Founders often spend their entire career building a great MSP. Unfortunately, caught up by the day to day operations, they do not take time to consider what buyers are looking for, and get paid less then they deserve when they exit. To avoid this, you need to know what buyers are looking for and be strategic while building your company. To help owners, we have created a guide for MSP owners to maximize the value of their business to a buyer.
Contracts: The Backbone of Your Business
First things first, get your contracts in order. Make sure all contracts and agreements are fully executed and that both digital and paper copies are organized and easily accessible. Set reminders for contract anniversaries and conduct regular internal contract audits to stay on top of things. Ensuring that your contracts are assignable on “Change of Control” or “Asset Sale” is crucial. Clear terms and conditions, including limitation of liability clauses, are essential. Make sure your contracts have defined lengths, without easy outs, and include at least a 30-day cure period. Auto renewals and built-in inflation increases keep your MRR moving up and to the right with limited effort from your team.
Customers: Building and Maintaining a Strong Base
Your customer base is a critical component of your MSP’s value. Define your target customer demographics clearly, focusing on a sweet spot like 25 to 100 users or companies with $5M to $50M in revenue. If you are vertically focused, know each vertical’s contribution to gross profit. Diversify your client base so no single client accounts for more than 10% of your revenue to mitigate risk. Manage large clients contractually to ensure stability. Conduct Customer Satisfaction (CSAT) surveys regularly and direct feedback to Points of Contact (POCs) and CEOs to maintain high satisfaction levels. Focus on your profitable customers, measure profitability by client regularly, and know your cost and margins per user and per device.
Employees: Your Most Valuable Asset
Your employees are the heart of your business. Hire slowly and fire when necessary to maintain a high-quality team. Run lean, aiming for less than 10% overstaffing to optimize efficiency. Maintain a 24/7/365 focus on talent: hire, nurture, and expand your team. Foster those who excel in building customer relationships, as this strengthens your MSP’s client retention. Owners should maintain a relationship presence and cannot off-load completely to ensure continuity and trust.
Financials: The Numbers That Matter
Your financial health is a top priority for potential buyers. Your Chart of Accounts should reflect revenue and margin mix by categories. At a minimum, have separate categories for Recurring Service & Product, One-Time Service & Product, and their corresponding Costs of Goods Sold (COGs). Focus on improving your gross margin and net profit. Your revenue and Net Income/Earnings Before Interest, Taxes, Depreciation, and Amortization (NI/EBITDA) should show a trending increase to demonstrate growth and profitability.
Cash, Taxes, and Net Income: Fundamental Financial Management
Using accrual accounting is essential for accurate financial reporting and avoiding the pitfalls of cash accounting. Keep all personal expenses out of the business to maintain clear and accurate financial records. Do your books regularly and close each month timely to ensure up-to-date financial statements. Understanding and managing your free cash flow, which is aligned with GAAP, is crucial as it represents the true measure of your business’s worth.
Bonus Actions
- Implement Modern Accounting Software: Use software such as QuickBooks to automate and streamline financial processes.
- Train Your Team: Ensure your finance team is well-versed in accrual accounting principles and consistent in their reporting.
- Prepare for Due Diligence: Accrual accounting facilitates smoother due diligence by providing detailed and transparent records, making it easier for buyers to verify your MSP’s financial health.
By following these strategies, you can enhance the value of your MSP and ensure a successful sale. Accurate financial representation, improved business valuation, compliance with standards, better cash flow management, and a strong operational foundation all contribute to a more attractive and valuable business for potential buyers.
For more insights or to have a conversation about your business, contact Charlie at [email protected].
