Avoid A Rude Awakening When It’s Time To Sell Your MSP Business

When it comes time to sell your MSP business, do you have a “magic number” in mind?

Whether you’re planning to jet-set around the world during retirement, live comfortably and take an occasional tropical vacation, or launch another business, you may face a rude awakening if there’s a big gap between your number and the market price.

Josh Kotler

You have two choices: Accept the buyer’s offer and scale back your goals, or work to increase your valuation before you sell.

If you choose the latter, it can be done, but you may need to recruit new clients, add services, and perhaps fire some people.

“Your MSP is an asset that is worth what the market says it’s worth,” says Josh Kotler, an operating partner at Axial Reade Capital and former MSP. “Many things factor into a market valuation, and the answer typically changes from buyer to buyer. What you get to decide is whether or not to sell it.”

How Much Do You Need To Close The Gap?

Selling is easy if you’re happy with the market price, but typically there’s a gap that you’ll need to close.

If you plan to retire, closing that gap is key to a more comfortable life post-sale, says Paul Cissel, CEO of Growth Caddie, M&A Expert in Residence for TMT, and Certified Exit Planning Advisor (CEPA). “If you’re not going to work, what do you need annually to live?” he asks MSPs.

Paul Cissel

Let’s say it’s $400,000 a year. If you’re retiring at 60 and assume you will live another 25 years, multiply the annual earnings by 25, which adds up to $10 million. Add another 30% for state and federal taxes, for a total of $13 million or so. That’s the number you’d want when you sell your MSP business, Cissel says.

What would your EBITDA have to be to sell for $13 million? “It depends upon how well the company operates,” says Cissel. “If they are best in class—20% adjusted EBITDA and 42% gross margin—it would be somewhere between $1.5 [million] and $1.8 million in adjusted EBITDA.”

How Should You Structure The Deal?

How you structure the deal impacts the price. Buyers may take into consideration whether you plan to stay or take the money and run. It also matters whether the sale is a cash-only deal or a combination of equity and cash.

Ramsey Sahyoun

M&A deals can have up to four components, says Ramsey Sahyoun, co-founder of private equity firm Evergreen Services Group: cash up front, an earnout based on future business performance, a loan from the seller to the buyer, and equity retained by the seller in the buying entity.

Transactions involve one or more of these components, Sahyoun says. “For most of our deals, it’s cash. Generally, people try to get the most cash-heavy deal possible.”

Take note that a cash-only deal typically means sacrificing 10% or 20% of market value, says Cissel. Some sellers like to take “a second bite of the apple by reinvesting a portion of the proceeds—10% or 30%—in the parent company,” he says. “Deal structure is really all about what you want.”

How Do You Make Your Business More Appealing?

When the value of the business falls short of your magic number, one way to make your business more appealing is to increase revenue. You may have to find new clients for recurring revenue services and add offerings for existing clients in high-demand areas such as security and compliance, says Kotler.

Cissel says buyers seek MSPs that derive 50% or more of their revenue from MRR.

You’ll also have to reduce costs, Sahyoun says.

Examine your operations too—what works and what doesn’t. Dismiss team members who “aren’t doing their share,” Kotler says. “Go through your expenses with a fine-tooth comb. Any expense or initiative that impacts long-term performance should be dropped.”

When you’re looking to sell your MSP business, he says, “the best way to prepare for a great exit is to build a great MSP.”

A great MSP can demonstrate “true growth.” It’s something buyers look for, says Sahyoun. It’s driven by sales and marketing, as opposed to over-reliance on referrals or the owner’s network. And it helps to fetch a premium valuation multiple, he says.

This kind of growth engine isn’t all that common with MSPs because owners tend to be technicians first, not sales and marketing people. Still, Sahyoun notes, often all it takes is one superstar sales rep to drive the required growth.

But one can be a dangerous number if you have one client that generates 15% of revenue or more, because it increases risk and can make the business unsellable, Sahyoun cautions. “Customers can leave for reasons out of your control. It’s a risk that you can’t totally mitigate.”

When Is The Right Time To Reveal Your Magic Number?

Sahyoun, who has participated in 70 MSP deals, says some sellers bring up price right away while others wait until later in negotiations.

“Both can be fine,” he says. Broaching the subject early can expedite the process. A seller unafraid to reveal the number up front demonstrates confidence, he says, but some prefer to feel out the buyer before revealing too much.

Cissel, who has participated in 57 M&A deals, prefers to get it out in the open from the get-go. It shows right away whether the seller is realistic, he says. “It’s one of the first questions that I tell buyers to ask sellers: ‘What do you think your business is worth right now?’”

Kotler sees it differently: “Keep that to yourself until the buyer has done some diligence and can indicate a valuation range. Once they present you with a range, you can choose to reveal your number.”

You also want to let the buyer know if you intend to stay with the business. Cissel says it’s OK to admit you want out because you’re burned out. “I had one owner tell me on a Monday morning, ‘Right now, for a used bag of golf balls, you can have my company.’”

Sahyoun says Evergreen usually has a successor in mind for the seller, so whether the seller stays or leaves has no impact on closing the deal.

Of course, not all buyers share that view. When Frank DeBenedetto was selling his MSP business, a prospective buyer walked away because he wanted out. DeBenedetto, who now heads Kaseya’s M&A Concierge program, eventually sold the business to Evergreen.

Don’t Be Stupid With Your Money Post-Sale

Even if you walk away with your magic number when you sell your MSP business, Cissel cautions that you will need a money management plan. He’s seen too many sellers make mistakes and advises getting help from a financial planner. He stresses, “Don’t be stupid with your money.”

For more from our ongoing M&A series, read “Money Can’t Buy M&A Happiness If Culture Is A Mismatch.”

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ABOUT THE AUTHOR
Colleen Frye is executive editor of MSP Success. A veteran of the B2B publishing industry, she has been covering the channel for the last 17 years.

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