M & A SERIES CONT.
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.
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 high-demand 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.
" TAKE NOTE THAT A CASH- ONLY DEAL TYPICALLY MEANS SACRIFICING 10 % OR 20 % OF MARKET VALUE. 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. DEAL STRUCTURE IS REALLY ALL ABOUT WHAT YOU WANT.”
— PAUL CISSEL, M & A EXPERT
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.
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