Even if they don’t intend to sell, every MSP should have an exit strategy. Learn more about exit planning, tracking adjusted EBITDA, and why it is important to understand your risk-reward ratio. Every MSP owner should have an exit plan. It is up to them to decide whether or not they want it to happen. MSP owners may not want to sell their business right away, but some might sell it tomorrow if they were offered a fair offer.
According to Nicholas Ashford (partner at Fordhouse), speaking at the 2022 CompTIA EMEA Member & Partner Conference, London, each of them should be working on an exit plan now.
“As an MSP owner, the key thing is to think about your future. What age do you want? 40, 60? What amount of money do you want? What amount capital are you required to reach your goals? He said that thinking ahead will make your company more valuable.
He explained that MSP bosses should focus on both the “science and “art” aspects of M&A–EBITDA as well as the EBITDA multiple they are aiming to achieve. It is important to be realistic and not get too excited about fantasy growth predictions.
Ashford stated that EBITDA must be credible. “If you can achieve 5 percent growth each year, that is your base growth forecast.”
It is important to make any strategic/internal changes at least six months prior to signing on the dotted lines, rather than one week before the deal deadline. It is easier to show how the sales director you fired wasn’t performing or how quickly your newly appointed salesperson is learning.
Standing out from the Crowd
When it comes to choosing the best multiple for an MSP, there is no one size fits all. Ashford stated that every MSP business is unique, and will eventually command its individual multiple.
There are many ways to increase your multiples. Take the initiative and not wait for it to happen naturally.
You can be a platform for private capital–not just another MSP–make you business a strategic target.
Think about what makes your business stand out. Do you have an IT system that scales? Are you able to automate your business processes? Are you an Azure or SOC specialist? Do you have a cybersecurity specialty? You can be a valuable asset to anyone looking to invest by building business capabilities.
PE investors may also be interested in MSPs (and distributors). Do you have a special relationship with a vendor/supplier? Do you have the potential to develop a deeper relationship? This could be a way to add value to your company.
Mixing the Right Mix
Ashford explained that the UK MSP market is different from the US market in terms of sector specialists.
He said that there are not many MSPs who specialize in sector specific areas in the UK, so being one of them can help increase your appeal to PE investors.
A MSP’s number of customers is not a good indicator of success in PE investment.
Ashford explained that less is more. A longtail of customers is not exciting. It is better to have high revenue but fewer solid customers. Also, ensure that your largest customer accounts are represented in the revenue. He cautioned against allowing it to get too high.
“For me, the perfect MSP is one that has 10 customers and each accounts for 10 percent of the revenue. All customers should be locked into recurring revenue. This way, if one of the customers leaves, it won’t be as bad as if they account for 20 percent or 30% of revenue,” he stated.
Ashford also discussed the issue of contract length. A five-year contract isn’t always the best and doesn’t guarantee that the customer will stay.
“One company I dealt with had rolling contracts that lasted 90 days. Another case, however, had a 12-month contract for each starter. Ashford stated that while I wouldn’t recommend it, it is best to have overlapping contracts that make it more difficult for customers leave.
If you have a customer who is approaching the end of a five year contract, you must tie them back in order to sell the business.
Taking a risk (or not)
When selling your MSP business, it is important to determine your risk-reward ratio. If you want to exit tomorrow, then the risk is on the acquirer. If you are willing to wait five more years and take more risk, you can still get the deal.