Q: Within the next five years, I’d like to retire from the MSP business. I know I’m almost ready to hang up my hat, but I’d prefer to sell my business rather than just close my doors on my employees and loyal customers. What should I start considering now to make my retirement dreams a reality?
One of the toughest decisions a managed service provider needs to make is when to leave the IT services business. Whether you’re 30 years into your IT career or you’re simply ready for a change, figuring out what the next step is can be daunting.
To help you decide what to do next, we talked to MSP-Ignite owner and peer group facilitator, Steve Alexander. With his extensive background in the channel, Steve has seen numerous providers transition their business, so they could effectively step away and retire. He shared the following insight on how to develop a five-year plan, how to build your business so it’s attractive for sale, and how networking can play an important role when you’re nearing your retirement.
Developing your five-year exit strategy
The hardest part of transitioning into retirement is getting your business to the point where you can step away — personally and professionally. Most MSP business owners spend a lot of time working on their business, and many don’t have hobbies they regularly participate in. This can make retirement hard. On a personal level, it’s important to find hobbies you enjoy and participate in a few years before you retire.
On a professional level, it’s important to have an accurate view of your business value. Often, business owners are under the impression that the payout will be higher and that the business is worth more than it is—and many forget to account for capital gains tax. To effectively transition into retirement, you need a strong financial plan and an accurate understanding of your business’ value before you sell.
At any point in time, you should have a five-year exit strategy. The first three years should consist of growing your business at all costs. How can you make it grow? How can you add more predictable recurring revenue? During the first three years you should be spending the right money and resources to grow at a rapid pace.
The last two years should be about making the company as thin or as profitable as possible by running a very efficient business with a high net income. This might mean cutting back on sales expenses while making sure you’re properly staffed to support the business. Doing this can put you in a good position to make your business attractive to buyers.
Making your MSP attractive to buyers
If you want to make your company attractive for sale, it should be able to run without you in your day-to-day role. If you’re still the lead tech, in the escalation point, or if you’re the only one managing your clients’ accounts, then you’re not positioned to leave. If other employees are managing the day-to-day with your clients, then you’re putting yourself in a better position to sell. The appeal of your business comes down to two things: analysis of your profits and loss, and analysis of your organizational chart to ensure that you aren’t wearing too many hats.
If the CEO is paid like a CEO, it’s easy to extract the expense and have the role absorbed by the CEO from the acquiring company. If you’re an owner who’s doing multiple jobs and paying multiple personal expenses be prepared to disclose it all to a prospective buyer. To determine the overall value of a company, a buyer will be looking to see what positions are filled and what the “true costs” are.
It’s also important — if you’re not doing so already — to benchmark your MSP business against others. What is your net operating income? If you’re hovering at single percentage digits, your company isn’t going to be that interesting to a buyer, whereas 20 percent or better would be.
To get more help learning which benchmarks matter for your business, hire a consultant, use free resources like CompTIA, or join a peer group. To learn more about MSP-Ignite’s peer groups, visit the website here. Peer groups can help you learn firsthand about every step of the exit process, what challenges you may face, and what questions you should be asking.
Transitioning your staff
There’s often a cultural divide between companies during an acquisition—which can make the transition difficult. If it’s a retention-based buyout, it’s in your best interest to stay on a while to educate the buyer about your customer base and employees. Staying on can help your customers and employees know that they’ll be taken care of. If you’re thinking about retiring in a few years, consider staying on at least a year in a retention-based buyout — and adjust your time frame accordingly. It’s hard to make an entrepreneur an employee, which is why you need to remember that new owners might not enjoy your candor all the time.
Building your network
One thing I’ve noticed is that IT companies get very territorial with their competitors. But, those individuals are often your suitors when you’re looking to sell. Put yourself in a position to be well thought of. When you run into your competitors, instead of avoiding them, walk up to them and introduce yourself.
Choose to not only know your competitors, but also embrace them. That was the strategy I always took, and often if I had a customer looking at a competitor’s prices, I heard about it from them before the customer told me they were looking elsewhere. Ask your competitors what they specialize in so that you can send business their way. Ask them what they might not enjoy, and they could become a source for referrals for you.
The best acquisitions I had were people I already knew, and it was natural. One of the businesses was free. The owner just handed me his keys and said he was done — and two of the accounts he handed me became my second largest clients.
If you’re looking to sell or buy, creating relationships with your competition can help open new doors. That could mean no brokerage fees or a better deal for everybody involved.
Retirement is inevitable — or so we hope — which is why it’s important to plan ahead to position your MSP business for success. By following Steve’s advice and networking as well, you can not only gain valuable insight from your peers, but you can also develop relationships that might ease your sale transaction down the road. To learn more about how peer groups can help you, visit Steve’s website at MSP-Ignite.com.
Photo: vectorfusionart / Shutterstock.