M&A Tips for MSP Sellers

Posted 2.26.2019

If you find yourself wanting to leave the managed services profession, there are some best practices and tips you will find helpful throughout the process. Although MSP valuations have been somewhat flat for the last few years (with some notable exceptions), growth in the managed services market has been steady.

As entrepreneurs, we evolve with time. We buy out business partners, seek to merge with other like-minded companies, and sometimes want new adventures. Whatever your reason, here are some tips to help your exit strategy.

Always Play Offense

In my experience, you will rarely find a perfect deal when approached by a buyer. Aside from mergers, buyers contacting MSP sellers are always the aggressor, putting sellers in a defensive mode whenever talks move past the theoretical.

If you want to sell, take the affirmative steps to put your company for sale and take charge. I suspect many sellers look at M&A similarly to dating; it’s better to be pursued than to pursue. When you are selling your MSP practice, it is almost always better to enter the M&A process on your terms rather than on somebody else’s.

Know Your Buyer

Not all buyers are equal. There are a lot of unrealistic expectations out there in the MSP community, many of them held by sellers; the same is true of buyers. Some buyers believe a company can be bought for very little down, or by making payments over a long period (yes, anything over 12 months presents an increased risk to the seller).

There are non-financial considerations as well for the seller. Often, a seller has a legacy or sentimental reasons at play when entering M&A negotiations. For example, it is not uncommon for a seller to want his staff and clientele to be taken care of after the sale.

Just as the buyer will perform due diligence on the seller, so should the seller perform due diligence on the buyer to better understand what life will look like after the deal closes.

Avoid Long-Term Payouts

My rule of thumb is never take an earn-out or other performance-based payment agreement which extends beyond 12 months. Payouts lasting more than 12 months tend to be less likely to come true, and unless it is a note without any performance contingencies, it is unlikely that you will receive your full payment.

Merge, Don’t Sell

If you are in an acquisitive mindset and think that buying up other MSPs is the only way you can grow, think again. We are experiencing high growth within managed services, and this is a global trend. The next several years will present many new opportunities for MSPs; the only question is will your firm be able to capitalize on those opportunities.

If you are not achieving the performance results you want, look at merging with other firms as a model for expansion, adding capital and resources, and distributing risk without having to work with external private equity firms.

Everyone has a price. Everyone has an ideal time for them to exit. When your time comes, make sure it is on your terms, and not someone else’s!

Tags : acquisitions,M&A,MSPs

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