Selling your business is both a milestone and a life-changing decision. On the one hand, there’s a clear path to lasting financial security after years of hard work and stress. On the other hand, selling at the wrong time or in a wrong way might not give you the results you want, neither financially nor psychologically, or personally.
Are you ready to sell your IT service business? Here are a few considerations to take into account.
The first step in preparing your company for sale is applying a few optimizations to make it more attractive for potential buyers.
For example, if you offer multiple services for multiple clients, can you rank them in the order of growth, revenue, and profitability? Since your company is valued based on the multiple of growth and profitability (but averaged out across all services), fixing problematic areas will help you increase the final selling price.
In case you can’t spur profitability or growth for some services or accounts, it might be beneficial to cut them, increasing your multiplier.
When you break down revenue by services or clients, you’ll see that some bring in healthy revenue but are barely profitable in the end.
The likely culprit is COGS — the cost of providing the service is close to the revenue you generate from those services. A typical MSP might find that longtime clients are still paying the same fees while the cost of delivering the service (e.g. labour, infrastructure) has significantly increased. This is the perfect time to have a conversation with your clients and look to implement auto renewal agreements with a price escalator.
Another reason for high COGS relative to revenue is miscalculation, particularly with new services. Unless new services are showing healthy margins and growth, you might want to consider whether it makes sense to keep them or alternatively increase the price in order to increase the valuation.
Owners of smaller but growing MSPs are often not only CEOs but also engineers, account executives, customer support specialists, and occasional bookkeepers — all while paying themselves a bare minimum to survive.
The question to ask yourself is “what would it take to replace you?” The buyer might have to hire a new CEO and other staff at market rates to get the same output. What would it cost them?
You should include the market rate salary necessary to replace your role in your region as part of the adjustments needed to calculate an adjusted EBITDA figure.
In addition, consider whether all your MSP’s processes are clearly laid out or are you mostly keeping them in your head? An important part of the transition is documenting every process the buyer needs to repeat your success.
Reasons to sell a company vary greatly, from personal including divorce to other debt to burnout and of course retirement.
If you control the timing, you should sell at the sweet spot — when your MSP produces healthy profits while continuing to grow. The other side of the equation is “how much do you need?”
While more is better, if you need $4M to retire on the beaches of Thailand, and your business can already be sold for over $7M, is it just inertia that keeps you going?
Conversely, if your business is just picking up steam, consider growing it for another year or two.
The key idea is to know your number, so you can calibrate accordingly.
The buyer will value your company based on the multiple of your revenue, EBITDA, or in the case of MSPs, adjusted EBITDA. The multiple is dependent on many factors including your growth rate, location, specialization (if any), percentage of recurring revenue and customer concentration among other factors.
In general, a healthy growing MSP can expect to sell for 3-6x EBITDA. Wondering what a more precise valuation of your company might be? Get in touch with us at The Host Broker and we’ll provide you with one — free of charge.
There are lots of ways to structure a deal, from a lump-sum cash payout, stock in a Newco or buyer’s firm to an earn-out to seller financing.
Tax implications are an important part of the process. While getting the whole sum in cash today seems like a good idea, paying tax at the highest marginal tax bracket and giving away half of it to taxes might not.
A CPA can advise you on what works best in your situation with regard to minimizing tax obligations and working backwards from a targeted amount if known. You should know what you’re looking for (need for retirement if relevant) before starting negotiations.
If you have other shareholders in the company, getting alignment before starting the sale process is essential. In many cases with a partner, you will be obligated to buy them out if you are not both aligned.
Having a clear idea of a desired selling price and conditions including any requirements to remain working for the buyer are important to think through.
The partner who leads the selling process should also make sure to openly and transparently communicate the progress with others.
When you’re used to waking up thinking about your business, mulling over problems while having lunch, and going to bed with new ideas in mind — adjusting to the new reality might be difficult.
All business owners need a clear direction post-sale. Even billionaires aren’t immune from this.
What are you going to do when you’re no longer operationally involved in your company? What other goals do you have?
A natural impulse for those who are used to working all the time is to get right back into the game with a new company. However, a non-compete agreement might prevent you from starting another MSP for a few years. So have a plan B.
It’s a good exercise to ponder the questions above before you start approaching potential buyers. Not only will you look at your company with more clarity, you might be able to increase its selling price and avoid living in an aimless depressed state after the deal is done.
But there’s much more that goes into a successful sale, from choosing the best buyer to negotiating to getting your books and operations in order. That’s where an experienced broker with a track record of successful deals can be invaluable.
Thinking about selling your MSP? Just reach out to the Host Broker for advice and get a helpful guide throughout the selling process.