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.

1. Asset Sale vs. Equity Purchase: Your First Fork in the Road

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.

2. Choosing the Right Entity: LLC, S Corp, or C Corp

  • 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.

3. Contracts and Assignability: Don’t Get Caught Off‑Guard

  • 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.

4. Non‑Competes & Non‑Solicitation Clauses: Enforceability Matters

  • 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.

5. Tax Allocation & Purchase‑Price Splits

  • 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.

6. Seller Financing & Debt Subordination

  • 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.

7. Navigating International Buyers

  • 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.

8. Working Capital & Post‑Closing True‑Ups

  • 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.

Ready to Learn More?

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

5 Common Myths About MSP M&A — Debunked

When it comes to selling or buying a Managed Service Provider (MSP), misinformation can cloud good decision-making. We often hear MSP owners assume their business is “too small” or “not ready” for a sale. But the market is far more dynamic and flexible than many realize. In this blog, we’ll walk through five of the most common myths about MSP M&A.

Or if you’d prefer, we also recently released a short video where we break down these five myths in detail. Watch the video: 5 Myths About MSP M&A

1. Myth: No One Will Buy a Small MSP

Truth: Smaller MSPs are sough after. While the multiples may be lower compared to larger firms, there’s still strong buyer interest, especially from mid-sized MSPs looking to expand their footprint or acquire accounts.

In some cases, where the MSP for sale is very small, the deal may be structured as a simple referral arrangement. The seller would earn a percentage of revenue over time rather than a lump sum upfront.

2. Myth: Solo Owners Can’t Sell If They’re Leaving

Truth: Key-man risk is a real concern, but manageable. Buyers often address this risk by structuring deals to include earnouts, where future payments depend on customer retention.

Owners of one-man shops who are leaving the business may also need to take on more responsibility during the transition period. However, this doesn’t make the business unsellable, it just means the transition plan becomes critical.

3. Myth: You Need Client Contracts to Sell

Truth: About half the MSPs we help sell don’t have formal customer contracts. An absence of contracts may affect deal structure, with a higher proportion of the valuation tied to performance-based payments. But many buyers appreciate client relationships and service continuity more than just paperwork.

4. Myth: High Customer Concentration is a Deal Breaker

Truth: If one or two or five clients make up most of your revenue, it raises concerns and will be a deal breaker for some buyers. However, for others this risk can be addressed through creative deal structuring (e.g., earnouts, holdbacks) and by clearly demonstrating account stability.

5. Myth: Without Recurring Revenue, You Can’t Sell

Truth: While MSPs with monthly recurring revenue (MRR) command stronger interest and more favorable terms, there are still lots of buyers interested in MSPs with substantial revenues pertaining to projects, time-and-materials, or block-hours. In fact, some buyers will see these MSPs as ripe for upselling, where recurring contracts can be introduced post-acquisition.

Final Thoughts

Each deal is unique, and many perceived “deal breakers” can be addressed with thoughtful planning and creative deal structuring. If you’ve held back from exploring M&A because of one of the myths above, it may be time for a second look.

Need Help Selling Your MSP?

If you’re thinking about selling your MSP, whether you’re ready now or just exploring your options, we’re here to help. Contact us to start the conversation.

The Implications of Operational Efficiencies on MSP Valuation

In today’s fast-paced managed services environment, operational efficiency isn’t just a nice-to-have—it’s the cornerstone of sustainable growth and enhanced enterprise value. Whether you’re aiming to scale your MSP, improve profitability, or prepare for a future sale, refining your operations can unlock significant financial rewards.

Understanding Operational Maturity

Operational maturity reflects how effectively your business functions without constant owner intervention. At lower levels, MSPs spend most of their time reacting to urgent issues. As you advance up the maturity scale, predictable processes and clear accountability reduce firefighting and free up bandwidth for strategic growth.

Why It Matters:

  • Reduced Risk: Consistent processes minimize service failures and client churn.
  • Scalable Growth: Defined systems let you onboard new clients and staff without reinventing the wheel.
  • Valuation Premiums: Buyers pay more for businesses that run smoothly post-acquisition.

Action Step: Conduct an operational maturity audit using a 1–5 scale (e.g., Service Leadership’s model). Pinpoint gaps and choose one process to standardize this quarter.

Common Operational Challenges for MSPs

  1. Owner Overload & Burnout
    Owners juggling delivery, sales, and administration struggle to lead growth initiatives.
  2. Single-Point Sales Dependencies
    Revenue growth stalls when all proposals and client relationships funnel through the owner.
  3. Inconsistent Systems & Accountability
    Lack of documented workflows and performance metrics leads to reactive firefighting and team frustration.

Impact: These issues cap revenue—often below the $2M mark—and erode potential valuation multiples.

Action Step: Identify your biggest bottleneck (e.g., sales dependency). Delegate proposal creation to a dedicated team member and track weekly conversion rates.

The Role of a Fractional Operations Integrator

A fractional integrator (similar to a part-time COO) partners with visionary MSP owners to:

  • Facilitate quarterly planning and manage scorecards.
  • Define clear escalation rules for service tickets.
  • Ensure smooth execution of new initiatives.

Benefits:

  • Recapture 30%+ of your week from low-value tasks.
  • Align leadership teams around consistent processes.
  • Accelerate strategic projects without hiring a full-time executive.

Action Step: Track how much time you spend on operations versus strategy. If operations exceed 30%, explore contracting a fractional integrator.

Implementing Entrepreneurial Operating Systems (EOS)

Frameworks like EOS, Scaling Up, and Gazelles provide structures—One-Page Business Plans, 90-day Rocks, Level 10 Meetings—that bring clarity and accountability to leadership teams.

Options:

  • DIY: Read Traction, download tools, and self-facilitate—but maintain discipline.
  • Professional Coach: Hire a certified implementer to guide workshops and sustain momentum.

Action Step: Choose your path and schedule your first leadership retreat or discovery call this quarter.

Tactics to Boost Valuation Through Systems and Specialization

  1. Document Key Processes: From onboarding to offboarding, buyers value reproducible workflows.
  2. Niche Specialization: Serving verticals (e.g., legal, construction) commands higher seat prices and reduces churn.
  3. Profitability Analysis: Identify unprofitable clients or services, then either improve margins or exit those lines.

Action Step: Run a service-line profitability review. Select one unprofitable client to offboard or repricing discussion this month.

Shifting Your Mindset for Growth

  • Work On, Not In: Focus on high-impact leadership activities—not daily tasks someone else can do.
  • Use Pain as Fuel: Let operational frustrations drive meaningful change.
  • Delegate Strategically: Track time reclaimed from delegation and reinvest it into growth or culture.

Action Step: List three tasks to delegate next week, measure the hours freed, and plan how you’ll deploy that time.

Want to Dive Deeper?

We hosted an in-depth webinar exploring these concepts and real-world MSP examples.

➡️ Watch the Webinar: The Implications of Operational Efficiencies on Valuation from an Integrator’s Point of View

Empower your MSP to run smoothly, scale efficiently, and achieve the valuation you deserve. If you’re tired of putting out fires and ready to build a sustainable, high-value business, contact us now. Let’s work together to move up the operational maturity ladder, unlock new growth, and maximize your MSP’s valuation!

Webinar: The Implications of Operational Efficiencies on Valuation from an “Integrator’s” Point of View

In this insightful webinar, Hartland Ross speaks with operations expert Kevin Heggeroser about how operational maturity affects MSP valuation. Kevin shares his experience as a fractional COO helping MSP owners implement systems that increase enterprise value and make businesses more attractive to potential buyers.

Key Highlights:

  • Operational maturity through systematizing processes directly impacts valuation
  • Owner dependency significantly reduces a business’s sellability and value
  • Implementing systems like EOS creates transferable value buyers will pay for
  • Specialization in specific industries commands higher valuations than general IT services
  • Private equity typically requires minimum $1M revenue for acquisition consideration
  • Documented processes that don’t depend on the owner are essential for maximum valuation

Summary:

The webinar emphasizes that MSPs focused on reducing owner dependency through operational systems and specialization will command higher valuations. For owners considering eventual exit, investing in operational maturity delivers better ROI than simply chasing new clients or raising prices.

Contact The Host Broker if you’re planning to sell your MSP.

Podcast: M&A Secrets for MSPs – Maximize Value & Navigate Growth Podcast

The MSP M&A market is more competitive than ever, with high demand from buyers—including private equity firms and strategic acquirers. But what does this mean for MSP owners considering a sale? In this episode of Sunny’s Silver Linings Podcast, Hartland Ross joins IT By Design CEO Sunny Kaila to discuss the shifting MSP M&A landscape and what it means for sellers.

Key Takeaways from the Podcast:

  • Why MSP Owners Sell: Burnout, security concerns, retirement, and relocation are some of the primary reasons.
  • Market Trends: It’s a seller’s market, with buyers struggling to grow organically and turning to acquisitions instead.
  • Preparing to Sell: Increasing Monthly Recurring Revenue (MRR), securing multi-year contracts, and reducing customer concentration risk can significantly boost valuation.
  • Valuation Multiples: MSP valuations typically range from 3x to 8x EBITDA, depending on profitability, revenue structure, and business sustainability.
  • Setting Realistic Expectations: Sellers often overestimate their business value—actual valuation depends on multiple factors, including deal structure and buyer fit.

If you’re considering selling your MSP or just want to understand its worth in today’s market, this webinar is a must-watch.

Looking to explore your MSP’s valuation or discuss potential exit strategies? Contact us today for a consultation!

Webinar: How to Calculate Adjusted EBITDA for MSPs

Here’s our detailed webinar on how to calculate Adjusted EBITDA for Managed Service Providers (MSPs), hosted by Devin Rose from The Host Broker. In this session, we dive deep into why Adjusted EBITDA is a crucial metric for MSP valuations, and how to accurately calculate it.

Key Topics Covered:

  • The significance of Adjusted EBITDA in MSP valuations.
  • Common adjustments to consider, including non-operating income, personal expenses, and owner salaries.
  • A step-by-step example using a fictional MSP’s profit and loss statement.
  • How Adjusted EBITDA impacts the valuation of your MSP.
  • Important considerations to ensure your adjustments are reasonable and credible to potential buyers.

Resources:

ExitCon 2024 4th Session – Post Close Success

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!

ExitCon 2024 3rd Session – Valuations

The 3rd 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 revolves around the valuation and market dynamics of MSP businesses, highlighting factors such as market consolidation, valuation metrics beyond EBITDA, and the importance of clear financial transparency and standardized accounting practices to attract potential buyers and optimize business operations. Key insights include the impact of acquisition trends and the necessity of preparing comprehensive financial documentation for effective decision-making and successful transactions.

Got more questions? Contact us now!

ExitCon 2024 2nd Session – Preparing an MSP for Sale

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!

ExitCon 2024 1st Session – Deal Process

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!