss when it is finished, so each open project’s estimate to complete matters, not only its billings to date, and earnings can be recast to match.

Client data and reusable code: a liability and an asset

Two further items move price and are easy to overlook. The first is client data. PIPEDA applies to every organization in respect of personal information it collects, uses or discloses in the course of commercial activities, subject to the exclusions in s.4(2) and s.4.01, although the federal government can exempt activity within a province whose own law is substantially similar, so which statute governs depends on where the information is collected, used or disclosed. The Privacy Commissioner’s guidance adds that an organization must keep records of all breaches of security safeguards involving personal information under its control, and a missing record is something a buyer can ask about. The second is reusable code and templates, which are an asset only if the firm owns them. CIPO describes an assignment as the transfer of some or all of an owner’s rights, and a licence as permission to use a work while the owner keeps ownership. Which of the two the firm holds, from clients and contractors alike, changes what is for sale. See who owns code written by a contractor.

What to show a valuator

• Gross profit split between engineering services, resale and recurring support, shown separately for several recent years
• A schedule of signed projects with their milestones, cancellation rights and any consent needed to continue after a sale
• The vendor partner agreements, with the certifications behind each authorization and the names of the people who hold them
• An estimate to complete for every open fixed-price project, set against what has been billed
• Revenue by client, with any public-sector body identified on its own line

Who is buying can change the price

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. For an integrator, it is worth asking which likely buyers would gain something from the firm that others would not: a larger integrator or IT-services firm that already holds the same vendor authorizations, or a buyer that wants certified staff, client references or government and enterprise contract relationships. A buyer pricing cash flow alone is weighing the discounts above. So the same integrator may be priced differently depending on who is at the table.