M&A Knowledge for the IT Services Business Community.

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Emotional Readiness Impacts Decision to Sell MSP

By George Sierchio
Executive Vice President & Sr. Partner

Navigating the complex decision to sell your Managed Service Provider (MSP) business includes many expected bumps and hiccups as well as some unexpected issues. These hurdles make this decision the toughest and most life-changing call most MSP owners will ever make.

Recently Cogent’s Managing Partner, Rick Murphy, shared thoughts about insights to M&A in the IT Services space. While demand continues to be strong, we’ve seen MSP owners stumble by underestimating the emotional components of deciding to sell.

At Cogent Growth Partners, we pride ourselves on getting deals done and we recognize that helping MSP owners find their way through the emotional impact of selling is an equally important responsibility. This is true whether we are working on the buy-side or sell-side, and also includes merger work as typically one company is being absorbed by another. We acknowledge that responsibility on our business cards by calling ourselves providers of “M&A Transaction Therapy.”

Enterprise Valuation: Buyer Point of View Sets Value

One of the first and most common emotional hurdles comes up when an MSP owner finds out what his or her company is worth to a buyer. Often this leads to cold feet about selling. Few MSP owners have the detachment needed to see their company from the potential buyer’s view. They often consider the blood, sweat and tears that went into starting the company, as well as the missed vacations and weekends at the office, as an added value. However, these components have zero added value to a potential buyer because that entrepreneurial sacrifice is already reflected in how the business performs currently and its maturity.

In addition, MSP owners may be fixated on an unrealistic number based on CEO-to-CEO conversations, incorrectly applying “multiples” heard from industry pundits without context or relying on value interpretation from someone without knowledge of the IT Services space. Rarely are these figures accurate and even more rarely are they applicable to their MSP. A company is only worth what a buyer is willing to pay and there are many factors that go into that decision.

Cogent developed a proprietary approach to setting value for an MSP in a service we call our Enterprise Valuation. This process looks at an MSP from the buyer perspective to set a price range and deal structure (how the seller gets paid) the company can be expected to attract in today’s market as well as the good, bad and indifferent of the business from the buyer’s perspective. This analysis is helpful to MSP owners whether they are planning to sell now or in the future, may be looking to bring on or divest a partner, or even for consideration to merge with another firm.

Deciding What’s Next for You

Expecting your MSP to bring a higher price than today’s buyer will offer is a scenario we see unfold frequently. However, that’s not the mistake we see sellers make most often. In closing more than 170 deals, we routinely see smart, savvy MSP owners get blind-sided by the reactions from two groups of people that hold great importance to them: their families and their peers. Reactions from MSP owners’ inner circles have stopped a viable, lucrative transaction more often than you would think. Sometimes even a small pause can end a deal.

Family members who have seen you as a hard-charging executive may worry about your emotional health after a sale. They will likely ask how you will spend your time. You may also hear, “Why are you giving up?” In addition to being worried about you, they are likely concerned about the impact this decision may have on their personal lifestyle.

In preparing to sell, MSP owners need to settle on their professional next steps early in the process. Questions to answer long before you entertain offers include:

  1. Do you want to stay with the merged company or move on?
  2. If you are staying, how will you feel when you no longer control the checkbook?
  3. Are you even employable after being an owner executive for so long?
  4. Is it time to retire?
  5. If you are retiring or not staying long term, what will you do with your time and where will you get your adrenaline rush?

Answering those questions requires a great deal of soul-searching and may call for expert help from a life coach, business mentor or wealth manager. Tell your family and trusted advisors that you are considering selling before you make the actual decision. It is imperative that you completely understand the financial and personal implications of selling beyond the sale price. For example, how much of the sale price will you get to keep after taxes? Are you willing to take a discount to get the money faster? What can you do with that money to grow it over time and assure yourself of attractive options in the future? If equity roll over was part of the equation, when, how and what does that cash out look like? If not enough money to retire, how much will you need to make annually working elsewhere, and for how long?

Non-compete Agreements Loom Large

One of the most often overlooked aspects of selling an MSP is the buyer’s non-compete and non-solicit arrangement. You’ll be barred from doing what you do now in your current geography and other regions the buying entity stipulates, typically for three to five years. The agreement likely states that you can’t start another company, be employed by, or invest in a competitive entity inside of the named geographic territory.

While this certainly restricts your post-deal options, you will most likely be free to start another MSP in a different territory. For example, if the MSP you are selling is based in the northeast and serves clients in New York, New Jersey and Connecticut, it’s likely you can move to Florida or Texas or any spot outside the northeast corridor and start a new MSP in the new location or work for one. Although a non-solicit makes sure that plan does not including taking clients from the buyer you just sold your business to.

Helping Employees Navigate

Once you’ve settled on what your own post-sale landscape looks like, remember that you will likely have some difficult conversations with a few of your current employees before the deal closes, and all of them after. In most cases, these folks are more than employees; you’ve likely worked side-by-side with them for years.

Those that are considered “key” employees will be the ones that may need to know what is happening before the transaction closes. That includes being brought into the deal inner circle of secrecy, likely being interviewed pre-deal by the buyer, and potentially need to be completely on board for the deal to close.

Consider the conversations, some of them difficult, that likely await you:

  1. Answering employee questions such as “How could you sell?” or “How could you sell to these people?” or “What’s going to happen to me?”
  2. Telling long-time employees that the new owner won’t be making them offers of employment.
  3. Counseling the employee who is pivotal to the deal and wants to leave.

Despite the emotional toll on you during the pre-sale period, your employees need you to be open and honest in answering their questions. Expect them to err on the side of shock as the decision to sell is news to them. You’ve been contemplating all the angles for some time, but they likely haven’t been part of the discussion.

In the case of the pivotal employee who wants to leave, you may need to pay a hefty retention bonus to him or her for a commitment to stay for a certain period of time. This is on the seller to make happen to give the buyer comfort. It could be that once the integration of the two companies is complete and the employee has a clearly defined role, he or she could elect to stay longer. Relying too heavily on an employee or two can unfortunately set a seller up to be held hostage so it’s important to plan accordingly on how this will affect a sale.

MSP owners who are contemplating a sale should expect the experience to be an emotional rollercoaster from start to finish – no matter how much money they make. However, working through the emotional impact their decision will have on themselves, their inner circle and their employees is time well spent.

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