The MSP market is in a huge phase of growth, expected to reach $274.20B by 2027 and many IT professionals are finding themselves swamped with offers for selling their business. If you’re fielding calls from those looking for MSP acquisition, (or if you’d like to be!) let this article be your guide. We’ll look at the different kinds of MSP buyers that may approach you about selling your business, how to plan and communicate for the best offer, and some best-practices you need to keep front of mind.
The Types of MSP Acquisition
Advice from Ramsey Sahyoun, Head of M&A at Evergreen Services Group when he spoke at NextGen 2019, suggests that there are three kinds of buyers who may approach you about buying your MSP company. When you speak with your potential buyer, consider which group they fall into and therefore what questions you need to ask to make sure that they take care of your clients if you decide to take the plunge.
1. Strategic MSP buyer: This is usually a large company or even your direct competition, who will be looking to gain a presence in your niche or region. As they aren’t an official acquisition company, they may not have a process in place, so the deal making can be on the slow side.
However, they often have the same goals as you do – which can make it easier to explain to your clients.
2. Private equity buyer: Think about your standard venture capitalist who moves fast, aggressively makes offers, and is looking to make money by growing your company before selling your business again. If they approach you – money is likely to be no object if your business fits their needs. Don’t forget to ask what their long-term business goals are for your company, as your client welfare should be high on your priority list.
3. Entrepreneurs/Search funds: Unlike VCs, these entrepreneurs won’t have the funds immediately available, and are raising the capital that they need at the same time as expressing interest in buying your business. Beware of a letter of intent (LOI) that doesn’t come through to action. While a LOI will contain critical information related to a purchase, they are usually not legally enforceable and definitely subject to change. While you wait for the buyer to gain funds, you may not be able to take a different offer.
By Which Metrics are MSPs Valued?
There are a few key metrics that your MSP will show value through. Let’s look at each one. Your buyers will want to be given detailed information about each of these, and these will help them to feel confident that you are a smart choice for their acquisition needs.
Remember, buying an MSP business is a harder purchase in terms of value than buying a retail business for example. While it’s easy to value assets such as machinery or stock – your MSP business may be reliant on your skill, know-how, or the personal relationships that you’ve forged over many years. These four metrics help MSPs to prove how valuable their business is.
1. EBITDA (Earnings before Interest, Tax, Depreciation and Amortization)
This metric comes from financial analysis, and shows how profitable an MSP business is once taxes and interest loans have been removed. This language will be used to express the offer that you’re being given. For example, a VC might offer you 3x EBITDA or 5x EBITDA.
2. Recurring Revenue
If your business is reliant on a break/fix model – then no matter how lucrative it is, your buyers will be wary. This metric will track your client relationships which are subscription-based or managed services. This is where buyers will look at how many clients you have, and the ratio of earnings to clients. If you have one main client who provides 80% of your monthly income, this is going to raise alarms. A broad client-base shows that your business is sustainable.
3. Retention Rate
Many VCs and investors look at customer retention rate over three-year, four-year and five-year periods. Buyers want to see that customers are spending more now than they did a few years ago, or at least that this number isn’t decreasing. If all of your clients are new in the past year – this is going to be a red flag for buyers. They want to see that your clients have a good reason to stick around.
4. Revenue Growth
Although this metric is less important, especially in a period of high IT growth generally – your buyers will also look to see that your business is growing. This isn’t necessarily related to the number of clients, you can also increase revenues with upsell opportunities, increasing your rates, or making intelligent changes to your service model. Here you can present operations metrics to your buyer, such as showing the curve of billable hours over time for your technicians.
Don’t Forget to Be Ready for an Audit
Of course, a buyer is going to want to get deep into your records and performance metrics before they sign on the dotted line. Expect a lengthy number of questions, generally more than a dozen pages or over 100 questions to answer about your business. Your VC might also want to speak to your clients and employees, to understand the feelings around an acquisition. If your employees are angry about the idea of a sale, or your MSP clients stick around because they love your leadership – the acquisition is going to be a whole lot harder for the buyer.
To make this process as smooth as possible, make sure all your records, reporting and accounting documentation is ready to go, long before you start searching for a potential buyer. You will likely need to sign an NDA, and you should be ready to be asked to make changes such as switching insurance or making operational tweaks to your business model.
It’s a Great Time to be an MSP!
Many equity companies, venture capitalist, private buyers and large corporations are realizing the value in thriving MSP companies to grow their own business, expand their reach, or make a profitable investment. If you’re open to offers, then tracking your metrics and ensuring your documentation and strategy is in order is an important foundational step for success.
For more information on reporting and analytics, check out our Knowledge Base!