A fallacy exists in the MSP industry: There are no real options for successfully selling your MSP exit unless you have $1 million or more in profit. While many private equity firms and “empire builders” are interested in acquiring these MSPs, they are not the only options for exit.
There are over 44,000 MSPs in North America, according to Fox & Crow Group research. Fewer than 8,000 among them have more than $2 million in annual recurring revenue. What do the owners of these smaller MSPs do when they’re ready to move on? They find nontraditional ways to exit their businesses.
Scenario 1: Enjoy Being an Entrepreneur But Hate Being an MSP
A nontraditional exit might give you the freedom and space you need to reinvent yourself. Many MSPs could consider the idea that a first exit need not be their only one.
Take, for example, the idea that you can exit a no-longer-enjoyable business to start a consulting practice. This was a strategy followed by me and my partner, Ian Richardson. The initial decision to sell our companies before we hit our “magic retirement number” was a little nerve-wracking. But two years later, our new consulting business is thriving.
Scenario 2: Enjoying Technology, Not Being an Entrepreneur
A nontraditional exit can provide you with a retirement “nest egg” that gives you the luxury of being extremely particular when it comes to choosing your next IT role. A nontraditional exit is limited only by the creativity and flexibility of the buyer and the seller. The transaction will be uniquely based on the needs of both parties involved.
A Successful Nontraditional MSP Exit
Carrie Richardson
The owner of a small MSP sold it to a larger competitor when the owner was struggling with their mental and physical health. They accepted a role with the larger MSP. As a result, this MSP owner received a nontraditional exit via an earn-out for the book of business as well as a fair salary.
Fast forward several years and that former MSP owner is in the best shape of their life. They’re happily married and they have time to invest in that new relationship. Their role with the MSP grew and changed, and they’re now an equity partner in the larger MSP.
When this MSP recapitalizes or sells, the former small MSP owner will stay financially stable. Sometimes owning a small percentage of a large MSP is better than running 100% of a small MSP.
This isn’t a unique story. Many deals in the MSP channel are never discussed publicly — and many are nontraditional exits.
Burnout and Your MSP Business
Burnout tends to be the most common reason MSPs consider an exit when they are well below the common “attractive” M&A threshold. Fewer than one in eight small businesses survive five years. Over 85% of small businesses in the U.S. never grow larger than a sole owner.
Entrepreneurship can be isolating and exhausting. It also can have lasting negative impacts on your family and marriage. Losing clients and employees is frustrating. Figuring out sales and marketing can seem impossible. It all adds up.
The levels of stress associated with entrepreneur burnout are high enough to seriously and permanently impact your physical and mental health. Employees quit high-stress jobs, but entrepreneurs have teams counting on them, debt to service, and contractual obligations to clients that prevent them from quitting.
If you feel trapped in your MSP business, you have two choices: Fix it so you can enjoy running it again — or sell it.
Fixing An Underperforming MSP
If you want to fix your MSP, you’ll need to invest both time and treasure. The average time frame quoted for fixing an underperforming or stagnant small MSP is about two years.
If you’ve got two years of hard work left in you, investing in one-time expenditures for (not recurring spends) financial and sales education, or engaging a professional on a nonrecurring, noncontractual basis. Avoid any expenditures that require signing contracts or making recurring payments. Recurring expenses and contracts can leave you trapped in a nonperforming engagement and overextended.
There are many free programs available to help you build and then execute a business plan. This can help you create a better MSP business that will give you the lifestyle and financial returns you want. Some examples include the entrepreneur education programs offered by Goldman Sachs and the SBA. You still have the option to sell your MSP after you fix it. It positions you for a better exit value.
Your hard work may allow you the luxury of being an owner that is free from day-to-day business operations while enjoying the profits.
Just Want to ‘Be Done With My MSP!’
If you’re unwilling or unable to invest that time because you’re “done” with your MSP, that’s okay. You likely have options for a nontraditional exit to another MSP owner.
There are many reasons MSP owners will consider buying small competitors in nontraditional ways, including:
- Adding more cash flow and revenue without increasing sales and marketing efforts.
- Acquiring additional technical talent instead of hiring new employees.
- Adding “boots on the ground” support after acquiring a new client in a different city.
- Expanding into a new vertical or new geography with less risk.
- Testing the acquisition and integration process prior to taking on a more desirable opportunity.
- A nonstrategic personal reason, such as offering a lifeline to a peer or friend in crisis.
Many innovative exit strategies can provide a healthy exit for a small MSP and a good return for the buyer. There is a deal out there for just about everyone. It’s simply a matter of finding an agreeable approach that works for both parties.
Carrie Richardson is a partner at Fox and Crow Group LLC. If you’re looking for a resource to learn more about an MSP Exit, visit mspexit.com, a Fox and Crow Group educational resource for M&A opportunities in the IT channel. For more great insights, check out Fox & Crow Group’s author page here.
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