Selling Your Business: The Good, The Bad, AND the Ugly

Today is a real treat for me because this dude I met at a bar at an industry event a little while back. We had an amazing time. Turns out that he has built a company just like mine that just went public a bit. ago and he sold it, and he’s also been the co-founder of three SAS companies, and he just wrote a book which is so true, called The Emotional Side of Selling A Small Business, and if you’re starting out in any type of business, you never really think about the exit at first, but it’s something to keep in mind, and we’re going to talk about that today. Because Jamison West, welcome to the show my man.

 

Thanks for having me on the show, man. I really appreciate it. 

 

Dude, I’m excited for our conversation because as I alluded to just a little bit ago, you know, when I started my MSP, which was 11 years ago now at this point, I never really had an exit in mind. Now, when I’m starting to talk with a lot of potential acquisitions, because we’re the first MSP ever that’s gone public, and we’re acquiring all these, every acquisition that I have a conversation with, there’s always emotions that are brought into it, man, and now it’s like my intro calls are never really even though they send the financials over and that’s in our standard document request. The first call is never about that for me now. It’s always about what’s your reasoning behind this, you know, where are you at? Tell me your life story. Well, you know, and you wrote a book about this too, which is amazing, dude, tell me about this.

 

Yeah, so it’s interesting like you. I started my consulting business because I wouldn’t have called it an MSP right out of the gate. It was a one man band kind of a lifestyle business. Really trying to help small business owners figure out technology before many of them knew much about it, right. So in the 90s, mid 90s, it was a minute ago, and it grew and became a support company and eventually a managed services company by the mid-2000’s. It was starting to scale. I started to see like wow, okay, this is no longer just me consulting and helping a few business owners we’re really able to do something different. As we grew I saw an opportunity and really started in 2008, but 2010, but when it really came to me pretty heavily that I could grow much faster through acquisitions. 

 

So my first foray in this world was really doing four acquisitions over 22 months on the Seattle market, just where my MSP was and we went from about eight or nine folks to 40 folks fairly quickly, and that was, you know, that was great. We really were able to scale up and do some nice things. My first acquisition was great. The second one was okay, the last one was really bad. So it is called The Good, the Bad and the Ugly, but I learned a lot in that process, and I had a lot of help from a lot of peers. I was in a pure group called HTG. Back in those days now. It’s called the ball that was acquired by ConnectWise, and I was very focused on what it looks like to build an MSP and break through that glass ceiling, like EMyth talks about like the 10 people, you know, it’s really it’s a to do, and ultimately, we recovered from that last acquisition that almost broke us. And I realized that we’ve kind of gotten to the point where my passion was more in the consulting side or building side and I kind of became a more operationally mature, operational service company. 

 

Not that I’d lost my passion for helping but it did. I’d been doing it for 21 years and I was ready to look for a change and to mitigate my risk of losing it because I’d almost lost it through that last acquisition. And so I ended up selling and, ultimately, I found a great buyer. I’ve talked to multiple potential buyers, but I found a great buyer sold in 2016. What I realized is all of the some of what I witnessed as an acquiring person from the buyers can like you mentioned that from the sellers. So what I was witnessing them going through is they were thinking through the process, combined with all of the challenges I went through when I did my sale. 

 

The process I had to go through I was like wow, there was a lot of there were a lot of there’s a lot of prep work out there a lot of books I could read about valuation, finance, legal due diligence, but there weren’t there wasn’t a book out there. Talking about hey, you’re gonna feel like the baby you raised is part of your identity that you’re selling it and there’s the you’re not going to be you’re going to be making different decisions in your business. Who can you tell about it before you’ve signed on the dotted line, all these challenges that you know what, there’s some legal issue that stops it right in the 24th hour all these things that were potential challenges for me that I was not well prepared for, and I didn’t really see a resource out there. So that’s when I decided to write a book.

 

That’s awesome, man. I’m excited because I’ve already ordered mine. You know, and there’s a reason because I just had another person on the show who wrote a book too. I have a lot of authors on and they’re like, did you read the book? I’m like, “No,” and that’s intentional, because otherwise I tend to be a little bit more commandeering in my conversation. I then tend to talk more than you, which is not what I want, you know, because I want to spotlight you, but I’m excited to read it because it’ll help me dive into the psyche of everybody personally. That I’m acquiring, you know, because it’s, I don’t do that from a position of, you know, I want to be able to go through the process easier. I want to understand really where they’re coming from so that it can be a fair scenario. So that we can really meet because it would really bummed me out dude, you know, coming from the position of a buyer, and you’ve been in this position to win you’ve acquired, it would really bummed me out. If we went through a sale close, no problems, and that individual didn’t really achieve what they wanted to achieve out of that. That’s not what I’m in this for. I’m in this for a win- win, and even more of a win on the seller side than I am for me.

 

Yeah, it’s interesting. The challenge is that a lot of folks are going through this and selling you know, they’re coming to grips with the fact that you know, there’s probably, you know, companies you’re acquiring that have owners that have maybe done this for a very long time. Our industry is pretty fraught with people who’ve been doing this for 20 or maybe even 30 years, like I own mine for 21 years, and they may believe it’s more valuable than it is but it’s always good to check and know and is it enough to retire so there’s all these kinds of things, this these realizations that they go through in the process and they need to be very, very careful to be super clear around what’s the outcome that they need to be happy with the situation when it’s all done and not put themselves through, you know, a negative paces so, no it’s great if you’re thinking that way it’s necessary to find the right buyer. You know, from a selling perspective, finding the right buyer was really important. I had to find one with integrity, and I was fortunate because I really wanted to make sure that the folks I was selling to are gonna, you know, live up to their word with me do the best steak I mean, you can’t promise your employees are going to stay but do the best for the ones that were the right fit and and take care of the clients and all that good stuff. So that was really critical.

 

Yeah, you mentioned one one thing and you were just saying that, you know where the buyer or the sorry, the seller always feels that they’re worth more you know, you sorted in not so many words. It was typically speaking, there’s a lot of emotion that drives that too. Do you touch on that in your book?

 

Yeah, absolutely. I mean, I think that if you soak a couple of things that come to mind first of all, a seller can think that working really, really, really hard drives value in the business. But what drives value in the business is revenue and EBITDA and process and maturity and client contracts. And if they’re having to work 100 hours a week that actually devalues the business and it’s something that I coach, my clients is like, how do you make a sustainable, scalable business that doesn’t if you’re requiring you to do three jobs that an acquiring party is going to have to hire three people to do your job. Right? Like you’ve got to, so you’ve got to kind of get to that. You’ve got to create some operational maturity and have some intent there. 

 

So I think one thing is that people mistake hard work for value, and it’s not. The second thing is I think that a lot of you know, I find that a lot of sellers really believe that they can look at a couple statistics and say this is what my business is worth. But value is in the eye of the beholder, right? You, I can’t determine what somebody is going to pay. I can’t buy this coffee cup for $50. You’re like I’ll give you five. Like what’s five so guess what it’s worth. It’s worth five because that’s all you’re gonna pay for it. Right? If I tell you what it’s worth, you get it, tell me what it’s worth. So there is, you know, there’s some emotion in psychology behind that, and it means that you’ve got to know, you’ve got to really be super clear around. You know what your expectations are, what your what you’re, what you’re willing to accept, and, and be super clear about that before you enter a negotiation. I have these conversations.

 

Yeah, right on, what’s a good way to navigate that and I’m actually going to use a story here because I’m curious, I know how I am navigating this one right now. But in an example because you mentioned that gap and I see this a lot in our industry too. Because with MSPs specifically now it’s really cool that you have both sides of the coin where you’ve been an MSP and you’ve been in SAS. Right, and at one point in time, valuations are what an MSP is worth. was looked at very similarly to SAS. Before, you know, those types of multiples and multiples are way higher for SAS than they are for MSPs. Yeah, I’ve seen this too, where it’s like that. That ideology still exists in the mind of some of the sellers. 

 

So I’ve looked at one the other day, and it was like, it was like 2 million in revenue, right, and it was like, Cool. So if I’m looking at your EBIT, if I’m looking at your seller discretionary earnings, you’re worth about 1x your revenue, which is fine, which that was like maybe between four and 5x the EBITDA of the MSP, which was perfect you know, that’s that’s where you typically see where these things are at these days, and he’s like, “Yeah, no problem.” He’s like, “But I need four.” Yeah, right on and to your point with the coffee cup. I’m like, “Dude, how do we bridge that gap?” “Well, I’ve been talking to private equity companies,” and I was like, “Oh, okay.” You know, cuz what’s your experience there? You know, with those guys, because I’m sure you had these being a seller too, right?

 

Yeah, you know, it’s interesting. The multiples do feel a little higher right now. It’s hard to get into that. So again, it depends on exactly what you do because the makeup of every MSP is different if you’re super heavy on product and TNM and project revenue, your multiples likely a little lower than if it’s recurring revenue. How strong is your contract, there’s all these pieces of hardware. Another big part of it is what’s your revenue and what’s your EBITDA? Not? So yeah, four to 5x EBITA is great, but that, you know, I doubt that spin kind of three to five has been there for a long time. That number goes up as the revenue and EBIT up percentage go higher. So if you can run a more profitable company, and if you can run it on more revenue, that multiple gets higher, right. 

 

So private equity companies are not looking at $2 million revenue MSPs Yeah, most of them have a $5 million revenue, minimum private, you know, for and then you know, and then you kind of become a platform company at 10 or 20 million and then you’re even then your multiple goes up even higher. But it’s usually based on multiples of EBIT and not revenue. So it’s been really, really interesting. You know, in our coaching, connect strat, I mean, this is what we help owners figure out like, what what, what does it look like? Everybody’s going to exit their business. Right, one way or another at some point, like, how do we get really intentional about what that needs to look like for you? How do you want to do it? Do you play by, is it selling to a VC firm or somebody else is it you know, is it you giving it to your kids? Are they inheriting the business like what it looks like? When are you gonna leave? What does it look like? It doesn’t need to be worth how you are going to structure the deal, and you know, people come into it eyes wide open. 

 

That’s great. Right now what we find there was a lot of folks and what I kind of write about in the book a little bit is a lot of folks who just kind of see another massive pivot in the industry with new risks. And security and all these things that are happening and they maybe don’t have the energy or technical prowess to navigate this new change. So they’re looking, they’re being more opportunistic than intentional. They haven’t spent the last five years building a sellable company. They’re like, Wow, maybe this is something I should be considering. Right? Because, yeah, the industry is changing.

 

For sure. It’s a good out and then that happens across industries, too. How would you describe that? Because that’s almost like an awareness right, which I guess is generated by an emotion as well. What drives that because there’s some that I feel that have blinders on. Right? Some sellers, no matter what industry you’re in, have blinders on as far as what’s going on in their own industry.

 

Yeah, it’s just you’re so you’re talking about like the kind of shift in model and what’s happening right now. I feel like you know, so if I go back into my I started my business, I said early 90s and first or mid 90s. First big shift for me was I didn’t start as an MSP, it was more consulting and time and material, right, and then our first big shift was creating a recurring revenue model for our managed services, which happened in the mid 2000s. For us everybody, different timelines, were kind of on the earlier edge, not scary early, but early, and then their next big pivot for us was, Wow, we don’t need servers and workstations anymore. It’s all cloud services. So for us, we were way earlier on that than most because a lot of MSP still aren’t there. But we did that and, uh, you know, the mid teens, you know, 2013 1415 We were really in the midst of that cloud services pivot. Now, it’s security. 

 

So, it’s just for me, I was very, very in tune with managed services and cloud services. I was aggressively ahead of the curve. Joma, you know, and it created a lot of value in the business. Yeah, I ran the MSP services business today. I would if I had the right revenue and EBITDA and I’d planned Well, personally, it was just me personally not saying for any other MSP owner. I’m not as adept or well versed in what’s happening in the security and threat landscape, as a lot of folks out there that come from a more technical background, so risks feel higher to me. Clients have had their insurance rates triple this year. I like my MSP clients being it’s a it’s cybersecurity is a thing, right. So. So it’s been interesting for me that that would have been a trigger for me to potentially look at mitigating the risk of this business and others it’s not mitigating risk. It’s a massive opportunity, because they’re well versed in it and excited about tackling the problem. So it all depends on your skill set, and confidence.

 

For sure. It is very similar from what I can see when there was the big on premise cloud shift a while back. Yeah, and there were a lot in our industry that were very hesitant. You know, it’s time to move to something that is cloud based. And it wasn’t the deep rooted fear man wasn’t that the cloud was not safe. The deep rooted fear was just the fact that the industry was changing.

 

Yeah. How do you deliver? I mean, for a lot of folks like something as simple as their pricing model. I’m charging clients per server, and other internal servers and they’re moving to the cloud. And it’s like, I don’t know how to price that. I don’t know how to deliver value. Nobody. You still show up at somebody’s site with screwdrivers and wrenches and now all of a sudden, we’re selling office 365 and tell him I don’t know I’ll put it in a ticket with Microsoft. Like, how where’s the value in that? So the mentality or the shift towards what are you delivering? There’s a big pivot for a lot of folks who weren’t already delivering some higher consultative value because that sticks no matter what, some people really moved towards just a support system, and a lot of those needs have changed significantly. 

 

For sure, man, for sure. When you went to sell back in 2016, or but you probably decided before, then, you know, actually, that’s a good place to start. How long were you thinking about your exit before you actually did?

 

So I you know, I had started to really think about building something I could sell in probably 2008. Like how can I build something that’s sellable, and I hadn’t made significant progress towards but those acquisitions were definitely from 2010 to 2012. Those are definitely engineered to create revenue and EBIT that would support a more interesting profile to potentially acquire and I believe that most of the decisions that we make to increase the value of our organization are the right decisions for the business. Not all of them. Not all of them every day, but most of them right like you could also you could also really destroy a business by being too aggressive and cost cutting and all those things but by and large, as long as I have longevity and scalability in mind, those decisions I make to increase value, my business is the right decision. So that was a mindset shift for me to just start building a scalable, profitable business and figure out how to grow and grow and grow and I just added acquisition to organic growth to my strategy.

 

That’s cool. That’s really cool. I like how you hone in on this and you know, the packet in a couple words. It’s almost like almost any decision you make is going to be a good decision for your business. Yeah. When you look at it that way, because it’s going to generate either revenue and or profit, right? Either one of those is going to be a good decision. You’re right. There’s a couple bad ones that you might be able to make if you have certain cost cutting measures, but anything that’s focused on growth, and as we were looking at the last two years to it was I saw it as a lovely time man because so many were pulling back and going into what you’re, you’re describing as these cost cutting measures, as a time to double down and focusing on growth, man, that’s the way to go anytime.

 

Now, COVID has created some interesting opportunities. I think a lot of people there’s a lot of fear in early 2020. Right? People were like, what’s going to happen to our industry and really, we were fortunate, right? The technology industry was impacted positively not negatively at the same time, and a lot of people did have a temporary negative impact because clients, especially if they were in certain verticals, were hit in the early part of 2020. But as they recovered and most that the vast majority of MSPs didn’t get hit too bad. They also potentially got some PPP money and some other things that really helped bolster their business and the smart ones really didn’t hoard it, they invested it and it’s been interesting, I’ve seen some significant growth out of some MSPs over the last 18 months. It’s been pretty interesting to watch how they’ve, you know, kind of leveraged this as an opportunity to shift their model, do more virtual work, and hire people who weren’t in their local region. It’s been interesting.

 

Yeah, it’s been really cool to watch man. That fear I think a lot of I don’t know cuz I haven’t read your book. Yet. But where are some of those key moments to where you’re like, Am I making the right decision in selling my business?

 

Oh, yeah. So you kind of get into the book a little bit and I’ll describe a little bit about the bucket. It’s written as a fable. So the first two thirds of the book kind of E Myth type style by Berger, or, you know, Patrick Lencioni writes in these fables, these fictional stories, and it’s loosely drawn off my story and several others like lots of people I we talked to and interviewed, and we borrowed little nuggets from them to make this fable of an individual going through the sale of a business right that’s two thirds of the book it’ll resonate with and it doesn’t have to be IT services or answers it just happens to be but any small business where it’s like wow, you know, I’m it’s getting a little risky or I’m getting a little tired or all these things happen, right. There are several components that you know, that are, you know, Alex, the CEO of our company that proprietor runs into over the course of owning his business that happens to be, you know, loosely basically my boys and my sister and I use family members as character name so it’s kind of fun. You know, runs into several components like starting to be more closed door and a little less transparent with their people because they have to hide what they’re doing and they’re going through the due diligence or loi process, I’m not making investment decisions, like not paying a bunch of money for marketing or internal infrastructure, things that don’t have direct revenue tied to it. Because ultimately, if a sale goes through, that’s just money out of the owner’s pocket that the buyer may not even care about. But when the owners were always super transparent, ready to invest in those things, and just stopped without telling anybody why. Everybody starts wondering what the heck is going on. 

 

So that was that really, I just had another conversation. With a friend about this. That’s a super super common problem like all of a sudden behaviors transparency, decision making change dramatically out of the owner and he’s trying to hide your she’s trying to hide Why not out of a lack of integrity, but because you just don’t go tell everybody in the business and kind of thinking about what I’m kind of thinking about selling its puts the fear of God in everybody, right. So yeah, so those types of things are very, very tricky. Um, the other other things that happen you know, you can get whittled down you have an eye a price in mind, but through conversations or due diligence, there’s these little things that start that nipple, the nipple, the amount that you had in mind, like, oh, the company was paying for my car and my home office and my all these things. So those things can be pretty challenging as well. And yeah, so it becomes quite interesting. We’re trying to figure out how we like to mitigate all of these potential issues. Another one that came up for me was in the 24th hour there was something kind of buried in the legalese of the agreement that there was a possibility might guaranteed payments because I have multiple components to my exit could actually go down if we didn’t meet certain thresholds, but I wasn’t going to be in the business and had no control. Well, okay. bejesus out of me, right So those types of things became very, very problematic.

 

Then it becomes something you have zero influence over.

 

Yeah, and it happens, right because it wasn’t a lack of integrity on the buyer’s side. It was just mitigating. In my case, it was mitigating some bank covenants and whatever we figured out a way around it. was okay, but all of those things were potentially dangerous to me and as a seller, I was emotionally invested in the outcome as soon as the conversation started so it is right on the table. This is what I talk about this our, you know, our guy starts thinking about it, and this is going wow, what would that do to my life? Oh my god, how would that change, and now Oh, and now and all these decisions they start making in the business at home and then just mentally, they’ve started to like it and put themselves in a vulnerable position where they more or less commit to it before inkling it paper until they get it. It’s not done. It’s not done right. We can talk about it and be hopeful that you can really put yourself in a scary position if you aren’t careful. Yeah, and then in the last third of the book, I went to six people who I’m close friends with who’ve been through this through sales of their businesses, and we have case studies. So it’s it’s an you know, so the first third is the favorite last thirds, this non fictional account of six different folks who, who’ve sold their businesses and all of them kind of describing some major emotional moment that may have or possibly did, or nearly upset the applecart in terms of their transaction and suggestions on how they may have mitigated that or what they did about that. So it’s really, really helpful for somebody thinking about a sale to go. I couldn’t really put myself in a way that puts myself in a strong position and prevents me from fully experiencing that emotional rollercoaster.

 

Yeah, no kidding, and it’s good to have an advocate on your side too, for something like that. Because I see in our industry, a lot of MSPs but I’m sure this is the case for a lot of small business owners who are looking to sell, they have not engaged with a broker, and they don’t even necessarily have even necessarily a corporate attorney that can work through the purchase agreement with them. They’re just kind of soloing and yes

 

So yeah, I would be really nervous to do that if you know, my sales and my acquisitions. I use the broker and in my sale, the same broker I use in my acquisitions is on the other side of the table. So I worked with the same broker through all five transactions. It was just one time I was on the other side of the tables, they were only by side. When I sold I used my CPA, my attorney, I didn’t use a broker to sell Yeah, and that was perfectly content with that I liked that methodology. I knew kind of how at that time, I knew who the players were, who were potential acquire targets. These days if I had a certain amount of revenue, I would probably talk to you if I were exceeding the $5 million dollar revenue mark, I’d probably talk to a broker because it’s less localized. Now. People are looking everywhere and you kind of get to that size where you can be a target from anybody globally. So it’s hard to find that as an individual.

 

For sure. You also had a lot of experience with that going through the acquisitions yourself so you had a good education around what the marketplace looks like and how the structure of a deal goes. Everything from nuts to soup, you know, it’s just, it was a good breadth of experience you had in those two years. Yeah, I would say for you, you weren’t walking into it. Blind when you were looking to sell. You had been through the process on the other side of the table already four times.

 

Yeah, absolutely. Yeah. It did help very, very much. So that’s absolutely the case.

 

Yeah, that’s cool, man. You just sold another business too, didn’t you? I did.

 

So you know after selling my MSP. I’ve been involved in three different Sass companies. One was T Maddix. I spent a couple years with my co-founder and I ultimately divested myself of that venture and my co-founder is still running that company in Seattle as it was a great project and it’s still alive and pumping. And the other two that I was involved in both of them. Were kind of co-founded with Brad Venter. He actually owned the first MSPI acquired and Google brilliant guy, all his ideas. So the first one was a smile back. There are a series of mini projects after I acquired as MSP and ultimately the one that started was a customer satisfaction survey type platform and reporting platform, which was rebranded smile back about seven years ago. Wonderful growth, great time building that company. I was a fractional CEO. I was kind of the only person in the United States, our team was principally out of Berlin, and ultimately, it was just the right time. 

 

We had a great team assembled, the guy was running it as you know, Brad wasn’t principally operating it in Berlin anymore. So we had a general manager who was doing great work and there’s just a great symbiotic relationship with Connect wise they were quite interested. And we announced the sale a month ago. So cool, connect wise acquired smile back, which was great. I’m also chairman of the board and we have a couple great co have a couple of great co founders have three of us that are founders, we have about nine or 10 additional staff at times us and so we do scheduling for managed service providers on multiple PSA platforms and office 365, and kind of similar to Microsoft bookings or Calendly or something like that, but deeply, deeply integrated to the managed service provider experience which none of those tools do well. So that’s what we are. We’re really very, very focused on the workflow of an IT services company.

 

I love it man and your unique insight too, because you had an MSP you acquired for more during that process so you’ve been on both sides of the table. Now at this point from MSP and vendor, everyone who’s listening, whether you’re in it, whether you’re an MSP or just a small business, you need to buy Jamison’s Book. The dude’s amazing and just has incredible insight dude, Jamisonwest.com we get your book there.

 

Yeah, absolutely. That’s the best place to find me kind of points to times we connect strat in my book so you can find all the stuff I’m doing right on my website there.

 

That’s cool. I love it, man. Thanks for being on dude. Really appreciate you.

 

Absolutely, thank you.

 

Important Links:

ConnectWise

Microsoft

ConnectStrat

TimeZest

SmileBack

EBITDA

Jamison’s Book