Written by James Anderson

“Run your business as though you’ll never sell… But at the same time, run as though you’re always gonna be for sale,” martinwolf’s Tim Mueller said.

If you want to sell your MSP, you should start that process when you launch your company.

That advice comes from Bradley Gross, counsel at Law Office of Bradley Gross. The legal expert urged partners to prepare for a sale from day one. And that means making sure governing documents are in order.

“You’re a business owner. You’re an LLC. You’re a corporation. We’re past the mom-and-pop stage. We’re past the point where you’re a bunch of people that got together and want to do something new,” Gross told an MSP audience at The MSP Summit, part of the Channel Partners Conference & Expo in Las Vegas.

Gross’ comments resonated with his panel, “MSP M&A Superstars: Understanding Today’s New Realities” at the conference.

“Run your business as though you’ll never sell,” said Tim Mueller, president of martinwolf. “Invest in that back end. Invest in solid principles and core values. But at the same time, run as though you’re always gonna be for sale.”

Cheryl Strom, partner, origination at The Riverside Company, said it’s important to eliminate surprises if you want to sell your MSP. And that takes planning.

“It really takes running your business in such a way that there are systems and processes that help you to be able to articulate the forecast and be able to understand if something is going to happen — if a good customer might be lost,” she said.

Gross, Strom and Mueller joined Neil Medwed, vice president of corporate development and M&A at Meriplex, and Cristian Anastasiu, managing partner at Excendio Advisors.

The panelists have been involved with different sides of M&A in an MSP channel that is undergoing consolidation left and right. Although economic headwinds and raised interest rates have given some potential sellers pause, Mueller said many opportunities still exist to consolidate the fragmented market. For example, Mueller said martinwolf advised on 100 transactions in 2022. Deals has occurred 45% of the time through private equity and 55% through strategic buyers.

What’s Your Desk?

But the onstage conversation pointed to some of the pitfalls buyers and sellers run into during the M&A process. And in many cases, pitfalls come when MSP leaders don’t fully understand their business.

In some cases, MSPs are overvaluing the sophistication of their businesses. Perhaps they’ve built their agreements via handshakes rather than through actual writing. Gross said that for deals that fell apart, MSPs weren’t listening to their M&A advisors.

“Every story of a failed deal is the story is one thing: hubris,” Gross said.

Sometimes MSPs underestimate the emotional impact of a transaction. For example, Anastasiu said one deal hit a snag when a client realized their sale included an office desk that had been passed down through their family. The transaction would have died on the table had the purchaser not adjusted the terms to include the desk, Anastasiu said.

“If you are an owner preparing to sell, what is your desk?” he said. “In most cases it’s really not a material thing. In most cases, it is your relationship with your clients and your employees. It’s the recognition you have among your peers for being a successful entrepreneur. It’s… the passion … the plans … the memories. What is that one thing that you will have a hard time [giving up] and, more importantly, how will you replace it?

Mueller said having a full picture of everything happen can help you as you sell your MSP.

“It’s often difficult to to let go of something that you’veworked really hard to build that represents a significant part of your identity. Clarity helps manage the emotional impact and ensures you’re making the decisions on your best behalf as well as the other people affected by the deal,” Mueller said.

Looking Back

Neil Medwed led a Texas-based MSP for 26 years before selling to and joining Meriplex. He told the partner audience that if he went back in time equipped with the knowledge he now has, he would have built his business much differently.

He said he would have relied more on key performance indicators (KPI) to measure his business. He also pointed to peer groups as a way for partners to acquire key information and compare themselves to peers. He also said he would have managed more with his head than with his heart. He said that some MSPs will benefit from right-sizing their business.

“If you right-size your business, you can invest in better tools. You can get better bonuses. You can bring more to the bottom line and be more valuable as a company. Whether you want to sell or not, it’s a for-profit, so look at financials,” he said. 

Finding a Fit

Strom, whose private equity company has acquired 12 MSPs over the last several years, said it’s important for MSPs to take time to ensure that they understand the character of the prospective buyer. For that reason, she said Riverside often delays on sending over a letter of intent to the partner.

“These due diligence and final stages are important to make sure that you honor and respect the buyer and that you want to do this,” Strom said.

USwired’s Robin Hau recently spoke to Channel Futures about his experiences with M&A. He emphasized the importance of finding a cultural fit.

“Cultural fit encompasses a wide range of factors, such as leadership styles, communication styles, employee attitudes and organizational values,” Hau said in a Q&A. “A misalignment in any of these areas can lead to conflicts, misunderstandings, and ultimately, a failed integration.”

Read the original article here.