Investment professionals were on hand at MSP Expo 2023 in Ft. Lauderdale, Florida, to provide advice for MSP owners looking to exit.
Whether you were interested in selling your entire operation or just locating a trustworthy, strategic partner, the panelists gathered to discuss "MSP End Game: What's Your Dream" certainly knew what they were talking about.
Susan Elder, CEO at technology marketing firm Ignite+Propel, moderated the group talk. "Let's talk about your options for achieving your endgame," she said.
"Has your company achieved the scale for the value you're expecting?" asked panel member Diya Berger, vice president at Grain Management, a private equity firm concentrated on IT. "What's your differentiation as an MSP?"
Berger said that before you consider cashing out, you need to demonstrate your success to the potential buyer. "I like to see specific EBITA targets that have been hit," she said. And be able to explain how you hit those numbers."
Berger says it's just as important to investigate your potential partner as it is to prepare your sales presentation. "How are you evaluating the partner who is buying you?" she asked. Berger said there can be differences of approach depending on whether your potential partner plans on:
- Using debt to finance the acquisition
- Expanding through mergers and acquisitions
- Growing your business before cashing in.
"You maximize value at acquisition time by being open and straightforward," said Eric Vaughan, CEO at GFI Software, a software developer for small-and-medium sized businesses. "You should be making money."
Vaughn said his firm has been involved in the purchase of more than 160 companies over the past 10 years. "A lot of founders hold on way too long," he said. "You want to be able to tell the best possible story, backed by the data."
He wants to see your annual recurring revenue, as well as your monthly recurring revenue. Long-time customers are especially valued. "We're looking at recurring revenue and retention rates," he said.
"Understand that customer lifetime value is important," agreed panelist Robert Cooper, managing partner at investment firm Logos Management Group. He suggests hiring a management consultant firm to get the most value from selling your MSP.
A management consultant helps prepare your exit presentation to your potential buyers. They'll help you decide exactly how you want to craft your deal, he said. "They'll really reality-check you," Cooper said.
"You only get to exit once," Berger said. "I would hire a financial adviser to help guide your exit." She suggest automating your back-office processes to make your MSP more valuable at exit.
Cooper agreed that process automation is an important factor in your MSP's valuation. "Manual is not salable," he said. "Eliminate and automate those manual processes."
"If what you designed is flexible and scalable, that really increases your value," Cooper said.
Cooper said the whole buying process can take less than 30 days if the seller has their house in order. The exit process goes something like this, he said:
- Management report produced
- Indication of Interest letter received
- Due diligence performed
- Letter of Intent received
- Confirmatory due diligence performed
- Asset acquisition closed.
Once you receive a letter of intent, the exclusivity period usually starts at 90 days, Vaughn said. "Usually it's done much sooner," he said. "We do it in 30 days generally."
Edited by Greg Tavarez