I recently watched a webinar from IT Valuations titled What Buyers See That You Don’t, featuring M&A leaders from Evergreen, Shield Technology Partners, and Courser. Between them, these firms have completed dozens of MSP acquisitions, not to mention the many more that they evaluate each year. Although each buyer has a somewhat different investment model, I was struck by how consistent their comments were regarding what creates value, what creates risk, and what ultimately causes a transaction to move forward or fall apart.
Sellers and buyers naturally view the same company very differently. An owner sees the business they built, the years of sacrifice, the customer relationships, the employees they developed, and the risks they took along the way. A buyer may appreciate all of those things, but the buyer is also trying to determine how predictable the company will be after the transaction closes. Will the customers remain? Will the employees stay? Are the earnings sustainable? Can the business continue to grow with or without the owner? Are the financial results being presented today consistent with what will ultimately appear in the quality of earnings?
I have always believed that buyers do not simply buy financial statements. They buy confidence. They want confidence that the financials are accurate, the revenue is durable, the management team can execute, the customers will remain, and the seller has been transparent about the strengths and weaknesses of the business. Nearly every question assessed during diligence is really an attempt to answer one broader question: How confident is the buyer in the future performance of this company?
As a sell-side advisor, this is something I see in nearly every transaction. The highest valuation does not always go to the business with the best presentation or the most compelling story. It generally goes to the company that can provide the strongest evidence supporting that story.
Clean Financials Are Not Optional
One of the clearest messages from the buyers was that messy financials create unnecessary uncertainty. This was not surprising to me. In fact, it is one of the reasons I created an entire course called Getting Your Financials Ready for a Sale. I have seen too many good businesses lose value simply because their financial statements did not clearly explain how the company actually made money.
No one expects the average founder-owned MSP to maintain the same accounting systems or reporting standards as a publicly traded company. Buyers understand that many smaller businesses do not have a large finance department or perfect GAAP-level reporting. However, they do expect the financial statements to tell a coherent story and allow them to understand the company without spending weeks rebuilding the books.
Revenue should be categorized appropriately, with managed services separated from projects, hardware, cloud licensing, consulting, security services, and other sources of revenue. Cost of goods sold should also be structured in a way that allows the buyer to understand gross profit by service line. Most importantly, the financial statements must support the narrative being presented about the business.
I frequently hear owners describe their companies as highly recurring, consistently growing, and extremely profitable. Then we examine the financial statements and discover that every dollar of revenue is recorded on one line, labor is inconsistently classified, and several years of adjustments are required before anyone can determine normalized EBITDA. A buyer cannot pay a premium for something that cannot be clearly verified.
Clean financials do more than make the diligence process easier. They create confidence in the quality of the earnings and reduce the likelihood of surprises during the quality of earnings review. That confidence can have a direct impact on valuation, deal structure, and the likelihood that the transaction will close on the terms originally proposed.
Not All Revenue Is Created Equal
Sellers tend to focus on total revenue, while buyers focus much more closely on the quality of that revenue. I recently worked with a seller whose income statement had only two revenue categories: recurring revenue and nonrecurring revenue. Unfortunately, those two descriptions did not provide the buyer with enough information to understand the real value of the customer relationships.
Buyers want to see managed services, project work, cloud licensing, security, consulting, hardware, professional services, and other revenue streams separately because each category carries different margins, growth characteristics, customer dependencies, and levels of risk. Contractually recurring managed services revenue is typically viewed differently from project revenue, product resale, licensing-only relationships, or services that can more easily be moved to another provider.
That does not mean nonrecurring revenue has little or no value. Many MSPs generate highly repeatable revenue outside of their formal managed services agreements. On-site work, virtual CIO engagements, cybersecurity assessments, support calls beyond contracted limits, and professional services may occur repeatedly with the same customers even though they are not technically covered by a long-term contract.
The seller must be able to demonstrate that repeatability. Buyers will want to understand which customers generate the revenue, how frequently it occurs, the margins attached to it, and whether it depends on a particular employee or owner relationship. Simply calling revenue recurring does not make it recurring in the eyes of a buyer. Likewise, calling something nonrecurring does not necessarily mean that it is not highly repeatable. The underlying data must support the explanation.
Do Not Manufacture EBITDA Before a Sale
Another important discussion involved the common advice to maximize EBITDA before taking a business to market. I agree that owners should improve profitability and remove unnecessary expenses, but the advice is often taken too literally. Artificially stripping the company of the people, systems, and investments needed to support future growth can create more concern than value.
Buyers can usually identify when an owner has delayed hiring, reduced headcount, stopped investing in sales and marketing, deferred necessary expenses, or postponed operational improvements simply to produce a stronger trailing twelve-month EBITDA number. If the buyer believes those expenses will need to be restored after closing, the buyer will normalize EBITDA to reflect the true cost of operating the business.
In some cases, aggressive cost cutting may actually reduce value because it suggests that the current level of earnings is not sustainable. My advice to sellers is to continue operating the business as though they may own it for another five years. Owners should remove costs that no longer contribute to the business, but they should not weaken the company merely to create a temporary increase in EBITDA.
There is also an important difference between a legitimate add-back and a future buyer synergy. A personal expense that will disappear after closing may be a valid adjustment. A salesperson, marketing program, or operational employee required to maintain revenue generally is not. Sellers frequently want buyers to add back expenses they believe the buyer could eliminate after the transaction. Buyers usually view those items as synergies that belong to the buyer rather than adjustments to the seller’s historical earnings.
This is also an area where I sometimes differ from buyers. I believe sellers frequently leave legitimate EBITDA on the table because they fail to identify operating mistakes that were corrected before the sale process began. Suppose an owner hired an administrative assistant, determined six months later that the position was unnecessary, eliminated the role, and never hired a replacement. If that employee’s compensation remains within the trailing twelve-month period, I believe it is appropriate to explain that expense as a legitimate adjustment.
That is not manufacturing EBITDA. It is accurately presenting the normalized earnings of the business. The distinction comes down to whether the expense has truly disappeared from the ongoing operation or whether the buyer will need to restore it after closing.
Customer Concentration Is More Dangerous Than Most Owners Realize
A large customer often feels like a major accomplishment to the owner of a business. To a buyer, that same customer may represent a significant risk. If one customer accounts for 20%, 25%, or 30% of revenue, the value of the entire company can change dramatically if that customer leaves.
Customer concentration is not always limited to one legal entity. If several customers are owned by the same private equity sponsor, parent company, or corporate group, the buyer may treat those accounts as one economic relationship. The contracts may be separate, but the ultimate decision to change providers could still be made by one ownership group.
Buyers also study where recent growth is coming from. A company may have historically served fully managed SMB customers but suddenly begin generating significant growth from licensing-only accounts or loosely defined co-managed relationships. A buyer will want to understand whether that new revenue strengthens the company or simply reflects the pursuit of available sales that do not fit the long-term business model.
Revenue growth is valuable, but the quality of that growth matters even more. Growth that creates concentration, lower margins, weaker customer relationships, or higher churn risk may not increase value as much as the seller expects.
Transparency Prevents Retrades
Every business has issues. There may be customer concentration, employee turnover, weak contracts, pending litigation, margin fluctuations, recent churn, or dependencies on a small number of employees. The presence of an issue does not necessarily kill a transaction, but failing to disclose it can create a much larger problem.
Buyers are generally more comfortable addressing a known issue before signing an LOI than discovering it during diligence. When a problem appears late in the process, the buyer begins to question not only the specific issue but also what else may not have been disclosed. That is often when trust begins to erode and the risk of a retrade increases.
A well-run sell-side process does not hide weaknesses. It identifies them, quantifies them, and provides the buyer with enough context to understand the issue before reaching an unnecessarily negative conclusion. However, transparency does not mean leading every conversation with the seller’s biggest weakness.
If churn has recently increased, for example, I also want the buyer to understand what happened afterward. Can we show a detailed 30-, 60-, and 90-day sales pipeline that replaces the lost revenue? Are there signed agreements already moving into implementation? Was the churn caused by an isolated event, a customer sale, or a strategic decision to eliminate an unprofitable relationship?
Context matters. A buyer who discovers a problem independently may assume the worst. A buyer who understands the issue and the plan for addressing it is much more likely to focus on solving the problem rather than using it as a reason to change the transaction.
Your Business Must Be Able to Operate Without You
The buyers on the webinar had different philosophies regarding how long an owner should remain after closing. Some prefer the founder to stay for several years, while others are comfortable transitioning the owner out over six to twelve months. Despite those differences, every buyer wanted to see a company that could eventually operate independently of the founder.
That does not mean the owner must be completely removed before going to market. It does mean the company should have management depth, documented processes, customer relationships beyond the owner, and employees who understand how the business operates.
Owners often tell me that the company runs without them while they are still managing the largest customers, approving every major expenditure, leading all sales activity, resolving employee issues, and making every important operational decision. That is not a business that runs without the owner. It is a business that continues to depend heavily on the owner, even if the owner is no longer involved in every routine task.
I recently represented two companies with nearly identical revenue and EBITDA. The offers they received differed by approximately three turns of EBITDA, and one of the primary reasons was the depth of their management teams. One company had capable leaders who could continue operating and growing the business after the transaction. The other remained heavily dependent on the owner.
That difference translated into millions of dollars of enterprise value. Management depth is not something that can be installed three months before launching a sale process. In my opinion, owners should allow at least eighteen months to build a credible leadership structure, transfer responsibilities, and demonstrate that the company can perform without constant founder involvement.
Sellers Need to Perform Due Diligence Too
One of the most important points raised during the webinar was that diligence should go both ways. Sellers should not spend all of their time answering questions while failing to evaluate the buyer with the same level of seriousness.
Owners should ask buyers how many LOIs they have signed, how many of those transactions actually closed, and why prior deals failed. They should ask about the average time required to close, the percentage of sellers who achieved their earnouts, how rollover equity has performed, and what support is provided after closing.
Sellers should also speak directly with former owners who have already completed transactions with the buyer. Those conversations can reveal how the buyer behaved during diligence, whether the transaction closed on the terms originally proposed, how employees were treated, whether promised resources were delivered, and whether contingent consideration was calculated fairly.
The highest offer is not always the best offer. Deal structure, buyer culture, integration strategy, rollover equity, earnout mechanics, communication style, and the owner’s post-closing role may ultimately matter as much as the headline purchase price. A sophisticated seller evaluates the buyer just as carefully as the buyer evaluates the seller.
Buyers Are Really Buying Confidence
My biggest takeaway from the discussion was not a particular financial metric or valuation multiple. It was the importance of predictability.
Buyers want confidence that customers will remain, employees will stay, the management team can execute, the revenue is durable, and the financial statements accurately represent the company. That is why two businesses with the same revenue and EBITDA can receive dramatically different valuations.
Owners frequently ask what multiple buyers are paying in the current market. That is not a bad question, but there is a better one: What risks does a buyer see in my business that I have learned to overlook?
Addressing those risks before going to market does more than improve valuation. It creates a more competitive process, reduces the likelihood of a retrade, and significantly increases the probability that the transaction will actually close.
Conclusion
Preparing a business for sale is not about creating the appearance of a stronger company for a short period of time. It is about building a business that is easier to understand, easier to trust, and easier to operate after the owner steps away. When the financials are clear, the revenue is well defined, the management team is capable, and known risks are addressed before diligence begins, buyers are far more likely to compete for the opportunity rather than discount it. The goal is not simply to earn the highest multiple. The goal is to create a business that gives buyers enough confidence to support that multiple and carry the transaction all the way to closing.
If you want to listen to the entire webinar, you can find it here: https://www.youtube.com/watch?v=usdmH8-P9PM
Thank you, IT Valuations, for putting this on.
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