MSP Exit Strategy: Are You in the Golden Quintile?
What percentage of your financial assets are tied up in your MSP? Chances are, most of them. The Exit Planning Institute estimates that small business owners have 80-90% of their financial assets tied up in their business. Yet only around 20% of small business owners are able to sell. In other words, four out of every five of you won’t be able to extract the value you want from your MSP when the time comes to retire. To improve those rather dismal odds, and get yourself into that Golden Quintile, you need an exit strategy.
It’s a maxim in retirement planning that the earlier you start saving your money, the more you’ll have by the time you retire. When your business is your retirement savings, the principle is basically the same. Every action you take today should be in the context of building a business that you can sell when the time comes. The good news is that the 20 percent of businesses that sell are also the most successful, profitable ones in their industries. Now is always a good time to start building a better MSP.
Buyers want businesses with strong revenue, EBITDA and growth numbers. Multiples on revenue are just over 1, multiples on cash flow closer to 3. Those numbers haven’t changed much over time — a buyer will only pay the value of the ongoing cash flow of the business, especially if they know that the seller is motivated (i.e. looking to retire) and that there are other options (think about how many other MSPs are out there).
So think about how much money you want to retire with. Even if you assume 3x EBITDA, which might actually be optimistic, just divide that target retirement amount by 3 and that’s where your business needs to be. Now look at where you are today, and what your historic growth rate is. Do those numbers line up?
How to Get There
If the numbers don’t quite add up yet, no worries. Start doing the things today that will increase revenue, lower your expenses, and put you in a position for growth. These things are not at all mutually exclusive. In fact, the opposite. Increasing revenue means giving your customers what they want. Every customer wants value, but value isn’t always about a low price tag. If you’re saving your customers a lot of money because you solve their problems in minutes instead of hours, or because you’ve got them running at 99.9% uptime, you can still bill at a premium.
The pathway is through efficiency. The ability to execute processes quickly, accurately, and reliably over a long period of time is a proven pathway to making customers happy while lowering your costs. The MSP owners most likely to get full value when selling their business are the ones that invest in tech and automation that fosters efficiency, the elimination of waste, and superior customer service. A tool like IT Glue, when optimized, can improve every aspect of your business, and help get you into that Golden Quintile.