Navigating the Legal Maze: Essential M&A Considerations for MSPs
Mergers and acquisitions (M&A) transactions can be complex—especially for managed service providers (MSPs) juggling technical delivery, client relationships, and growth goals. In this guide, we distill insights from our recent webinar with legal expert Mick Misra (Coleman Greenberg Business Law) into actionable takeaways. Whether you’re buying or selling, here’s what you need to know to structure deals that protect your interests and maximize value.
Asset Sale
- What it is: Buyer acquires specific assets (hardware, contracts, goodwill) and only takes on liabilities they agree to.
- Buyer’s drivers: Liability carve‑outs; stepped‑up tax basis on assets.
- Seller’s trade‑off: May face double taxation if selling as a C corporation; must negotiate purchase price to compensate.
Equity Purchase
- What it is: Buyer acquires stock, membership or partnership interests—getting the company “as‑is.”
- Seller’s drivers: Capital gains treatment; avoids piecemeal asset assignments.
- Buyer’s trade‑off: Assumes hidden liabilities; less favorable tax basis.
Action Step: Early in negotiations, align on structure. If asset sale, map out which contracts or certifications require assignment consent; if equity sale, plan due diligence on liabilities and tax impacts.
- LLC: Highly flexible ownership and operating agreements—easy to sell membership interests.
- S Corp: Pass‑through taxation but strict shareholder eligibility rules—may limit buyer pool.
- C Corp: Standard legal framework; watch out for double-tax hit on asset sales.
Action Step: Review your entity type ahead of a deal to identify potential roadblocks (e.g., S Corp restrictions) and consider pre–transaction restructuring if needed.
- Default rules: In many states, absent a non‑assignability clause, contracts are assignable—but always verify governing law.
- Certifications & gov’t contracts: Held at corporate level and often not assignable—may force equity deals.
Action Step: Inventory all client/vendor contracts and certifications. Flag any that require counterparty consent or are non‑assignable.
- State variation: Some states (e.g., California) heavily restrict non‑competes; others enforce two‑year, industry‑specific geographic limits.
- Executives vs. Staff: Courts scrutinize non‑competes more strictly for rank‑and‑file employees than for owners or senior execs who receive clear consideration.
Action Step: Craft clauses with reasonable duration, geographic scope, and industry limits. Tie consideration to sale proceeds or severance for each signatory.
- IRS Form 8594: Both buyer and seller must agree on allocations among asset classes (tangible assets, goodwill, etc.) or risk audit.
- Goodwill‑heavy deals: Even in MSP purely service‑based valuations, document any hardware or software assets separately.
Action Step: Build in a 90‑day post‑closing window to finalize allocations in good faith and consult with an independent accountant if buyers and sellers disagree.
- Seller notes: Often unsecured; expect institutional lenders (e.g., SBA) to have first lien via UCC filings.
- Security & guarantees: Personal guarantees or escrow for earn‑outs can improve seller comfort.
Action Step: Negotiate clear subordination language and consider partial escrows or letters of credit to backstop deferred payments.
- Due diligence: Vet buyers’ financials, reputation, and previous deals.
- Legal protections: Insist on U.S. governing law, domestic dispute forums (or binding arbitration), and consider escrow for earn‑outs.
Action Step: Maximize cash at closing; structure earn‑outs or deferred payments in escrow to mitigate enforcement risk abroad.
- Asset deals: Buyers sometimes request a working capital target similar to equity transactions—ensure it reflects the asset base.
- True‑up approach: Credit deferred revenue back to buyer and prepaid expenses to seller post‑closing for clean hand‑off. This is our preference for asset transactions.
Action Step: Agree on precise definitions (e.g., “deferred revenue,” “prepaids”) and a timeline (30–90 days) for post‑closing adjustment.
Join us for a deep‑dive webinar where we discuss these legal strategies—and answer your questions.
➡️ Watch the Webinar: Legal Considerations for MSP M&A with Mick Misra
