You have decided that it’s the right time to sell your MSP business, and you have narrowed it down to a few candidates that meet your price. You’re ready to move forward, right? Not so fast. You have several other steps that are critical to ensuring a successful transaction — many of which take place during the due diligence period.
ChannelPro spoke with experts in the channel who have sold their own MSPs. They shared their insights on how to best traverse the process.
A Deep Dive through Due Diligence
It’s important to vet each company carefully by researching its financials, culture, accounting methods, and more. Typically, this process is called “due diligence.”
Doing due diligence well can mean the difference between a good deal and one that is mismatched in several ways. A poor match could lead to employees or clients leaving, devaluing both the deal and the company.
“Due diligence requires examining every function of the business — finances, insurance, legal status, sales and marketing, operations, products, revenue, inventory,” explained Ian Richardson, founder and principal consultant with Fox & Crow Group. “You also have to examine their practices, what their documentation looks like, and where the gaps are between how the acquiring company does things and selling company does things.”
Evaluating Reputation and Employee Sentiment
During due diligence, the selling company also must understand the buyer’s market reputation and employee sentiment. So said Terry Rossi, former CEO and founder of PICS ITech, the managed services division of PICS. Rossi sold his company to private equity buyers several years ago.
Key Facts to Remember in Due Diligence
- Thoroughly Assess the Buyer’s Financials and Culture
Vet the buyer on financial stability and cultural fit. Misalignment can lead to employee or client turnover, ultimately reducing the value of the deal. - Evaluate Funding Sources
Understand how the buyer is financing the acquisition. This is especially important with smaller buyers, as a fully funded buyout can offer security and continuity for your employees and clients. - Prioritize Employee Roles and Retention
Ensure employee roles and benefits are secured. Discuss with the buyer how your team’s talent will be integrated and confirm that they will support staff continuity. - Consider Payment Structures Carefully
Evaluate the pros and cons of earnouts, equity rollovers, or guaranteed payouts. Each option carries unique risks and benefits, so align on a structure that protects your interests and ensures financial clarity.
Rossi compared the due diligence process to hiring someone: “You only know someone well enough from an interview or two, which means you don’t really know them at all,” he shared. PICS ITech’s due diligence involved a thorough financial review of the private equity and platform companies led by the company’s investment banker. Rossi also met with the two founders of the platform company, visited its main facility, and spoke with senior staff and a few competitors to understand its market reputation.
Similarly, Joanna Mirov — who sold her IT managed services company MXOtech to Ntiva — conducted her due diligence by talking to competitors who had worked with Ntiva. “I called many of them blindly and told them in confidence what I was thinking of doing. I asked for their feedback about what they liked and why they left,” she said.
Ian Richardson
Mirov also spoke with a few employees to gauge their satisfaction and researched Ntiva’s reputation online. She found that it was regarded as one of the best places to work in Illinois, with 24/7 support and a large security team — aspects that helped her feel her clients would be safe.
Money Talks: Assessing Buyer Funding and Structure
MSPs must address deal funding early on. While it might seem less critical to verify how a buyer is funding the deal, it’s essential. This is particularly true if you’re selling to an individual investor, a group of employees, or a competitor of comparable size. This concern is less pressing when selling to a large MSP or private equity firm with cash reserves, Richardson explained.
For instance, as a large MSP, Ntiva funded acquisitions with a mix of cash from an existing debt facility, equity, and rollover equity. “As a sponsor-backed organization, we didn’t need to employ the use of a seller’s note or seek a specific debt facility for this acquisition given the presence of our existing debt facility which we could draw upon,” said Christopher Vollmond-Carstens, Ntiva chief M&A officer.
On the other hand, Rossi required the buyer to produce a letter certifying that the bank fully funded the buyout. This was to ensure that his partner could exit immediately while he stayed with the acquiring company for 12 to 18 months. PICS ITech chose this fully funded buyout approach over other options like partial buyouts, earnouts, and equity rollovers.
Evaluating Payment Options and Risk
Different funding approaches come with unique risks. For instance, equity rollovers allow sellers to reinvest part of the proceeds into the new company. This method aligns interests with the buyer but carries risks tied to the success of the new entity.
“I did consider this in my sale initially,” Rossi explained. “In the end, I wanted to have time and space to understand my future investment choices and basically get out of the IT space as the risk and liability in the industry was increasing daily.”
Joanna Mirov
Another common way is earnouts, which do have drawbacks. Mirov learned this the hard way, when she agreed to an earnout without control over financial or operational decisions. “I wouldn’t do an earnout again unless I was in control of that department,” she admitted. Although the outcome was positive, she dodged a bullet, Mirov said. Her recommendation: MSPs should consider rollover equity or agree to a reduced but guaranteed payout.
Now, as an M&A specialist with Ntiva, Mirov noted that earnouts aren’t ideal for buyers either. “If the owner is staying with the company, the seller wants them focused on staff and client retention instead of their earnout,” she explained.
Ensuring Employee and Cultural Alignment
Depending on the circumstances, MSPs may value other aspects of a deal nearly as much as the money.
Take Mirov and Rossi, who wanted assurances that they had roles in the new companies. They also wanted their employees to continue in their existing roles. Other sellers, meanwhile, might seek guarantees for employees, like stock in the new company or severance packages if they leave.
Terry Rossi
“We had about 30 employees at the time of sale, and we wanted to make sure we took care of our staff,” Rossi said. “We wanted to know where they would work, who they would report to, and whether their benefits would change.”
To ensure these things, Rossi had several discussions with the buying company about the roles his senior staff would play in the organization. He also wanted to ensure that the match was a good cultural fit. “We found that they were enthusiastic about integrating our team’s talents to enhance their offerings and staff,” he revealed.
Additionally, Mirov prioritized service quality, and wanted Ntiva to offer the same or higher standards for MXOtech’s clients. Her research helped confirm that the acquiring company met those criteria, providing peace of mind for her client base.
Securing the Right Future for Your MSP
Selling an MSP business is far more than a financial transaction; it’s about securing the right fit for employees, clients, and the future of the business. By performing thorough due diligence, understanding funding structures, and prioritizing employee continuity and cultural alignment, MSP owners can help ensure a smooth, successful sale.
Ultimately, a well-executed sale isn’t just about the highest offer. It’s about choosing a buyer that respects the foundation you’ve built and is committed to its growth. Take the time to explore all aspects of a potential deal, engage in open discussions with prospective buyers, and prioritize a seamless transition. Doing so will not only preserve the value of your business but also set it up for continued success.
Featured image: DALL-E
