The 4th session of ExitCon 2024 hosted by Devin Rose, with Guest Speakers:
ExitCon is an online event designed to provide MSP Owners with the knowledge and tools they need to plan a successful exit strategy. This conference features industry experts who will share their insights and experiences on navigating the complexities of selling an MSP.
The session focuses on strategies for achieving post-close success in MSP acquisitions, emphasizing employee retention, cultural integration, and maintaining customer relationships. Key points include the importance of clear communication, addressing employee concerns proactively, and aligning technology stacks to support long-term growth and integration.
Got more questions? Contact us now!
The 2nd session of ExitCon 2024 hosted by Hartland Ross, with Guest Speakers:
ExitCon is an online event designed to provide MSP Owners with the knowledge and tools they need to plan a successful exit strategy. This conference features industry experts who will share their insights and experiences on navigating the complexities of selling an MSP.
The discussion focuses on preparing an MSP for sale, emphasizing the importance of having long-term, stable client contracts and implementing best practices to maximize the business’s value. Key reasons for selling include focusing on another business, retirement, and burnout, while challenges such as ensuring cultural fit and maintaining transparent financials are highlighted. Proper due diligence and understanding the buyer’s strategy are crucial for a successful sale.
Got more questions? Contact us now!
The 1st session of ExitCon 2024, hosted by Hartland Ross.
ExitCon is an online event designed to provide MSP Owners with the knowledge and tools they need to plan a successful exit strategy. This conference features industry experts who will share their insights and experiences on navigating the complexities of selling an MSP.
The session discusses key considerations for MSP owners contemplating a sale, including reasons for selling, such as retirement and burnout, as well as the impact of COVID-19. It highlights the importance of setting expectations, understanding valuation, managing customer concentration, and documenting revenue trends. Additionally, the role of intermediaries in facilitating better buyer-seller matches and smoother transitions is emphasized.
Got more questions? Contact us now!
Our Team’s Hartland Ross recently joined Tim Fitzpatrick on the Realto Marketing podcast. In this engaging episode, Hartland delves into the complexities of M&A, offering invaluable insights for anyone considering buying or selling a business. Whether you’re a novice or an experienced professional, this podcast is a must-listen.
Establishing trust early in the negotiation process is crucial. Hartland emphasizes the importance of rapport-building from the first interaction, whether through Zoom calls or in-person meetings. This trust lays the foundation for a smooth transaction.
The diligence process is where the buyer evaluates the opportunity. Hartland highlights that the speed and accuracy of information exchange can significantly impact the buyer’s confidence and the overall success of the deal.
Hartland advises buyers to focus on deal-killer issues that can make or break a transaction. Identifying these early can save time and resources for both parties.
One of the most common deal-breakers is a mismatch in valuation expectations. Hartland explains the importance of realistic valuations based on market standards and not personal financial needs or aspirations.
Having the right legal and financial advisors familiar with M&A processes is essential. Hartland shares examples where incorrect advice from inexperienced advisors led to complications, stressing the need for specialized expertise.
Prolonged negotiations can lead to deal fatigue, where parties lose motivation to close the deal. Hartland stresses the importance of sticking to agreed timelines and maintaining momentum to avoid this pitfall.
Hartland Ross’s insights are not only profound but also practical, providing a roadmap for navigating the often-turbulent waters of M&A. Don’t miss out on this opportunity to learn from one of the best in the industry.
Tune in to the full podcast episode here and elevate your understanding of mergers and acquisitions today!
When you sell your MSP with The Host Broker, our processes assure that your business is going to receive enough interest from potential buyers to return fair market value (or greater). In today’s blog, we’ll demonstrate by looking at milestones in the selling process from a numbers perspective.
For our new listings, we create a one-paragraph summary of the business which acts as a teaser for interested buyers. It identifies the nature of the business, the geographical scope, some high-level financial metrics, the seller’s reason for exiting, and anything else that is unique about the business. We distribute this blurb across multiple channels:
While it is difficult to come up with a precise tally, when you add up the estimates for each channel, it is safe to say the number of potential buyers reached when you list with The Host Broker is in the 1000’s.
When a buyer is interested in receiving more information about a listing, their next step is to request and sign a non-disclosure agreement. Once signed, we then send them a package containing more information about your business including a Company Overview document, balance sheets, and profit & loss statements.
For a typical MSP listing, we’ll have several dozen potential buyers who sign the seller’s NDA.
After a buyer has reviewed the package, if they are interested in moving forward, the next step is usually to arrange a discovery call with the seller. Sometimes, a buyer may have questions they’d like answered prior to having a call. In any event, the call gives both parties an opportunity to become acquainted and to ask each other questions about operations, key clients, employees, company culture, or anything else that is important to them.
Ultimately, most MSP listings result in 10-15 phone calls between interested buyers and the seller although this can be increased or decreased based on how rigorous the qualification process is.
After a call with the seller, the buyer will decide whether or not to put forward an offer. Often this will take the form of a Letter of Intent. An LOI is a non-binding agreement which establishes expectations for the key deal terms such as the valuation, payment terms, exclusivity, non-compete clause, access level to materials during due diligence, what is being purchased and more. The LOI typically has an expiration date. Some buyers will instead put forward an informal offer detailing the valuation and payment terms, then will graduate to a formal LOI upon request from the seller.
Most owners of MSPs who list with The Host Broker end up with 3-6 LOIs to choose from, again depending on how stringent the qualification process is.
By going through the selling process, sellers end up with several competing LOIs to choose from and can be confident they are being offered a fair price for their business. But price isn’t the only consideration. Sellers also consider which LOIs have the most favorable payment terms, their rapport with the buyer, whether the non-compete clauses align with their future plans, whether their employees/clients will be well-served by the potential buyers, and more.
Factoring all that in, the seller chooses one LOI to sign, and proceeds to the due diligence period.
During the due diligence phase, the chosen buyer gains access to and reviews key documents including financials to verify their accuracy. Legal and operational reviews are conducted. If needed, this is also when the buyer may secure financing, and their bank may have additional requests for documentation. Negotiations and adjustments rarely, but sometimes may occur based on the findings.
This phase is a thorough examination of the business working towards finalizing a purchase agreement and may take 2-4 months.
Once due diligence is complete and both parties are satisfied, their attorneys take over to negotiate the purchase agreement. It usually requires multiple rounds of iterations to align the purchase agreement with the buyer and seller’s intent and to ensure legal compliance.
Finalizing the purchase agreement typically takes several weeks, but once agreed to, is signed, and the acquisition is official!
Selling your MSP with The Host Broker guarantees exposure to thousands of potential buyers through various channels, results in multiple competitive offers, and culminates in one purchase agreement that is satisfactory for both parties. Contact The Host Broker to explore whether selling your MSP is a good fit for you.
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.
When it’s time to sell your IT service business, you want to find a deal that’s fair to everyone — great compensation for you, growing future profits for the buyer, and a fitting new environment for your team — without wasting a lot of time.
Some buyers, however, don’t think that way. Whether they are not serious about the deal, want to aggressively negotiate down the price, or try to lock you into an exclusivity clause to keep their options open, you should be able to spot typical buyer red flags and avoid them to find a great new home for your business.
Tip: Want to sell your IT business without setbacks? The Host Broker will connect you with thousands of trusted buyers of IT firms and walk you through the process step by step, avoiding common pitfalls.
If you meet with a potential buyer and they don’t have constructive follow-up questions, you should be concerned.
Lack of questions might mean that the buyer didn’t prepare for the meeting, willing to waste everybody’s time. It might be a sign that they are disorganized and don’t have a proper process in place. It hints at lack of commitment.
Asking questions already answered in the provided documentation, such as “how many employees do you have?”, is no better. It shows that the buyer hasn’t reviewed even the basic information about your business.
What are some good questions to ask to avoid getting things off on the wrong foot? A few examples questions that demonstrate that the buyer is thinking about next steps could include:
Buyers who don’t pay close attention to what matters to the seller should cause suspicion.
If the seller says that their employees or customers mean more to them than the final price, a reasonable buyer would provide assurances about cultural fit and taking care of the existing customer base.
Instead, if the buyer becomes picky with employees’ lifestyle benefits or some customers not paying enough, it’s likely they will change these things as soon as they take over.
Other important elements of the deal are know-how, certifications, and geographical presence.
If your business works with specific technologies (e.g. Citrix, Oracle, VMware), the buyer should be aware of that and concerned with being able to maintain the same level of service.
If your business services clients in a particular industry (e.g. government or healthcare), the buyer should make sure they have all the necessary certifications, clearances (ex FedRAMP) etc to continue that work.
If your business has clients that require on-premise work in different geographical locations, is the buyer able to support these customers as needed?
No one wants to sell to an incompetent buyer who would run the business into the ground a few years in. The buyer’s lack of familiarity with industry terminology is one of the easy-to-spot red flags that they might not be the right choice.
When an MSP sells to another MSP, industry terminology is rarely a problem. However, if a buyer comes from a different space — finance, oil and gas etc thinking it would be exciting to diversify and own an IT business, you should think twice.
It’s hard to understand the implications of running servers, maintaining infrastructure, making the right technological hires, and supporting customers when you know very little about the industry.
Besides the disruption poor industry knowledge can bring to customers and employees, it can also have a serious effect on the seller if there are earn-out clauses or seller financing involved.
There is no shortage of potential buyers who do next-to-no due diligence before submitting an offer or LOI. The reason is that they don’t want to miss out on a deal and try to beat their competition to it with the idea that they will negotiate the deal down later if they miss something.
The buyer then starts their due diligence only after getting the seller on a no-shop or exclusivity period.
This creates a asymmetry, since the buyer can still find reasons not to go through with the deal they don’t like (e.g. not liking the exposure to a particular industry), but the seller is likely going through the process in good faith and ultimately wasting their time.
If the deal is not signed, the seller has to start the whole process all over again.
It’s always a good idea to check the buyer’s references and see how their past acquisitions have turned out. Even if they haven’t done a deal before, checking the quality of their references is an important step.
If the buyer has done deals in the past but can’t provide a single reference and is making excuses — a critical red flag.
If the potential buyer always tries to find something wrong with the business and asks confrontational questions that put the seller on the defensive, there is little chance for a trusted relationship to develop.
Examples of contentious behaviour could be nitpicking negative Google reviews, saying that revenue projections are hard to believe (without providing evidence), questioning the competence of employees after reviewing ticket history etc.
When the buyer doesn’t believe they are buying a great business, they are more likely to prove themselves right post-purchase.
When you meet with potential buyers, listening to what they say, how they behave, and what questions they ask (or don’t ask) can be a strong indicator of a good or poor fit.
Watch out for:
Avoiding red flags in negotiations comes with experience of seeing bad acquisitions play out. But you don’t have to go through it if you rely on an experienced IT service business broker.
The Host Broker can put your business in front of thousands of qualified buyers and guide you through the whole process. Contact us to ask any questions, and we’ll give your business a fair evaluation — for free.
Selling a business is an important milestone that happens only once for most entrepreneurs. Make sure to take heed of the red flags above, and you’ll avoid many common mistakes.
What questions should an MSP owner consider before selling their business? Find out in a webinar presented by The Host Broker and eBridge Marketing Solutions with special guest, Josh Peterson, the CEO of Bering McKinley and BMK Community.
The first question to consider is: what valuation does the owner need to achieve their goals? We emphasize the importance of considering this question early on and not waiting until the owner receives an offer or lists the business for sale. We also mention the personal and financial factors that should be taken into account when determining the valuation and the need to consult with a CPA to understand the tax implications of the transaction.
The second question is about the financial metrics that should be focused on to increase the valuation of a managed service provider (MSP) for sale. The valuation methods for an MSP are related to cash flow and net profit. Recurring revenue is another metric that can increase valuation. For smaller MSPs, attaching a cost of goods sold to each item of revenue and knowing where the profitability comes from is essential.
The third question is whether having a sales team in place can increase a company’s valuation. Having a sales team shows maturity and planning, and gives buyers confidence that the company has a system and process in place that will continue to produce growth. However, the assumption is that the sales team is productive and can justify their cost. Relying solely on word of mouth and referrals is not unique and will not increase valuation. Overall, having a sales team can help increase valuation, but it’s important to ensure that the team is effective and can produce results.
We also discuss whether an MSP’s clients are month-to-month, or have break-fixed contracts, that can be converted to longer contracts. There can be a healthy mix of recurring, project, and hourly revenue. But it is important to realize that buyers are looking for certainty in revenue streams and a customer base that will be with them long term. MSPs whose clients are on shorter term contracts may require a greater earn-out component.
The company culture and employee morale are also important factors for sellers to consider when preparing for an acquisition. Buyers will want to make sure that there is a cultural fit, and if the company is a bad place to work, it will be a red flag that will impact the valuation of the business. A good way to measure employee satisfaction is through the employee net promoter score (eNPS), which can help identify areas for improvement. A positive company culture will make employees more likely to stay, which will make the business more valuable to buyers. Remote work can also increase employee satisfaction, especially in areas with traffic congestion and long commutes, and can make the business more attractive to buyers from other regions.
The technology stack and infrastructure are also very crucial when selling an MSP. Sellers benefit when their CRM and PSA tools are similar to those of potential buyers to make integration easier. Having a better-built stack makes a business more attractive to buyers.
The next question is “What % revenue is associated with the top 5 clients?”, where we discuss the issue of customer concentration and its impact on a potential buyer’s perception of a business. For example, having a single client representing over 20% of a company’s revenue or the top five clients representing over 40% is seen as risky. However, sometimes there isn’t much an MSP can do about a situation where a large client grows substantially, in which case a buyer may wish to structure the deal with an earn-out or retention strategy to mitigate the risk.
Lastly, we discuss the cost of replacing the owner’s role in a business, which is an adjustment made to the profit and loss statement (P&L) when calculating adjusted EBITDA. The cost of replacing the owner depends on their role and geography, and it affects the valuation of the business.
If you have any questions, please don’t hesitate to contact us.
Any business owner who tracks their books knows how valuable EBITDA (earnings before interest, taxes, depreciation, and amortization) can be. EBITDA measures core (or operating) business profitability, before debt, taxes, or asset maintenance come into play. Even though EBITDA is not part of GAAP, it’s almost universally included in income statements because it helps external parties better understand how a business is performing. Knowing EBITDA answers a critical question — is this a fundamentally good business?
If EBITDA is negative, for example, it tells you that the business has serious operating issues. It might be spending too much on marketing to attract new customers, having too few customers to cover fixed costs, or even not charging enough to offset variable costs for each customer.
That said, positive EBITDA doesn’t mean a business is profitable, especially if it spends a lot on CapEx to operate.
Still, EBITDA is routinely used in the business community to compare company valuations, usually expressed as a multiple. A growing technology company might sell for anywhere from 3 to 10x EBITDA. Large companies with a significant moat (e.g. proprietary technology) might expect even higher multiples of between 10 and 15x or more.
While EBITDA tries to get to the core performance of a business by subtracting non-operating expenses, there still might be some non-recurring expenses that muddle the picture. Subtracting those can help clarify business performance even further — in a metric called adjusted EBITDA.
Adjusted EBITDA drills down further to analyze the core operating business by adding back additional one-off expenses or subtracting non-operating income – COVID-related loans for example. The expenses can vary widely and include debt write-offs, employee bonuses, legal expenses, COVID-related spending, etc.
Unlike EBITDA, adjusted EBITDA varies for every company. Knowing how to calculate it properly (and reasonably) for your business can be the difference between being valued at a lower or higher multiple in an acquisition or investor negotiations.
That’s why adjusted EBITDA is crucial for IT service providers that are looking to sell their business or bring in external investors. Getting the adjusted EBITDA right can increase the company’s valuation by a whole multiple (or more) — meaning hundreds of thousands or more added to the purchase price.
Although adjusted EBITDA is different for each company, there are still common adjustments that tend to be used by most IT service providers.
Note: EBITDA adjustments can both increase and decrease the value of your company. While they are more likely to do the former, it’s important to be clear truthful, and reasonable, so others can see how your business really works.
Here are just a few typical EBITDA adjustments you’ll see ISPs make.
Additionally, the COVID-19 pandemic has added lots of one-time expenses that could obscure the true health of the business:
As mentioned above, while adjusted EBITDA is not a strict accounting metric, it helps outsiders (e.g. financial analysts) evaluate the core of the business without unusual gains or expenses. Adjusted EBITDA growth over a few years, for example, shows that the core business is in a good place and makes forecasting easier.
In turn, this gives potential acquirers a solid base from which they can calculate the company’s valuation based on growth and future returns, without being distracted by extraordinary events, such as the COVID-19 pandemic.
Since EBITDA and adjusted EBITDA are common industry metrics, they are often used for benchmarking and comparing different IT firms. If one company’s adjusted EBITDA margin is 40% and another one’s is 30%, we know that the former is more efficient and can take a closer look at its financials.
It’s easy to be swayed by one-off gains and happily book large increases in profitability. But why rely on lottery tickets and external events?
Adjusted EBITDA helps keep the business grounded, growing its core operations, which results in more realistic and resilient measurements over the long term.
Not sure where to start with adjusted EBITDA? Contact the Host Broker, and we’ll guide you through the process — and even give your business a free evaluation.
Know more about your business and how it performs compared to your industry peers by connecting with us today!
Are you doing less than $5M of revenue as an MSP? In this latest episode of The Business of Tech, The Host Broker’s Hartland Ross joins Dave Sobel to talk about deal dynamics for MSP earning less than $5M in revenue per year.
If you enjoy this video, you might also want to check our previous interview with Dave Sobel where we discussed trends in managed services. Watch it here!
The Host Broker offers a free evaluation for owners of IT services businesses considering exiting. Learn about the acquisition process and find out what your company may be worth on the market.
Contact us to learn more about the dynamics of MSP and how to start earning more than $5M revenue in a year.