By Bruce Teichman
Executive Vice President
Whether you are considering selling your Managed Services Provider (MSP) now or several years down the road, how can you tell if you’re ready to sell and how can you determine if your company is ready to sell? This post will help you assess both kinds of readiness.
Let’s focus on what you need to do now to become a “good seller.” First, you’ll need an attitude and approach that recognizes and rewards opportunity. Most “sellers” aren’t sellers at all; they are MSP owners who are making the decisions needed to propel their companies forward. Whether or not they are contemplating a sale in the short term or just “blue skying” the future, the decision to sell is a business opportunity just like the others they evaluate every day.
Gathering Information About the Opportunity
More specifically, there are three critical steps to help you get the most out of evaluating an opportunity to sell. First, you need to take the inquiry phone call. You’ll need to learn more to evaluate the specific opportunity and you’ll need information to do that. Secondly, avoid being too guarded during the conversation. Having a discussion is not agreeing to be sold. You are gathering information just as you would before you make any business decision.
A good seller is totally open and honest about the good, the bad and the ugly of the company because every MSP has some of each. The more transparent you are out of the gate and throughout the discovery process, the faster you’ll get to “No” or “Yes,” and the more confident you’ll be that you made a strong decision based on fact – not emotion. Remember, getting to “Yes” only means that you have an offer to evaluate. You can then make a decision to proceed or not knowing there will be no surprises for either side.
During your evaluation, we recommend all of our sellers look at the opportunity first and money last. As tempting as it is to skip to the Financial section, look at the potential deal from all angles. How will it benefit your customers? Your staff? You professionally and personally? Once you decide why this would be a good decision for all your stakeholders, then dive into the financials.
How Ready is Your MSP?
If you have decided that the opportunity in front of you is good for your stakeholders and worthy of exploration, now you need to focus your critical thinking on the actual readiness of your business to be acquired.
Ask yourself these key questions:
- Have you had enough time to build a mature, profitable and growing business with talented employees and tenured customers? Often, the decision to sell comes on the heels of your best year. However, it is never a good idea when you are coming off a bad year. Looking at today’s macro-economic environment tells you now is a great time to sell.
- How prepared is your business for the due diligence that is coming your way? If you believe you are “somewhat prepared,” that is good enough to proceed. Perfection, which is better known as “complete readiness,” doesn’t exist and is not required for M&A.
- Being somewhat prepared indicates that your company is following industry best practices. For example, do you have signed versions, ideally electronic files, of all your contracts with every, customer, vendor and employee? Are each of these contracts easily “assignable?” That is, can you assign the contracts to a new owner without having to secure customer, vendor or employee approval on each document? If not, you have significant homework to do to get your company “somewhat prepared.”
- Having your financial house in order is critical to every level of readiness. Begin with reviewing your company’s legal status? Is your company in good standing with the state? Are your state and federal returns up to date and completed? Have you been properly tracking and paying sales and income taxes?
Next, take a long look at your company’s Accounting Systems. At a minimum, your P&L revenue accounts should have separated recurring services, recurring resale, one-time services and one-time resale. Additionally, each of those four categories should have its own corresponding Cost of Goods (COGS). Do you understand your books deeply, reviewing them for accuracy and ensuring they are closed on time each month? How do your books recognize “Deferred Revenue?” For example, customer deposits and pre-paid services should be reflected as liabilities with dollars recognized as revenue as the debt to your customer is satisfied.
Finally, expenses tracked as benefits to the owner must be reflected in detail. It is common practice for many owners to put expenses through their operation that may not be “required” for the business. If you follow this practice, be sure that all owner benefits can easily be separated from your P&L statement. A potential owner will want to know, and you will need to understand exactly what you’ve spent on meals and sailboats, to determine your company’s true profitability.
Now that you understand what’s involved in being a good seller, you can move forward with confidence whether you decide to sell now or later. Plus, you can be sure that any new owner you speak with will appreciate your transparency and your readiness.