Sell Managed Service Provider Business

You’ve decided to sell MSP business, but is now the right time to sell? When the decision is abrupt, you have no choice but to accept the pricing at the current state of the market. If you hold off, however, and make improvements to your operations and revenue, the results could be rewarding.

MSP Business Valuation

For MSP business owners, what is the perfect scenario? Generally, you want to aim for two conditions:

• The market conditions are great.
• Your business obtained a good valuation.

The first point is an external factor beyond your control. On the other hand, getting a good valuation is achievable when you implement strategies that boost value. To help you set goals, here are some key factors that determine an MSP business valuation:

• Monthly recurring revenues (MRR)
• Gross margin (as a percentage of revenue)
• Churn rates
• Cybersecurity capabilities
• Logo growth (acquired clients)

As an MSP owner, you also need to understand how recurring revenue impacts your MSP’s worth. Potential growth is what drives a higher valuation. It builds trust and creates loyalty in clients when an MSP has a steady revenue that enables them to dedicate resources to improving services and adopting the best technologies.

Preparing Your MSP for Sale

It’s common for businesses to get a valuation to determine where the company stands financially and market-position-wise. Your M&A advisors or business brokers can give you insights on how to best prepare for selling MSP business, including the preparation of necessary documentation and processes to organize, as well as financial records preparation for potential buyers. Moreover, when you hire business brokers specializing in internet/digital companies like WebsiteClosers.com, you’ll get advice on how to strengthen your client contracts and relationships.

Experts suggest several strategies to enhance the value of a managed service provider before a sale. Engaging existing clients to upsell new, high-value services and updating the Master Service Agreement to be transferable can significantly increase appeal to buyers. 

Additionally, reducing the cost of goods sold, particularly in the software stack, directly improves profitability. MSPs can benefit from structured programs to analyze and optimize these costs, boosting EBITDA quickly. Building a comprehensive “data room” with all necessary documentation ensures readiness for due diligence, streamlining the sale process.

Finally, investing in key talent, such as sales and marketing leaders, strengthens the team and supports long-term growth. When you apply these improvements, you’ll have more bargaining power to aim for a higher sales price during negotiations with the buyer.

The MSP Exit Planning Process

You’ve decided to sell IT managed service provider business, so it’s natural to consider when to start planning to sell your MSP business. While it’s possible to sell your business on your own, you could hugely benefit from building a team of advisors for selling your MSP company.

With these professionals helping you, maintaining confidentiality during the process creates a discreet and secure sale. Why is this important? As an MSP, you have proprietary tools and processes to protect. Moreover, your clients are entrusting you with sensitive data and systems, so preserving their trust is critical. 

A breach in confidentiality could jeopardize client relationships. This will result in a diminished value of your business on top of giving your competitors an edge. Working with experienced professionals who prioritize discretion means safeguarding your intellectual property and client confidence. It smoothens the transition and maximizes the value of your managed services company during the sale.

Finding the Right Buyers

Part of the process to sell MSP company is connecting with the right buyer. Learning about the types of potential buyers will help you choose one that aligns with your goals post-sale.

• Do you want someone as passionate as you to take over?
• Are you after profit and growth?

Here are some of the kinds of business buyers you’ll usually deal with in this process of selling managed IT firm.

• A strategic buyer purchases MSPs to pursue long-term objectives instead of immediate financial gains. Listed under their priorities are goals like market expansion, product diversification, or improved operational efficiency. Typically, these buyers are larger firms with a strategic vision in mind. They make it possible by incorporating other capabilities into their business by acquiring companies.
• Financial buyers, such as private equity firms, acquire companies to achieve returns through strategies like boosting profitability, selling at a higher valuation, or launching an IPO. These investors typically gather funds from institutional sources, like pension funds or endowments, and wealthy individuals to purchase and oversee businesses.
• Individual buyers. These are likely MSP employees or managers (or professionals within the same industry) with an entrepreneurial spirit. Those who want to quit the corporate grind choose hands-on ownership as the next step in their career path.

You can decide to be highly involved or less involved in the selection of potential buyers. Business brokers will guide you through how to identify serious prospects.

Negotiation and Deal Structuring

In the world of MSP M&A, deal structuring depends on factors like the buyer’s type, the company’s size, and the post-closing intentions of both parties, but most transactions typically include a few standard elements that contribute to the overall enterprise value. We explain the deal structures in the points below:

• Cash at close is the amount of money a buyer transfers to a seller when the transaction closes. In many current MSP acquisitions, particularly those involving private equity, this cash payment often forms a substantial part or the entirety of the total purchase price. This element is highly advantageous for sellers, allowing them to immediately secure funds and reduce risk, making it especially appealing for those eager to exit.
• Earn-outs represent a segment of the purchase price paid to the seller after the sale, contingent on the business achieving specific performance goals.
  • Understanding earn-outs and transition periods: In MSP acquisitions, these payments are often linked to post-sale targets like increasing revenue or EBITDA by a set percentage in the following year(s). They can also be designed to incentivize outcomes like enhanced margins or customer retention, often aligning with the buyer’s goals during the post-sale transition period.
• In MSP acquisitions, if you go with a seller note, the process is similar to a loan, where you enable the buyer to purchase the company with you as the financier. It is an excellent structure when you sell network management firm because your take-home money increases through the interest rate. The payments are also not reliant on the performance of the company, so it’s lower risk than an earn-out setup.

There are tax considerations for every deal structure. Talk to your business broker if you want to negotiate for a more advantageous structure for your post-sale goals.

Post-Sale Transition

You’re finally done with the “sell my MSP business” phase. Now, it’s time to implement all the necessary transfers and takeovers.

Your role as the former owner in the post-sale transition is to make everything smooth as the takeover process takes place. The transfer of responsibilities and knowledge to the new leadership needs to be smooth to avoid disruptions that could impact operations and customer services. How do you do this? We break them down into two major plans of action:

Managing client relationships after selling your MSP business:

• Prioritize delivering consistent, high-quality client service throughout the transition period.
• Develop a clear communication strategy for clients, incorporating regular updates and feedback mechanisms to reinforce their trust in the MSP’s ability to provide seamless, high-quality services.
• Continuously monitor service quality and promptly address client concerns to maintain trust.
• Proactively gather and act on client feedback to identify and implement service enhancements.

Employee retention strategies during ownership transition:

• Maintain operational stability in the short term to ease concerns, ensuring continuity until the acquisition is complete.
• Ensure consistent and open communication with employees, who are vital to the MSP’s operations, through meetings, emails, and internal channels to keep them informed about changes and sustain morale and engagement.
• Preserve the MSP’s culture and values by connecting new owners with key team members, sharing the company’s history and traditions, and reinforcing the core principles that drive its success.
• Avoid disrupting workflows by allowing employees to continue their regular routines, fostering a sense of normalcy whenever feasible.

MSP Exit Planning

As you learn the importance of MSP exit planning, you’ll discover that developing a strategic exit plan should be done from the very beginning. In other words, you need to think about the following:

• Whether you’ll sell managed services provider business on your own or you’ll use the services of a broker. This is particularly ideal for those who already have a potential buyer.
• The level of involvement throughout the sale process when you work with an advisor or broker.
• Whether it’s an immediate exit or you’ll stay with the company for a period of time.
• The deal structure you’ll be willing to accept.
• The type of buyer you’ll deal with.
• Most importantly, you need to know your financial situation and post-sale plans.

Conclusion

Once you’ve decided to sell IT service provider company should regularly assess your readiness to exit. However, prioritizing decisions solely for a quick sale may undermine long-term value creation. Avoid short-term financial boosts that compromise sustainable growth, as savvy buyers will likely spot such tactics.

Apply strategic planning in every financial and operational improvement to drive your company to the best possible outcome when the time to sell arrives.

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