MSP and ITSP M&A terminology… lots of big words often putting seller and buyers at odds before they even first speak to one another because of their different thoughts on the definitions.
Animosity and misunderstanding can doom a deal before it even starts, or kill it at a variety of points along the way from pre-offer to close.
One of the keys to being a good buyer is being a “sophisticated” buyer, allowing you to make good decisions on buying a business that fits your investment criteria and strategy.
An important aspect in maximizing the extraction of business value upon a sale as a seller is thinking like a sophisticated buyer as they are the ones making the investment you want to cash in on.
Below is some helpful terminology:
| Unsophisticated Seller | Terminology | Sophisticated Buyer |
| Revenue that repeats itself monthly, quarterly or annually. | Recurring Revenue | Consistent, contractual revenue with a history of proper financial booking on a monthly, quarterly or annual basis. |
| 2 or 3 large clients posing minimal risk to me and therefore minimal risk to a much larger Buyer. | Client Concentration | Any client that is more than 10% of revenue poses additional risks that diligence will determine need for risk mitigation. |
| Our contracts are 1 or more years long and have a 60-day client out clause for any reason. We also typically don’t get them re-signed so they default to 30-day contracts. | Long Term Contracts | Client contracts are 1 or more years long with only an out for stipulated cause, are evergreen, and contain an automatic minimum rate increase annually. |
| Team of current management employees that take over after I do post-close transitions. | Seller Management Team | Team of current management employees that can operate the business without support of the exiting founder(s). |
| A lawyer I trust and knows my business that will protect me in getting the deal closed. | Seller Legal Counsel | A lawyer or law firm that is versed in M&A transactions of the complexity at hand and ideally this space. |
| Removal of any costs we think the business overspent on and what we think a Buyer will not need as an expense going forward. | Addbacks | Reasonably removed one-time expenses, owner benefits, and non-operating related costs. Having many or large adjustments signals problems. |
| It doesn’t matter if I pay myself too much or too little to work in the business as it’s an Addback I should get a multiple on. | Owner Compensation | Proper annual salary and benefits that would be paid to an individual hired by the company for the same role and duties the owner is performing as an employee of the business. |
| Financials we feel represent how the business truly runs. | Normalized Financials | Clean financials adjusting out proven Addbacks. |
| EBITDA after removing Addbacks and all Owner Compensation plus adding in Buyer Consolidation and potential Synergies. | Adjusted EBITDA | EBITDA resulting from Normalized Financials and proper Owner Compensation that are well documented and justifiable. |
| Comparing my business to what I have heard others say they were paid for their business in this space. | “Market” | Comparing what recent closed deals of the same structure, size and risk profile look like in this space. |
| A level of intrusion I will control while handing over only enough information that I think the Buyer needs to be good with paying the Purchase Price. | Due Diligence | Financial, legal, HR, and operational discovery on the Seller’s business to prove out the Purchase Price, assess Risk Mitigation and craft proper Transaction Documents. |
| An Intrusive financial diligence the Buyer will use to change the deal and/or structure of payments. | Quality of Earnings | 3rd party diligence, often required by funding sources, to verify Seller “earnings” compared to what they presented pre-offer and also the “quality” of their books in terms of accuracy, reliability and sustainability in the future. |
| A way to create a Buyer issue that allows them to add deal structure or pay less for my business. | Risk Mitigation | Safeguards put in place to reduce or eliminate legal, financial, or operational threats discovered during diligence. |
| We raise prices on most clients every year plus new logos annually, but sporadic and through referrals. | Seller Growth | There is both farming and hunting that are process driven by a team and can be proven as repeatable post-closing. |
| Growth the Buyer will create on top of my clients that I should see the majority of the benefit from. | Growth Opportunities | Future potential growth above what the selling business is expected to do. If significant enough in the short-term, the Seller may be granted deal structure to share in upside if achieved. |
| My employees the Buyer is looking to fire to save money and not pay me a multiple on. | Consolidation | Elimination of myriad redundant expenses expected soon after closing to help achieve modeled deal ROI. |
| Gains the Buyer will definitely see and not pay me a multiple on. | Synergies | Future potential operation and/or financial gains due to better pricing, cross-selling, etc. to help achieve modeled deal ROI. |
| The total amount of money I expect to get paid for my business, no matter what. | Purchase Price | The total amount expected to be paid assuming no risk mitigation structure is triggered. |
| Purchase agreement needed to memorialize deal terms agreed to in the LOI. | Transaction Documents | Various agreements and schedules necessary to spell out deal structure, legal issues, and ramifications/recourse, which get more complex depending on deal terms. |
| A Buyer following along my thoughts of Adjusted EBITDA, “Market,” Due Diligence and Transaction Documents. | Reasonable | A Seller following along industry standards of Adjusted EBITDA, “Market,” Due Diligence and Transaction Documents. |
| An outcome that pays me back the blood, sweat, and tears of running this business for X years. | Fair Outcome | Paying a reasonable price for an investment that is properly risk mitigated and likely to achieve goals on ROI. |
Perspective note: This article reflects Cogent Growth Partners’ perspective, shaped by 16 years in business and experience advising on more than 200 closed transactions in the IT services and MSP market.
