.png)
IT ExchangeNet is optimistic about middle market M&A in 2024, fueled by a confluence of factors reshaping the landscape in our favor.
The middle-market IT sector remains a growth engine for the global economy based on the extended runway for digital transformation, strengthening the long-term outlook for IT Services firms. What’s more, the U.S. economy is growing, wages are rising and unemployment is low.
What to Know When You Sell
As an owner-operator of a Managed Service Provider, you've poured your heart and soul into building a successful business. You’ve likely used the proceeds from your business to purchase a home, take vacations and perhaps put your kids through school.
But when the time comes to sell, navigating the sale will feel like uncharted territory.
This article outlines Ten Timeless Truths for selling your MSP. By understanding these key principles, you'll be better positioned to maximize your return, secure a smooth transition, and ensure your legacy lives on.
1. High Recurring Revenue = High Transaction Value
In the world of selling your MSP, predictability is king. Businesses with a strong track record of recurring revenue are more attractive to buyers because they offer a more stable and predictable cash flow. This stability makes it easier for buyers to value the target MSP and secure financing for the deal. Recurring revenue can come from subscriptions, contracts, or other arrangements that generate regular income for the business. Companies with a high concentration of recurring revenue command higher valuations in an MSP transaction.
For example, imagine ACME MSP sells software with a one-time licensing fee and hardware with low margins, while DELTA MSP offers a cloud solution with monthly subscription fees. DELTA’s recurring revenue stream would make it more attractive to an acquirer, even if the two companies have similar total annual revenue. This is because DELTA’s revenue is more predictable and less reliant on one-off sales.
2. Loyal Customers Demonstrate Consistency
A strong, long-standing customer base is a critical asset for any business, but it's especially important in the context of selling your MSP. Loyal customers demonstrate the value of the product or service and the strength of the company's brand. This consistency is a positive signal to potential buyers, as it suggests the target company has a sustainable business model. It helps to mitigate risk for the buyer.
There are a number of ways to measure customer loyalty. Some common metrics include customer churn rate, repeat purchase rate, and customer lifetime value. A high churn rate, for example, is a red flag signally underlying problems with the business model or the quality of the product or service.
3. Get Your Financials in Order
Before embarking on the M&A process, it's essential for MSPs to have their financial house in order. This means having clean, accurate, and up-to-date financial statements. Clean books not only make the due diligence process smoother but also gives potential acquirers confidence in the financial health of the target company. Inaccuracies or inconsistencies in the financial statements will raise red flags for buyers and derail a deal.
The process of getting your financial house in order may involve working with accountants to ensure financial statements are accurate and compliant with all applicable accounting standards. Consider engaging your CPA to review your books through the lens of a buyer conducting due diligence on your business. It's also important to have a back-office system (even QuickBooks) in place for generating timely and accurate financial reports.
4. Buyers Benefit More from Delayed Closings
In an M&A transaction, the closing is the day on which the deal is officially finalized and ownership of the target company is transferred to the buyer. There are several steps needed to be taken before a closing can occur, including due diligence, perhaps regulatory approval, and obtaining financing. Sometimes, these steps can take longer than expected, which can lead to a delay in the closing.
While a delayed closing is frustrating for sellers, it will often benefits buyers in a number of ways. Seller fatigue could set it, the buyer may identify a different acquisition target, the seller could lose a key customer, or a market downturn could drive transaction values down. Deadlines create results. Set a closing date and respond to buyer requests with urgency.
5. Cash is King
Cash is always king. Sellers generally prefer to have as much cash upfront as possible as the least risky option. Stock deals can be more complex. And equity roll as the value of the buyer's stock can fluctuate. However, rolling stock into a transaction can materially increase total valuation price over time.
The structure of the “perfect deal” is largely dependent on the age and goals of the seller, their risk tolerance, and the vision for the future.
6. Buyers Must Earn the Right for Data
During the sale process, buyers request a significant amount of information from the seller. This information includes financial statements, marketing materials, customer contracts, and employee lists. While it's important for sellers to provide buyers with the information they need to complete their evaluation, it's also important to protect confidential information during the early stages of discussions. Since many of the best buyers may be competitors, sellers should make buyers earn the right for more information based on the stage of the M&A process.
Sellers shouldn’t automatically share all their data during discussions prior to signing the Letter of Intent (LOI). Once the LOI is signed, however, the seller is required to share all data requested by the buyer leading up to the sale.
7. Culture Clash Can Sink a Deal
Company culture is a critical factor to consider in any M&A transaction. A successful merger requires the cultures of the two companies to be compatible. If the cultures are too different, it can lead to employee morale problems, productivity issues, and difficulty integrating the two companies.
MSP sellers should carefully assess the cultures of both companies involved in a potential transaction. This can be done through interviews with executives, a review of company policies and procedures, and observation of the company's work environment. If the cultures seem incompatible, it may be best to walk away from the deal.
8. Be Prepared to Walk Away
No deal is better than a terrible deal. MSP owners should be prepared to walk away from a transaction if the terms are not favorable or if the risks are too high. It's important to have a clear understanding of your deal-breakers and to be willing to walk away if those deal-breakers are not met.
Walking away from a transaction can be difficult, but it's sometimes the best course to take. By being willing to walk away, you send a message that you’re not desperate. And if your process was well-managed, you’ll have other buyers to consider.
9. Reputation is Everything
A strong reputation will help attract the best buyers. A poor reputation, on the other hand, can make it difficult to sell your MSP. This means being honest and transparent in your dealings with clients, employees, and vendors. It means keeping your promises and delivering on your commitments. By building a strong reputation, you’ll position yourself for a sale.
10. Integration Planning
Integration planning is the process of developing a plan for how the two companies will be merged after the deal is closed. This planning begins midway through the exclusivity period and should have input from all key stakeholders. A well-developed integration plan helps minimize disruption and ensures a smooth transition for employees, customers, and other stakeholders.
The plan also addresses several issues like staffing, technology systems, back office, marketing, and branding. It's also critical to craft a communication plan to keep employees and customers informed of the changes taking place.
Conclusion
Selling your MSP may be the biggest professional decision you’ll make. And for many owner/operators, it represents a large percentage of your net worth. It's critical that you stay educated and let us know how we can help.
Tim Mueller is an American businessman specializing in the growth of technology and communications companies. With a 30 years of experience in startup, high growth and business exits, he is best known for identifying next generation technologies, assembling teams to leverage these opportunities, and building cultures for success. He has founded and sold four technology-based businesses prior to co-founding IT ExchangeNet.