Selling your MSP: Strategic vs. Financial Buyers
Selling your MSP is a complex process requiring careful consideration of multiple factors, including the type of buyer that’s right for your practice. The two most common types of buyers for MSPs are strategic buyers and private equity firms (otherwise known as financial buyers). While both offer unique advantages, there are key differences that should be considered when deciding which type to select.
A strategic buyer acquires MSPs with the intention of achieving long-term business goals beyond short-term financial returns. This type of buyer is typically a larger company looking to expand its market share, diversify its product offerings, or increase its operational efficiencies through the acquisition of complementary businesses.
Strategic buyers often have a specific set of criteria they use to evaluate potential MSP targets. They may look for an MSP having a strong market position, unique intellectual property, or long-standing customer relationships. Additionally, they may target MSPs operating in related industries or have similar business models to their own.
Unlike financial buyers, who are primarily interested in maximizing returns for an exit within 3-5 years, strategic buyers are willing to pay a premium for MSPs that fit their strategic objectives. They may also be more willing to work with existing management teams and retain key employees to maintain continuity and ensure a smooth transition.
Overall, strategic buyers are a valuable force in the M&A landscape, as they bring a long-term perspective and a focus on creating value.
Here are some advantages and disadvantages of selling your MSP to a strategic buyer:
- Higher valuations: Strategic buyers often place a higher transaction value on an MSP than private equity firms. This is because strategic buyers are willing to pay a premium to gain access to new technology, product, or customer base.
- Potential for synergies: Strategic buyers focus on synergies with your MSP by combining it with their existing operations. This can lead to additional value creation for both companies.
- Longer-term partnership: Strategic buyers are often looking for a long-term partnership, which can be beneficial if you are looking for a buyer who is willing to invest in the long-term success of your business.
- Less control: When selling your MSP to a strategic buyer, you may have less control over the future direction of your business. Strategic buyers may want to integrate your business into their existing operations, which can result in significant changes to your business.
- Longer sales process: Selling your MSP to a strategic buyer can be a longer process than selling to a private equity firm. This is because strategic buyers may take more time to evaluate your business and negotiate a deal.
- Cultural differences: There may be cultural differences between your MSP and the strategic buyer. This can make it more difficult to integrate your business into the buyer’s existing operations.
PRIVATE EQUITY (financial buyers)
Financial buyers are investors who acquire companies with the intention of generating a return on their investment through financial means, such as increasing the company’s profitability, selling it at a higher valuation, or taking it public through an initial public offering (IPO). Private equity firms are a specific type of financial buyer that typically raise capital from institutional investors, such as pension funds and endowments, and high net worth individuals to acquire and manage companies.
Private equity firms are known for their focus on operational improvements, cost-cutting measures, and other strategies aimed at increasing a company’s profitability. They may also seek to leverage the target company’s assets, such as intellectual property, to generate additional value.
Private equity firms typically acquire a controlling interest in a company and work closely with management to implement their strategies. They may also provide expertise, resources, and access to networks that can help the company grow and expand.
Private equity firms typically operate on a timeline of several years (three to five years), during which they work to improve the company’s financial performance before ultimately selling it to another buyer, taking it public, or holding onto it as a long-term investment.
Overall, private equity firms are a valuable source of capital and expertise for companies looking to grow or improve their operations.
- Faster sales process: Selling your MSP to a private equity firm can be a faster process than selling to a strategic buyer. This is because many private equity firms are often more decisive and can move quickly to close a deal.
- Greater control: When selling your MSP to a private equity firm, you may have greater control over the future direction of your business. Private equity firms are often more hands-off than strategic buyers and may allow you to continue running your business as usual.
- Operational expertise: Private equity firms often have significant operational expertise and can provide valuable guidance and resources to help your MSP grow and scale.
- Rollback Equity: Rollback equity, also known as “upside equity,” refers to the equity ownership stake that the management team or other key employees of a seller receive in a new private equity-backed company created after a transaction. As part of the deal, the management team of the MSP may receive a percentage of the equity ownership in the combined entity, which is often referred to as “rollover equity.” This provides the management team incentive to work towards the new company’s success and aligns their interests with those of the private equity firm and stakeholders.
- Lower valuation: Private equity firms may offer a lower initial valuation for your MSP than strategic buyers. This is because private equity firms are typically focused on generating a return on their investment within a few years. However, in many cases MSP owners rollback equity as part of the transaction, which means the seller retains a percentage of the combined companies. But rollback equity will often provide a venue so total transaction value (which can only be measured in the rearview mirror) is exponentially higher than the initial valuation.
- Shorter-term partnership: Private equity firms are typically looking for a shorter-term partnership, which can be a disadvantage if you are looking for a buyer who is willing to invest in the long-term success of your MSP.
- Limited resources: Private equity firms may have limited resources compared to strategic buyers. This can make it more difficult to achieve growth and scale your MSP..
The decision to sell your MSP to a strategic buyer vs. a financial buyer will depend on your unique situation and goals. It is important to carefully consider the strengths and weaknesses of each type of buyer and to work with a team of experienced advisors to help guide you through the process.
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