Most MSPs never contemplate selling, but at some point, everyone is for sale! Now that the fiscal cliff has been postponed, sort of…many MSPs are looking at 2013 with a fresh set of eyes. Taxes, regulation, general uncertainty, and other unknown factors may cause some MSP owners to reevaluate their exit strategies for the coming year and beyond.
There are generally two common scenarios in which a MSP will be acquired by another company; 1) MSP is approached by a buyer, or 2) MSP plans to sell. More often than not, option 1 is the most common scenario that leads to a sale. Very few companies proactively decide to sell, which may seem odd given that when approached by a buyer your odds of selling at a maximum value are actually quite low.
In this article we will examine the reasons why you would want to proactively contemplate selling, followed by several easy things you can do to optimize your value to a prospective buyer, no matter which scenario applies to your situation.
Reasons to Sell vs. Being Bought
There is a big difference between deciding to sell and being pursued by a buyer. It may not seem like much but in actuality it can make all the difference when it comes to cashing that final check.
1) Choose your own ground. Deciding to sell means you get to control the pace of the deal. You pick the parties you want to engage, you can set a purchase price, you can dictate the process. When you are approached by a buyer and decide to negotiate, you are automatically at a disadvantage because you are playing defense. This is not to say you can’t get a good deal; it’s just much more difficult when you are responding to a buyer instead of actively pursuing them!
2) Preparation. Imagine someone knocked on your door and asked if you wanted to sell your house. You haven’t vacuumed, the walls need painting, the roof needs to be repaired, and the house in general just needs a little work. Selling in such an environment would likely mean getting less than you could because you are not putting your best foot forward by preparing the house for sale.
The same is true for a business. Preparing your company for sale means doing many things, like getting your financials in order, getting all your documentation up to date, and in general, optimizing the company for maximum valuation. All of these things take time and can be challenging, if not impossible, to achieve when you are not in control of the timing of the M&A process.
3) Financial Optimization. Most small businesses run their businesses for the long term, which means tax minimization. MSPs are no different. Small companies don’t generally think about net income as an indicator of their success or failure. They look at their ability to make payroll, expand at a normal rate, and keep their tax liability at a minimum.
4) Valuation. Many MSPs never even know the value of their company until they sit across from a buyer. Preparing your company for sale means having a general sense of the worth of your MSP practice. Going through a valuation exercise before your company is negotiating with a buyer will help you identify weak spots and maximize value.
Tax minimization, however, is not always in line with maximizing your company’s valuation. Buyers usually want to see a historical timeline of profitability. This means showing a bottom line that may come with a tax bill that is higher than you may like. However, the price of paying that higher tax bill for a period of 2 or 3 years may yield tremendous benefits, especially when you take the company to sale. A buyer will find it difficult to reduce the purchase price when there is a strong multi-year track record of solid profits.
You may find yourself presented with a company that is willing to pay you a tidy sum and those situations do happen. However, for the majority of MSPs, deciding when you want to sell can make a huge difference when it comes to how much money you have at the end of the deal.