A Guide to Selling your MSP Business

For the last 20 years EvolvIT has gone from strength to strength and as a result we are now looking to enter a phase of growth through acquisition. This will allow us to bring in new talent, new clients and new capacity to grow and become better at what we do. As such we’re on the lookout for managed service providers (MSPs) who might be thinking about selling their business, so if this is you then get in touch.

First though, you might appreciate reading our guide to selling your MSP business, which delves into the ins and outs of what’s involved.

Informational technology lies at the heart of almost every modern business and with this new found reliance on computers, comes a reliance on those with the skills and experience to manage, protect and administer these business critical systems. Today, even small companies are looking for IT services that traditionally were the domain of enterprise-level organisations, like cloud computing and remote hosted desktops.

The frenzy has translated into a veritable gold rush in the IT world. The last decade has seen IT transform from important yet often overlooked business function to a central strategic talking point in the boardroom. Thousands of businesses have welled up from this spring of opportunities. The demand for highly specialised services has set the Managed Services Provider (MSP) sector on track to become a £201.8 billion market by 2023, with an annual growth rate of 11.32 percent.

But a closer look shows that the space is not quite as equally lucrative for all companies. The majority of future growth will be concentrated into a few players. Some industry experts even predict that as much as 80 percent of the market will be divided amongst only 20 percent of the MSPs.

Yet the predication isn’t a death knell for everyone else. This simply means that for small to midsize MSP providers, another gold rush awaits–at the exit. While the wellspring for IT services is far from dry, owners of mature MSPs will find that today, when bigger companies are looking to expand both geographically and financially, is the best time to cash in on the net worth of their successful businesses.

As acquisitions heat up you may find yourself asking how to best position yourself to get snagged by eager buyers. Below is a guide to help you negotiate the best deal for your hard-built business.

Determine Business Fit

In MSP acquisition you typically see two types of buyers. You have bigger companies who snap up smaller businesses in order to gain a foothold in new regions or to expand their individual product offerings into a one-stop-shop platform. There are your private equity firms and their endless pockets of investor money looking to cash in on the spike in demand for IT-management services.

Successful MSPs will not be short of purchasers knocking on their doors in the next couple of years. The challenge is finding a buyer that can take care of your clients and offer fair terms. Knowing the buyer’s long-term goals for an acquisition will help you make a better pitch for your business or find a buyer whose existing services and infrastructure are actually compatible with your own.

Prepare Metrics that Matter for Valuation

Selling a managed services provider business is a little more complex than selling a product-based business. The value of tangible assets like machinery, physical property, and IP is easier to compute than nebulous assets like expertise, skill and client goodwill.

Fortunately, there are measurements MSPs can begin with to prove the strength of their assets. One of them is earnings before interest, tax, depreciation, and amortisation, known in the investing world as EBITDA. The metric is often used by financial analysts to determine the profitability of a company removed from non-operational expenses like taxes and interest loan payments. It’s also how valuations are offered–companies are bought for multiples of their EBITDA.

There are many more elements that factor into presenting a fair valuation for your business, and EBITDA is far from enough. Some investors like Warren Buffet are even wary of the measurement, which can be manipulated to hide the issues of a business. MSP providers should have other attractive metrics at hand to show buyers, like their number of existing contracts or how many employees plan to stay after the acquisition.

Aim for Long-Term Profitability and High Customer Concentration

Aside from hard metrics like EBITDA, purchasers will be looking at your profitability through the lens of customer retention. Ideally, an MSP will want to have contracts that last 3 to 5 years to look attractive to customers, advises Ramsey Sahyoun, the head of mergers for Evergreen Services Group, a group of companies built through MSP acquisitions. These numbers prove that your business has the capacity to make money over time, not just cash in on the current boom for IT services.

You’ll also want to diversify your client base. While supporting well-known, big brands can get your foot in the door and attract interest, relying on only one or two accounts to float your business looks like a risky set up to buyers. A broad client base is a sign of sustainability, the efficient management of operations, and ability to scale.

Learn how to Navigate through a Letter of Intent

The Letter of Intent (LOI) is a document from the buyer that contains tentative yet critical details about an offer. Although the terms of an LOI are usually non-binding, it’s important because once mutually approved buyers and sellers can proceed with more detailed audits of the business.

For sellers, there are a handful of important factors to remember before agreeing upon an LOI. One, that the terms of an LOI are subject to change, depending on what a buyer may find during their investigations. Two, it’s imperative that there be clear terms for how both parties can terminate the deal at any time. Three, the document often grants a buyer the right of first refusal, meaning sellers won’t be able to field any other offers until the buyer makes a decision.

Get your business ready for an audit

After the initial meetings and LOI will come possibly one of the most meticulous phases of an acquisition: proving the performance of your business matches the claims you’ve made. The buyer typically sends questions for due diligence–as many as 150 in some cases. Some interview selected clients and employees to get a feel for the business. The process is often long and comprehensive and needs to be completed within a specific time frame. Failure to send back documents or complete tasks in the allotted time can negatively impact buyer confidence and damage rapport.

To ensure timely compliance, sort all your records and metrics well before you start putting out feelers for potential buyers. Set aside dedicated time to answer the questions, and maybe even create a team to make sure the buyer can smoothly dive in and around your operations.

The next decade will be an exciting time for MSPs, with eager equity firms bringing their fat war chests onto the negotiating table and SMBs hungry for technical expertise skyrocketing the sector’s growth. To capitalise on this IT gold rush MSP owners will want to double down on retention, sorting out their metrics, and knowing how to spot the buyers who truly have the capacity to take the business they’ve painstakingly grown over the years to the next level.

If you’re in the market to sell your MSP business, then we’re in the market to buy one, so we could be the perfect fit. If you’d like to have a chat and let us know more about your company, then give us a call on 0345 880 4554 or drop us a message using our contact form.