M & A SERIES CONT .
M & A deals can have up to four components , says Ramsey Sahyoun , co-founder of private equity firm Evergreen Services Group : cash up front , an earnout based on future business performance , a loan from the seller to the buyer , and equity retained by the seller in the buying entity .
Transactions involve one or more of these components , Sahyoun says . “ For most of our deals , it ’ s cash . Generally , people try to get the most cash-heavy deal possible .”
Take note that a cash-only deal typically means sacrificing 10 % or 20 % of market value , says Cissel . Some sellers like to take “ a second bite of the apple by reinvesting a portion of the proceeds — 10 % or 30 %— in the parent company ,” he says . “ Deal structure is really all about what you want .”
How Do You Make Your Business More Appealing ?
When the value of the business falls short of your magic number , one way to make your business more appealing is to increase revenue . You may have to find new clients for recurring revenue services and add offerings for existing clients in highdemand areas such as security and compliance , says Kotler .
Cissel says buyers seek MSPs that derive 50 % or more of their revenue from MRR .
You ’ ll also have to reduce costs , Sahyoun says .
Examine your operations too — what works and what doesn ’ t . Dismiss team members who “ aren ’ t doing their share ,” Kotler says . “ Go through your expenses with a fine-tooth comb . Any expense or initiative that impacts long-term performance should be dropped .”
When you ’ re looking to sell , he says , “ the best way to prepare for a great exit is to build a great MSP .”
A great MSP can demonstrate “ true growth .” It ’ s something buyers look for , says Sahyoun . It ’ s driven by sales and marketing , as opposed to over-reliance on referrals or the owner ’ s network . And it helps to fetch a premium valuation multiple , he says .
This kind of growth engine isn ’ t all that common with MSPs because owners tend to be technicians first , not sales and marketing people . Still , Sahyoun notes , often all it takes is one superstar sales rep to drive the required growth .
But one can be a dangerous number if you have one client that generates 15 % of revenue or more , because it increases risk and can make the business unsellable , Sahyoun cautions . “ Customers can leave for reasons out of your control . It ’ s a risk that you can ’ t totally mitigate .”
When Is The Right Time To Reveal Your Magic Number ?
Sahyoun , who has participated in 70 MSP deals , says some sellers bring up price right away while others wait until later in negotiations .
“ Both can be fine ,” he says . Broaching the subject early can expedite the process . A seller unafraid to reveal the number up front demonstrates confidence , he says , but some prefer to feel out the buyer before revealing too much .
Cissel , who has participated in 57 M & A deals , prefers to get it out in the open from the get-go . It shows right away whether the seller is realistic , he says . “ It ’ s one of the first questions that I tell buyers to ask sellers : ‘ What do you think your business is worth right now ?’”
Kotler sees it differently : “ Keep that to yourself until the buyer has done some diligence and can indicate a valuation range . Once they present you with a range , you can choose to reveal your number .”
You also want to let the buyer know if you intend to stay with the business . Cissel says it ’ s OK to admit you want out because you ’ re burned out . “ I had one owner tell me on a Monday morning , ‘ Right now , for a used bag of golf balls , you can have my company .’”
Sahyoun says Evergreen usually has a successor in mind for the seller , so whether the seller stays or leaves has no impact on closing the deal .
Of course , not all buyers share that view . When Frank DeBenedetto was selling his MSP business , a prospective buyer walked away because he wanted out . DeBenedetto , who now heads Kaseya ’ s M & A Concierge program , eventually sold the business to Evergreen .
Don ’ t Be Stupid With Your Money Post-Sale
Even if you walk away from the sale with your magic number , Cissel cautions that you will need a money management plan . He ’ s seen too many sellers make mistakes and advises getting help from a financial planner . He stresses , “ Don ’ t be stupid with your money .”
Pedro Pereira is a writer in New Hampshire who has covered the IT channel for two decades . Pedro has worked for a variety of media companies , including Ziff Davis , CMP Media , The Nielsen Company , and daily newspapers .
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