During my vacation time this summer, I got a chance to catch up on my “industry” reading. I came across an article written by MSP Success about how owners feel about their exit strategy. What caught my eye, specifically, was when they asked their readers (those who plan on selling in the next 3 – 5 years) what steps they were taking to get ready for a transaction. As you can see from the chart below, top actions included: cleaning up financials (53%), attending an M&A session at an industry conference (49%), talking with a broker (45%), updating documentation (39%), putting out word-of-mouth feelers to peers (32%), and getting customers on contracts that are transferable (28%).
As an M&A advisor and former owner of three of my own companies that I sold throughout my career, I think the list is missing some really important items. My guess is the list was provided by the publisher, so the respondents couldn’t add their own opinions. Therefore, let me address a few key missing items for those who are truly working on getting their company ready for a sale.
A Technology M&A Advisor’s List of 6 Things Sellers Should Do to Prepare to Sell Their Company
#1
First on their list is also first on mine; I agree with getting your financials ready. I think this is so important that I wrote an entire module on it, called “Getting your Financials Ready for a Sale,” in my course, Ready.. Set.. SELL. The reason why it is so important is that it not only determines your true net income, but it also should show all of your normalizations. This is truly where money can be found!
#2
Second on their list is attending an M&A session, which is great if you don’t know the multiples in your space. Most M&A advisors like to discuss this topic because it’s something everyone wants to hear, but they usually focus on the outliers (rather than the multiples sellers are most likely to receive) so as to draw interest to their firm. Instead, I would recommend that you determine your adjusted company value using tools that will give you more accurate result. More on that later.
My #2 would be to determine your adjusted EBITDA. Did you know that most companies sell for only 70% of their value? That is because a buyer won’t look for normalizations to your net income that increase your value. They, instead, will look for those that will decrease your value. Understanding normalizations is key to getting the most value for your company. Most sellers just hand over their financials to a buyer with no normalization adjustments and, therefore, lose value.
#3
#3 on their list is to talk with a broker. If you plan on using one (note: many transactions are completed without an advisor), you should understand the fee structure, which includes upfront fees, success fees, minimum success fees, and any monthly retainers if used by the broker. Then, figure out how much you can sell for and calculate the fees based on that number (see #8 below). If you have less than $3M in revenue, it won’t make financial sense to use a broker. But again, we teach you how to sell without an advisor in my course.
Personally, I think the third most important items to work on are customer satisfaction and customer concentration. If you have more than 15% of your revenue tied up in more than one client, it will be a major red flag for any buyer, unless you have them on at least a three-year contract with a very serious termination clause. So, now is a good time to check that out. Here is a post that will help. Customer churn is also a red flag for buyers. If you have a track record of losing customers continuously, it will reduce your value, if not totally scare off a buyer. Many sellers will look for CSAT scores or some other annual customer survey. Now is the time to start doing this if you currently don’t have any of this data to share.
#4
I agree with their #4, which is to update your documentation. This should include things like making sure everyone has a signed NDA on staff and that all customer agreements are current. Almost every MSP and VAR transaction I work with has multiple customers with no agreements. Even if they have been with you for 25 years, agreements matter to buyers. No agreement means they can move on day one after a sale.
#5
Their #5 is to put out word of mouth feelers to your peers. I am assuming that means you will ask people if they (or others they know) are buying, because you are thinking of selling. Personally, I would pass on that for so many reasons. But I see MSPs especially do that within their peer groups. I am not totally opposed in that context, as everyone in a peer group should be under NDA. But short of that, I don’t recommend sharing that message.
Instead, I would start looking for an M&A transaction attorney and have them review your agreements for assignability and change in control. If not structured right in your agreements, this can be a major deal delay while you go out and get your customers to all sign new agreements. I have seen this so many times, so now is a good time to review agreements well in advance of looking at buyers.
#6
#8 on their list would be #6 on my list, which is to engage a valuation analyst. If you are selling to a partner or need a valuation due to a divorce, absolutely engage a valuation analyst. Otherwise, save your money, because what you will receive is not necessarily what the market will give you. If you have followed me for a while, you know that VARs, MSPs, MSSPs, and ISVs have different starting EBITDA multiples for the same revenue, and most valuation analyst don’t account for that. They treat all technology service providers the same, and that is only their first mistake. I have seen some valuations come back too low and others too high because the person doing them doesn’t understand our space and is just looking at numbers. Plus, most sellers don’t give the right information to the analyst because they haven’t taken into account normalizations.
If you want an accurate valuation, use my Value Maximizer Assessment™, which will give you a very accurate picture of your potential market value and where you are leaving money on the table. The link to the assessment is here, but you’ll need to send me an email at support@rosebiz.com to tell me you want to take the assessment, and I will send you the code, as it is gated. You deserve to know the accurate value of your company, and since you have spent the time reading this article, I am happy to provide the code for free.
Conclusion
Keeping current on industry articles is important, but some you have to take with a grain of salt, especially if it’s not their core expertise. While I enjoy reading MSP Success digital magazine, it is written by marketing people, so you cannot take M&A advice as gospel. But they do have great marketing and sales tips, so be sure to read those articles! I hope you found this article informative.
From Planning to Profit: A Comprehensive Guide to Successful M&A Transactions