In the past 18 to 24 months, many MSP buyers are becoming sellers due to an increasingly widening gap forming within the information technology industry. The owners of these companies have a significant decision to make: Either get out of the business or stay.
When making the difficult choice, it’s essential to look at the owner’s initial motivation for starting the company in the first place. That can help to better understand their ultimate motivation for selling it in the end. Either way, both are power moves that can change the course of someone’s life. So, there’s much to consider.
To Stay or to Go
Business owners who acquired their organizations a couple of years ago now realize that they need to sell for two possible reasons. They either don’t have the necessary business competencies or the ability to keep up with ever-evolving cybersecurity trends. They need to sell before they go bankrupt due to these knowledge inadequacies or the general impact of the pandemic on business—the desire to sell hinges on lacking the capability or capital to succeed.
The most common scenario is an engineer turned owner/operator who struck out on their own by creating a small consultancy, only they never really transcended into the true entrepreneur or CEO role to scale. Initially excited about the opportunity to be their own boss, they now feel that there’s no way they can keep up with the complex nature of cybersecurity and all its components. They’re underwater in the knowledge department, and they’re thinking, I better get out while I can still get a high price for what I built.
But then there are the companies struggling because they were the engineers who didn’t have the necessary business competencies to begin with when starting their MSP. And they ran their business into the ground or struggled significantly during COVID last year, which is why they need to get out before they are completely bankrupt. They misjudged what it really means to keep up with the changes in managed cybersecurity, cloud, compliance, IoT, etc. Owners assume that, because they are keeping up with the constant changes, that they are pivoting their business. However, the truth is they clearly did not make the critical shift or make it in time; they did not pivot because they are facing bankruptcy. What can they do now to get out of their present predicament?
These MSP owners need somebody to save them so that they can work for the next five or ten years for somebody else. Then they won’t have the pressures of trying to make payroll every couple of weeks anymore. They can simply pay their mortgage, go to work, and do their job by contributing to something that’s bigger than themself without having to learn new skill sets.
Unfortunately, this means they can also become a cog in a bigger organization. So, when they’re selling, the buyer needs to assess how much the seller and their company are really worth.
Know Your Worth
It can be tricky to value a company and its owner if you plan to take them on as part of the acquisition. It’s a matter of finding the right percentage of revenue-for-revenue mix between both recurring and nonrecurring revenue. And the numbers can be manipulated to benefit the buyer or the seller.
Another more common approach is taking a look at the EBITDA—earnings before interest, taxes, depreciation, and amortization. It’s a snapshot of short-term operational efficiency. As an owner, this helps to ensure that you’re not taking out too much money, that you’re paying your people the right way, and that you’re not overstaffed so that you can make sure you’re operationally efficient when you decide to buy or sell. The most reasonable valuation is between 1-10X EBITDA dependent on several factors, like MRR percentage of revenue, client contract retention, and operational efficiencies.
For both parties, it comes down to how they go about making the deal.
The Art of the Deal
There’s always a huge gap between what the buyer wants to pay and what the seller wants to get, so it’s important to understand where to start with the deal, the steps through the deal, and what the valuations look like in the multiples. Factors such as financing, timeline to making a profit—earnings—and timeline for operational efficiency may affect the deal. As a seller, what should you focus on to be an attractive acquisition? As a buyer, how can you ensure you’re getting a healthy MSP?
There must be consensus on those answers, and there are ways to structure the deal around them because you’re never going to completely agree. Still, there are different things like earnouts or cash plus stock or some other financing in order to get the deal done to where everybody’s happy—and then funding around that. For example, there are some creative ways to do funding because you don’t need to go out and get an SBA loan for this kind of acquisition. All you have to do is make sure that your cash flows out, meaning they are in the black within a specific time period. Typically, it’s between three to five years. But I like to say no longer than three years because I’m on the faster acquisition path.
Considerations for Acquisition
The future you want is what will determine whether you’re going to buy or sell—whether you just want a decent salary or true financial freedom. It’s a time-sensitive, emotionally triggered decision strongly impacted by rapid changes in the industry. It’s also important to set financial and personal long-term goals before you acquire a business.
And ask yourself where you see yourself within the next five years. Do you see some amazing opportunities now, that you want to be in the thick of 12 months from now? That’ll determine whether you’re going to buy or whether you’re going to sell and when you’re going to do either of those. Because it will help you figure out if this is the path you want to take.
If you believe now is the time to sell, or even if you’re giving it some thought, my MSP, ReachOut Technology, is currently acquiring MSPs. Click here for more information. We’ll answer important questions, like what your MSP is worth, what the transition will look like for you, and what the experience will be for your customers.