M & A SERIES
Avoid A Rude Awakening
How To Close The Valuation Gap Between What Your MSP Is Worth Today And What You Want To Sell It For
BY PEDRO PEREIRA
W
hen it comes time to sell your MSP business , do you have a “ magic number ” in mind ?
Whether you ’ re planning to jet-set around the world during retirement , live comfortably and take an occasional tropical vacation , or launch another business , you may face a rude awakening if there ’ s a big gap between your number and the market price .
You have two choices : Accept the buyer ’ s offer and scale back your goals , or work to increase your valuation before you sell .
If you choose the latter , it can be done , but you may need to recruit new clients , add services , and perhaps fire some people .
“ Your MSP is an asset that is worth what the market says it ’ s worth ,” says Josh Kotler , an operating partner at Axial Reade Capital and former MSP . “ Many things factor into a market valuation , and the answer typically changes from buyer to buyer . What you get to decide is whether or not to sell it .”
How Much Do You Need To Close The Gap ?
Selling is easy if you ’ re happy with the market price , but typically there ’ s a gap that you ’ ll need to close .
If you plan to retire , closing that gap is key to a more comfortable life post-sale , says Paul Cissel , CEO of Growth Caddie , M & A Expert in Residence for TMT , and Certified Exit Planning Advisor ( CEPA ). “ If you ’ re not going to work , what do you need annually to live ?” he asks MSPs .
Let ’ s say it ’ s $ 400,000 a year . If you ’ re retiring at 60 and assume you will live another 25 years , multiply the annual earnings by 25 , which adds up to $ 10 million . Add another 30 % for state and federal taxes , for a total of $ 13 million or so . That ’ s the number you ’ d want from a sale , Cissel says .
What would your EBITDA have to be to sell for $ 13 million ? “ It depends upon how well the company operates ,” says Cissel . “ If they are best in class — 20 % adjusted EBITDA and 42 % gross margin — it would be somewhere between $ 1.5 [ million ] and $ 1.8 million in adjusted EBITDA .”
How Should You Structure The Deal ?
How you structure the deal impacts the price . Buyers may take into consideration whether you plan to stay or take the money and run . It also matters whether the sale is a cash-only deal or a combination of equity and cash .
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