What MSP Buyers Really Want
A lot of MSPs have or will have discussions around selling their company. These discussions don't always happen at a time of your choosing. Whether you are actively trying to sell your MSP business or just testing the waters before committing, here are some practical insights into what typical MSP buyers are thinking.
New Client Acquisition
There are many reasons why companies want to buy an MSP business. The most common reason I've noticed is the acquisition of new MSP customers. If you are an existing MSP and want to grow your monthly recurring revenue (MRR), acquiring another MSP may seem like a really good idea.
When approached by another MSP looking to accomplish this goal, it should tell you a lot about how the buyer will negotiate. For example, such a buyer will probably not want to compensate you for any revenue not related to managed services. Projects, hardware, software, revenue will all be discounted heavily or not valued at all in such a scenario.
I've seen a lot of deals where the buyer did not want to put up a lot of cash at closing. Instead, they will ask the buyer to take an earn out or payout based on future performance. I call this "seller financing".
Statistically, the likelihood of buyer and seller remaining on friendly terms immediately after closing a deal is not good. Wait 12 months and things can change a lot! It can often be much safer to lower your total valuation but increase your cash at closing compared to a higher valuation but with a longer payout. These deals can be very risky.
Finding a buyer who is willing to put up a legitimate amount of cash at closing is very important. Think of it like buying a house. If you can't put up at least 20%, you aren't a legitimate buyer.
Due Diligence Now, Offer Later
A lot of buyers will want to rush the due diligence period. Some buyers will even ask for a lot of information before a formal offer or letter of intent (LOI) is made. There are many dangers of entering the "due diligence" period too soon:
- Time: it takes a lot of effort to go through due diligence.
- Risk: showing too much to a buyer who isn't really interested can have tremendous risk to your business. Due diligence periods are meant for serious buyers only, and only after they have made a legitimate offer, which has been accepted.
- Competitive Intelligence. Although underhanded, some buyers will use M&A as a means to look at other MSPs just to see how they " do things". Taking an in depth look at another MSP can yield great intelligence about how other MSPs operate. It's like free consulting.
In closing, I've highlighted some of the more egregious ways M&A deals can go bad. But, it doesn't mean that they don't happen. Knowing what a buyer may be thinking is very important for keeping your MSP safe until you make the final decision to sell.