If you’re an MSP owner, you have probably received more than a couple of emails asking if you are interested in discussing an acquisition. For many, it has never been the right time to entertain a conversation of that nature, so the email is promptly redirected to the trash.
However, at some point when an exit is appealing to explore, you might be compelled to click reply. But what happens after that? How do you know you are on the right track if it is your first time going through the process? Selling your MSP is a process that can differ depending on the buyer, but at a high level there is a clearly defined procedure, and your alarm bells should go off if your buyer is deviating too much from it. Hopefully this guide helps prepare you to navigate the process of selling your MSP.
Author: Alex van Lent, M&A Professional,
Evergreen Services Group
- Introductory Call: The first step in any process is to have a conversation, whether it is over coffee at an industry event or on a video call. In many ways this chat is like a first date. The buyer wants to see if your business fits their baseline criteria for things such as revenue or EBITDA scale, recurring revenue percentage, and growth. Meanwhile, you should be evaluating whether the potential buyer would be a good partner for your business based on their background and strategy.
- What are some common questions you might get asked?
- Tell me about the history of your business and your goals moving forward?
- Rough financial metrics (revenue, EBITDA, recurring revenue percentage)
- What does your target customer look like? Do you focus on any specific verticals?
- What interests you about a potential sale?
- What are the things you should be asking?
- How are you funding your acquisitions? Do you have committed capital?
- How do you structure your acquisitions?
- What is your typical timeline and process for an acquisition?
- What happens to my company post-acquisition?
- NDA & Initial Data Exchange: If the first call checks the preliminary boxes for both sides, the next step is to execute an NDA and share some financial information. An initial data request from a buyer will usually be easy to pull out of any accounting system. In our case, we typically just like to get review the P&L and Balance Sheet for the last three years of a business by month.
- Tips for sharing your data?
- Ahead of beginning the process of selling your business it can be valuable to spend some time making sure your financials are in order. You’ve spent a lot of time and effort in building your business and the financials are a huge part of how a buyer will develop their opinion of it. When selling your home, you would tidy up before having an open house, right?
- Have revenue broken out by type (managed services, professional services, hardware, etc.)
- Bonus points if COGS are also broken out by their associated revenue lines
- Make sure revenue and expenses are being allocated to the proper categories
- Be able to identify compensation for owners and any other personal expenses that are running through the P&L
- Financial Call: After spending some time with the numbers, a buyer will put together a list of questions to clarify anything in the financials and go a layer deeper into the operations of the business. Usually these will be discussed during a slightly longer follow-up call within 1-2 weeks of sharing the data. This call is also a great opportunity for you to discuss any additional questions that may have come to you since the first call.
- Common things you might get asked about?
- Clarifying what is being captured in different revenue and expense lines
- Reasons for significant spikes or dips in certain months
- Revenue contribution from your top customers
- Driving forces behind growth or decline trends in the business
- Details about the makeup of your service agreements (duration, pricing model, services included)
- The structure of your team and key employees
- Letter of Intent: Alright, you’ve shared data and had a couple calls with your prospective buyer, so what now? For an experienced buyer, the next step is to present you with a Letter of Intent (LOI). An LOI is an offer to acquire a business that outlines important points regarding the buyer’s proposed acquisition plan. The majority of an LOI is not legally binding, but it does give the buyer a predetermined period of exclusivity to conduct due diligence, will serve as the framework for the eventual purchase agreement, and signals that both parties are now working towards completing a deal at the proposed terms.
- What to expect in an LOI?
- A proposed purchase price, deal structure, and financing plan
- Post-close leadership plan and strategy
- Assumed financial metrics for the business based on pre-LOI data and conversations
- Outlined components of due diligence process
- Target close date for the acquisition
- Due Diligence: You’ve signed an LOI, now comes the fun part. From signing the LOI to the target close date, various due diligence workstreams will be conducted by the buyer. In essence, the goal of due diligence is to validate the buyers’ understanding of your operations and financials that were discussed pre-LOI. It is standard to have a kickoff call within a week of signing the LOI to walk through timelines, data requests, and planned diligence areas.
- What are some common components of due diligence?
- Buyer Data Requests & Management Meeting
- A buyer will share a more robust request of financial data and documents to analyze
- Similarly, a longer form meeting (3-4 hours) will be organized for the buyers and sellers to deep dive questions from the data and strategy
- Quality of Earnings
- A buyer will likely engage a third advisor to perform a Quality of Earnings to validate the numbers underwritten in the LOI. This can be thought of as a “mini audit” of your business’ financials and is generally the most time intensive aspect of diligence.
- Customer Diligence
- A buyer may conduct blinded customer satisfaction surveys or calls on to gauge quality of service and potential risk of customer churn.
- Legal Diligence
- Requests will be made concerning corporate structure, employment and vendor agreements, privacy and data security, etc.
- Close: The actual closing moment of a transaction may feel a little underwhelming as it is usually only a couple minute long call where lawyers announce that signatures have been released. The exciting part is when the wires hit your bank account and you get to celebrate the culmination of many years of hard work.
