Getting Offers to Sell Your MSP? Understand What’s Happening and What to Do Next.
The appetite for acquiring small and medium-sized businesses has never been so rampant as in the past three years. You’re likely receiving weekly emails from firms looking for you to engage in a conversation about “an exit.” Let’s unwrap this and guide you on what to do next.
Who is sending these emails?
There are several types of buyers, all clamoring for acquisitions. Each has unique motivations and interests.
- Strategics : Larger companies in your industry with an acquisition strategy. They seek geographic growth, industry expertise, and the specialty offerings that your firm can bring. Some Strategics are backed by Private Equity, an investment vehicle that makes money by buying companies, holding and growing them, then typically exiting within a 3-5 year window.
- Independent Sponsors : Sometimes called fund-less sponsors, these firms raise money for acquisition AFTER the target company is under a Letter of Intent (a basic agreement to explore a sale).
- Search Funds: These are similar to Independent Sponsors but usually staffed by one or two recent MBA grads, some with industry experience and many with none. Search Funds and Independent Sponsors may run the business from an executive level and look for steady growth and a longer runway than PE firms might.
- Buy-Side Brokers. Lastly, you may receive a solicitation from a buy-side M&A intermediary. These are firms employed by buyers to originate and underwrite new acquisitions.
From a targeting perspective, Strategics, PE-backed Strategics, and buy-side intermediaries will likely have done more research on your firm before the outreach. As they are looking on behalf of an existing firm, there will be parameters for a fit that they rarely stray from. Alternatively, Independent Sponsors are more generalists and cast a wider net, and Search Funders spray thousands of emails with little thought into the firm or industry.
Why do they want to buy my firm?
Managed Service Providers, and all the variants of this tech-based model, are uniquely attractive to buyers for many reasons:
- The revenue is sticky. Client attrition is low relative to other industries and models, especially given the transition from break/fix to more subscription or recurring revenue models.
- Law firms, doctor’s offices, and other small businesses are not likely to cut IT spending during economic downturns.
- Revenue growth is excellent. It’s not unusual to see steady double-digit growth while maintaining healthy profit margins.
- For the strategic acquirer, growth through acquisition is far faster than organic growth, especially when entering new geography or service specialization.
For those buyers looking to roll up multiple firms into one, there are a couple of other factors at play. First, profitability is improved by streamlining the companies’ operations and reducing overlapping expenses (in accounting, HR, purchasing, marketing, et al.). This efficiency also improves the cash flow, offsetting the acquisition cost or providing higher distributions to the new ownership. Second, there is the concept of “multiple arbitrages.” MSPs and most other lower-middle-market companies are bought and sold on a multiple of an operating statistic. Usually, this is adjusted EBITDA. Larger companies sell for higher multiples than smaller ones. Buying companies at a 5x multiple, reducing costs through integration, then selling the larger company at a 10x multiple is a lucrative and attainable goal for the acquirers who do it well. In today’s investment environment, few strategies have a greater return profile as this.
What do these “exits” look like?
While no two exits are precisely the same, they will have some commonality, depending on the party transacting. Most Strategics will predominantly offer cash paid at closing. There may be a holdback for working capital, a small equity rollover or an earnout. PE-backed Strategics will want more Equity rolled over and a longer commitment from you, the seller, to achieve growth and profitability goals that lead to the next exit of the mother ship. Independent Sponsors offer terms similar to PE-backed Strategics, while Search Funders will often use heavy earnouts or seller notes to reduce the amount of capital necessary to close the transaction.
How are the transactions funded?
There are a number of ways to fund an acquisition. For the buyer, cash available on a balance sheet, commercial or private debt, or equity offering are the three most common. For the seller, earnouts and seller notes often are requested and sometimes mandated, depending on the terms of the offer. Sellers should understand the specific financing requirements of the buyer, as two offers may have different financing mandates, which will alter the attractiveness of each. A “proof of funds” statement should accompany all offers so the seller can measure funding risk alongside valuation and other terms.
What should I do if I’m interested?
Receiving an unsolicited offer for your company is incredibly flattering but can be a huge distraction. You’ve spent a lifetime of experience learning your craft and likely tens of thousands of hours building a business from scratch. Your business is probably the largest single asset you will own in your lifetime. Our best advice is to proceed with caution. Assemble your team of trusted advisors (CPA and attorney at a minimum), and begin discussing the end goals you, your family, and all other stakeholders have for the business. Learn about the process and set your goals for an ideal exit scenario. Perhaps your exit is more a reduction in risk and refocusing your efforts with a larger firm. It could be a complete exit so you can retire or pursue other interests. Know what your end goals are before pursuing any offer.
Lastly, hire a sell-side intermediary. Transactions are incredibly time-consuming and can negatively affect the performance of the firm. We see, all too often, sellers going it alone and winding up with failed transactions due to lower revenues or profits. Always get multiple offers and leverage the offers against each other and your goals. You may only get one opportunity to sell your business, so an organized process is paramount to success.