Mergers and Acquisitions, Channel investors, Mergers and Acquisitions

Friday’s Exit Strategy: Sell Your Business But Stay for Bonus Round?

You're set to sell your managed IT service business. Of course, the deal involves multiple inflection points. Perhaps the biggest of all: What will you do after you sell your business?

In our case, my business partner (Amy Katz) and I sold a media business in September 2011 (it was somewhat similar to the MSP model since we focused on recurring revenues). After the sale, we stuck around for 2.5 years, exceeded the earnout objectives, then resigned from that parent company in early 2014. What did we learn along the way from that previous business journey? Without revealing exact terms of our own deal, here are some questions and considerations for potential sellers to keep in mind...

1. All Cash Up Front: If the buyer pays you the entire sum up front, it likely means you're selling at a somewhat reduced price to get your hands on the immediate cash.

2. Want Stock?: Careful of what you ask for. Stock options can be sexy. And they're certainly tempting. But they can also turn into golden handcuffs -- keeping you around for the long haul in a position you may not love. I've had stock options while working for other companies four times in my life, and not once since 2005 or s0. I made some money twice. But not life-changing money. Not even "goodbye for a few months" money. Careful of the stock option hype.

3. Can't Get Stock?: Perhaps you really want stock options but the new owner won't grant them. That could be a clue... you're not considered highly valued to the business. Or in the case of private equity ownership of an MSP, perhaps no options is a potential yellow flag... (In our case it wasn't. But still food for thought.)

4. Earnout Targets: If a portion of the payment is based on meeting longer-term business objectives, be extremely careful of those objectives. In our case, my business partner (Amy Katz) handled negotiations for all of the earnout KPI targets -- and then she ensured that we exceeded them. Be careful to focus the KPIs on one metric -- rather than multiple metrics that may offset or compete with one another. For instance, you may want to push for revenue KPIs -- top-line growth targets. But the buyer may want to focus on profit margin KPIs -- taking costs out of your business. Stick with one -- not a mix of the two. And know for sure (before you sign on the dotted line) that you can achieve the KPIs.

5. Additional Bonus Money: Let's assume you exceed your earnout targets during the earnout period. Perhaps you hit the full-year targets in September of a given year -- leaving you October through December to coast, or perhaps even ramp up for the following year. Either way, figure out if you want additional upside for blowing away your targets. But don't overplay this during the M&A discussions, since the buyer could quickly realize that the initial earnout targets are too puny and need to be raised.

6. After the Earnout: You've gotten your money. They want you to stick around as a salaried employee. But the lucrative earnout perks are gone. This is another one of those big inflection points. Do you choose...

  • Door Number One: Stick around as a salaried employee -- without the stress of business ownership, but without the potential financial rewards as well.
  • Door Number Two: Negotiate aggressively for a new package -- perhaps including stock, perhaps something else that drives enormous value for the business.
  • Door Number Three: Pack your bags, take time off and consider your next move.

In our case, we chose door number three. (Confession: I sort of knocked on door number two but fortunately there was no answer.) The result was some time off before Amy Katz and I reemerged to launch After Nines Inc. in late 2014, plus ChannelE2E in late 2015, and MSSP Alert in mid-2017.

The journey continues. Let us know how yours is playing out.

Joe Panettieri (@JoePanettieri) is co-founder and executive VP of After Nines Inc. and its IT media platforms — ChannelE2E and MSSP Alert. His great grandfather arrived to the United States from Italy around 1917, charting the way for three generations of entrepreneurs.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.