I am often asked when the right time for an MSP to be ready to sell is? It’s a great question, especially in today’s COVID-19 climate, and I like to set the bar then explain that process and what it looks like. The important takeaway is, do something. Don’t remain stagnate.
Let’s be honest; there’s a lot of consolidation that’s happening right now. But you know, when I started my MSP 10 years ago, I wasn’t thinking about it because it was still a time when you knew there was a lot of you break, and I fix types of scenarios going on. And then, moving into the middle of this last decade is really when cybersecurity services started to finally make their way to the market.
As a result, today’s landscape is so much more difficult to scale than it was back then because you had the same competencies related to technology that had been around for years. But these days, cybersecurity is a completely different skill set altogether. There are tools that MSPs can apply to different vendors, but that requires an understanding of how to integrate those resources, which can be overwhelming for some.
So, I would say the right time to start thinking about selling is really at the beginning of your MSP journey. Ask yourself what do I want out of this, what do I want out of my MSP in the next five years? Where do I see myself going in life, and is this something that’s going to be my forever job to pass on to my kids? What’s my endgame here? Because we really have to start thinking about that now with the differences in how this space even looks from where it was ten years ago when I was just starting off.
Next Steps
Here’s the thing. I want people to make more money, whether that’s by selling their company or it’s by just listening to the things that made me successful. Either way, that’s a win, and I get fulfilled because you have more money in your bank account at the end of the day.
The best way to ensure you’re ready to sell is to consider that monthly recurring revenue. When you look at an acquisition, private equity, if you get to be that large, a buyer really only wants you if 80% of your revenue or higher is MRR. For what I’m looking for, because of the type of scale that I’m doing, with a public rollout, I’m looking at 50% or higher MRR. But I see acquisition potential coming across my desk all the time with MSPs that are still doing so much project work, so much break-fix undependable revenue, having like between 20 to 30% MRR. So, if you kick that MRR percentage up, convert some of those break-fix clients, take some of your project work and maybe include projects now as part of your packaging is in pricing, raise your seat price, and include projects so that you have more money coming in every single month and your monthly recurring revenue now comes up to about 80%.
I see most MSP owners only taking home about 80k a year on average. So, when I see these acquisitions come across getting into the $5 million range, and from what I’ve seen, that is sort of the sweet spot from my perspective. But I also want to bring on the MSP owners that I see as a good fit because I know that they’re worth more, and I know the weight that they carry on their shoulders. And they can make more money while being a part of something bigger.
Then What?
Once you get to that point, you can access financing tools that exist out there to have these types of programs because below that $1 million mark, even third party leasing companies look at you as a vendor, a person to see your creditworthiness, and whether you’re actually going to fulfill uninstalling equipment. And if you don’t have a track record, and if you were like me, where I was laid off with two newborn twins at home while 90 days past due on my mortgage with a credit score of 408, that’s pretty bad.
So, you can’t do these things now. But the floodgates open up to the possibilities to generate these new revenue streams. It’s a grind to get there. I know the struggle because I did it, but once you hit that million-dollar mark, there’s a lot of things that break free.
Yes, Metrics Matter
You know what metrics an MSP should be tracking, and you know what I should be looking at as an MSP owner. Well, I’m a little bit unique when it comes to metrics. It’s a complete shift of mindset because most of the metrics that MSPs will track will be open versus closed tickets. Unfortunately, that gauges how many people you need to throw at the problem and not much else. It was a good place to start eight or nine years ago.
But now, as of a year and a half ago, I flipped the script and said we’re going to measure the amount of pain that our clients are feeling. The metrics that I track are something that I call reactive ratio, which is where I look at how many tickets are being generated per the number of employees. I look at it through a three-to-one ratio, which means, for example, that I expect a 30-person law firm to generate ten tickets per month. That’s a great way to be able to scale and maintain your profitability. And what’s even better is, I show my clients these numbers too. We pull back the curtain and say, you know what? Last month was at a 2.8 to one; we didn’t quite make that three. Let me show you why last month missed the mark.
Then, we look at what we call our top fives. First, it’s the top five ticket types or the top five issues the company faced, and then it’s the top five employees experiencing issues. Both help us to determine why our reactive ratio may be out of whack for the month. So, we’re managing way more human elements now than we are in actual technology.
Make the Choice Sooner Rather Than Later
It’s a buyer’s market right now because coming out of COVID, MSPs lost a lot of clients. I really feel that regardless of whether you’re going to scale or sell, if you don’t do one of those two things, if you don’t double down and try to blow this thing up that you’re managing, meaning in a good way scale at skyrocket high and go at it and attack it, which is a lot of effort, or if you don’t sell, you’re just going to be closing your doors in the next two years. It’s almost like a purge that’s taking place in the MSP space right now. One because of competency, but two because of the economic climate.
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