21 M&A hacks to maximize your profit when you sell your MSP

Common reasons for MSP owners to sell their MSPs include:

• Retirement

• Burnout

• Pursuing another business opportunity

• Health challenges

• Divorce

If you'd like to sell your MSP one day, here are 21 M&A hacks to maximize your cash return after you sell your MSP:

1. Increase your EBITDA

Most owners think in terms of revenue, but buyers think in terms of EBITDA. The higher your EBITDA, the higher your cash return. This means you can't just add more revenue to make your business more valuable. Your revenue needs to grow faster than your costs.

(We actually recommend MSP owners think in terms of cashflow instead of either revenue or EBITDA, which we wrote about earlier.)

2. Increase your EBITDA margin

If your business generates $1mm in EBITDA on $2.5mm in revenue, then your EBITDA margin is 40%. Higher EBITDA margin signals stronger unit economics and business fundamentals, so buyers are willing to pay a premium.

3. Increase the portion of revenue which is MRR

Most investment bankers in the MSP space advocate for MSP owners to have at least 60% of revenue be MRR before they sell. The more MRR, the better. You probably already have a lot of incentive to convert break/fix revenue into MRR, so this is yet another incentive to do so.

There's still value in retaining some project and transactional work. They are opportunities to upsell and cross-sell. They help to keep competitors out of your accounts, otherwise there's a risk of competitors entering through project work and then taking over your accounts.

4. Lower your working capital requirements

This is as simple as lowering your current assets, like accounts receivable and inventory, and increasing your current liabilities, like accounts payable. When clients pay you sooner, but you pay your suppliers later, your working capital requirement goes down. Buyers prefer businesses with less working capital requirements.

5. Time your sale during a time when yearly revenue is increasing

Most buyers will be interested in your last three years of financial statements. An MSP showing consistent yearly revenue growth in the last three years will sell at a higher price than another showing consistent yearly revenue decline, even if both MSPs are equal otherwise.

6. Choose the buyer with the most willingness to spend

The two main types of buyers for your MSP will be strategic buyers and financial buyers.

Strategic buyers are larger MSPs looking to scale by acquiring smaller MSPs. They comprise over 75% of the prospective buyers for your MSP. They're generally willing to pay more due to synergies.

Financial buyers are private equity groups and investors. They typically prefer MSPs generating over $1mm EBITDA and require the management team to already be in place.

7. Increase your customer diversity

If your largest customer does over 15% of your revenue, you have a "customer concentration" risk that will affect the buyers' willingness to spend. Aim to increase your revenue diversity until your largest customer does less than 10% of your revenue.

8. Hire an intermediary, broker, or investment banker

Most MSP owners want to maximize their outcome when they sell their MSP, but the M&A process is laborious, obscure, and highly technical. Hiring an intermediary will maximize your odds for navigating the M&A process and closing the transaction.

A good intermediary will help you evaluate offers and counteroffers, guide you through the many tricky parts of the M&A process, advocate for a higher price and better terms on your behalf, filter out unsuitable buyers, handle difficult conversations for you, and play the good cop/bad cop game on your behalf so you can maintain a positive direct relationship with the buyer.

You must pick somebody you trust. If you hire an intermediary and you don't listen to their advice, you either should fire them and find another whose advice you actually do listen to, or you're unlikely to close.

9. Ascertain whether client contracts can transfer to new ownership

If your professional service agreement doesn't include a change of control provision, then add one now. Buyers want to see clear change of control provisions in your contracts, so they feel confident that they can retain clients after closing the transaction.

Other important terms in your contract include out clauses, length of contract, auto-renewal clauses, automatic price increases, and autopay clauses. You should aim for at least 3-year contracts.

10. Remove yourself from the business

You need to make a strong case that you work on, not in, your MSP. Will the company continue functioning if you take a month off? Would it even grow if you took a month off? If yes, buyers will pay a premium.

Most owners aren't in 100% passive roles in their MSPs, and that's ok. Sophisticated buyers should readily accept this. In this case, you should recommend 1-2 potential hires that can fill your responsibilities after you exit the company.

11. Remove key person risk

Which of your employees are irreplaceable? Which employees would your MSP struggle most without, if they took a month off?

It's understandable if your MSP has a couple key people, but buyers will still prefer to buy a business with no key person risk. To reduce your own MSP's key person risk, and increase your buyer's willingness to spend, you should at least create detailed SOPs for the key person roles so the buyer can feel confident hiring a replacement if necessary, making key person risk less scary to them.

12. Demonstrate your management team's strength and continuity

List all employees in a management capacity, including their credentials, responsibilities, compensation, and tenure at the company. Most buyers will prefer to buy a company with a strong management team already in place, especially financial buyers.

13. Normalize financial statements

Your MSP will be much more difficult to sell if you don't have clean financials. Messy financials will make your MSP look less desirable to the buyer. Most buyers will consider it a red flag.

Cleaning up your financials includes removing personal expenses from business accounts, which is an issue that most small business owners have with their financials. Consider splitting your personal expenses into a separate "owner benefits" category.

This also includes proof of addbacks. For each addback that you want the buyer to include in their valuation of your MSP, include invoices, receipts, and an explanation for why you're adding those items back. A buyer is entitled to accepting or rejecting your addbacks as they see fit, but you should make it easy for them to accept them.

14. Prepare a client list

This includes revenue per customer, broken into contractually recurring revenue and project-based revenue, and the tenure for each customer.

15. Be trustworthy

Sometimes an MSP doesn't sell not because the MSP itself is unsellable, but because the owners are untrustworthy. Trust is everything in M&A. Even if you have the cleanest financials and amazing investor materials, if buyers catch you lying or cheating, they won't trust you enough to follow through with the transaction and buy your MSP.

I've been involved in M&A deals that died two weeks away from closing, due to the sellers conspiring to cheat the buyers at the last minute. They tried to gaslight the buyers into a childish narrative about how the sellers are still trustworthy, in spite of getting caught lying red-handed.

Worse, the sellers shocked the buyers with their degree of entitlement. In the wake of their conspiring and gaslighting, the sellers were beating their chest and insisting that the buyers needed to pay more cash than previously agreed to help the sellers "secure their legacy." The sellers angered the buyers, and the deal died.

Don't piss off the buyer by demonstrating poor integrity, a lack of a conscience, or manipulative tactics.

16. Be collaborative

Beyond general trustworthiness, you're more likely to sell your MSP if you demonstrate collaborativeness. This means making the buyer feel heard and being openminded to new information. If the buyer feels like you only believe facts if they're convenient for you, and you don't believe anything that's inconvenient for you, then the buyer will walk.

It's common in M&A for buyers and sellers to be speaking over each other, rather than conversing with each other. If buyers feel like they're not having the same conversation as you, and if they don't feel like you're listening to them, they'll walk.

17. End the process if the buyer doesn't reciprocate your trustworthiness and collaborativeness

It's a two-way street. You have to be able to trust the buyer as well. The buyer also has to demonstrate a willingness to collaborate.

A good buyer should communicate well. They should make you feel heard as well.

M&A is a weird space. There's millions of dollars on the line. For many sellers, the sale of their company will be their largest cash event in their careers. At the same time, there's large egos among both buyers and sellers, and people with large egos don't always get along with each other.

You must listen to your gut and know when you walk away.

18. Disclose potential issues early

This is important for building trust. Can you tell that trust is an essential ingredient for selling your MSP?

Be transparent about skeletons in the closet. Every business has skeletons. Quality buyers should understand that. You have more to gain by disclosing potential issues early than by hiding it.

19. Keep the process moving and avoid delays

Deal fatigue is an obstacle to closing that settles in the longer it takes to close the transaction. One of the tedious parts of selling your MSP is collaborating with the buyer on due diligence. The buyer will have lots of requests for information. Revert on these requests quickly to demonstrate your commitment to closing.

On the flipside, moving slowly on the buyers' due diligence requests is a great way to lower the buyers' trust in you. You have a narrow margin for error if you have a habit of moving slowly during due diligence.

20. Hire an M&A lawyer and accountant familiar with your business model

Yes, hiring a lawyer and accountant for M&A is worth the price. However, don't hire general lawyers and accountants. You want advisors who have M&A experience. Furthermore, you want advisors who have helped other MSP owners sell their MSPs. Industry-specific M&A experience matters.

21. Manage your emotional attachment to your business

Buyers will make you an offer for your MSP based on how much your MSP is worth to them. Not how much it's worth to you.

If you're not happy with any offers, you're more than entitled to walking. But that means you have to keep working on your business.

The more urgently you want to sell, the more open you need to be with market valuations, and the more you need to separate your MSP's emotional value from its market value.

Here's some bonus content! Woo!

The above hacks are all things that you can control as the owner over a longer time horizon. There are 4 other variables that affect your profit after a sale, even though you have less ability to influence them yourself:

1. Your geographic market size

Most buyers are willing to spend 25% more for an MSP in a market with over 5 million people than for an MSP in a market with less than 2 million people. Unfortunately, most MSPs can't just pick up and change markets, but your market will affect your valuation anyway.

2. The capital markets

At one end of the macroeconomic cycle is buyers with access to cheaper capital, meaning they're much more willing to spend, and you'll have more buyers to choose from. At the other end of the cycle is when capital becomes expensive, and the buyer pool shrinks.

Although you prefer to sell your MSP in a strong macro, macro cycles can span many years. It can be difficult to time your sale so that you're selling at the top of the market.

3. Market terms

Every buyer and seller is replaceable. If you don't like the terms your buyer offers, you are entitled to walking. But if every single buyer is offering you unacceptable terms, then you're the common denominator. The market has spoken; you're not finding a buyer because your criteria for a sale are off-market.

You either need to adjust your criteria and separate emotional value from market value, or keep working on your business.

4. Alignment with the buyers' existing business

Buyers will have more willingness to spend depending on synergies with their existing business. This includes pricing alignment with their existing business, tool stack compatibility, industry alignment, and service compatibility.