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[00:00:45] Do you want to talk about the TikTok ban?
[00:00:51] Like what does that mean?
[00:00:52] What does that mean is this?
[00:00:53] The government doesn't understand what social media can be used for.
[00:00:58] They only think it's for bad and that's because some of them are run by lizard people.
[00:01:02] But the other ones, I think the problem with TikTok honestly is that the government doesn't
[00:01:08] have any sort of control on it.
[00:01:11] And it's way, I mean look at all fairness, my TikToks are like dad jokes, puppies getting
[00:01:17] haircuts and food.
[00:01:19] So like I'm really not one to talk.
[00:01:22] But I think it really is that the government doesn't recognize the freedom of speech that
[00:01:28] can be had on this platform.
[00:01:29] And I think that's what scares them.
[00:01:30] And I think that banning TikTok is not going to do anything because I think something
[00:01:36] else will just, something else.
[00:01:38] Correct.
[00:01:39] It's the illusion that TikTok, because it's TikTok and it started in China is inherently
[00:01:44] bad.
[00:01:45] Right.
[00:01:46] They don't have any more control over Facebook or LinkedIn.
[00:01:49] Right.
[00:01:50] Yeah.
[00:01:51] So the American version of TikTok is run by a guy who's from Singapore.
[00:01:57] We've had this conversation.
[00:01:59] It's not even run.
[00:02:00] He has no connections.
[00:02:02] Well, at least you shouldn't have any.
[00:02:05] I'm taking it to face value of what he said at the Senate hearings.
[00:02:08] He doesn't have any connections to the Chinese government.
[00:02:10] So like if that is true and we want to believe what he says, not listen to whatever
[00:02:16] Senator was grilling him on, did you have Chinese food today?
[00:02:21] Kind of level questions.
[00:02:22] Yeah.
[00:02:23] Yeah.
[00:02:24] Obama put it out the best years ago.
[00:02:25] Obama had a thing where he was just like, it was to get people to vote and he was like,
[00:02:28] do you want grandpa telling you what to do with the Internet?
[00:02:31] No.
[00:02:32] Go out there and get new senators.
[00:02:33] Go vote.
[00:02:34] Like that was the whole thing that he did.
[00:02:37] But that's kind of where I'm at with the TikTok thing.
[00:02:39] So yeah, I like my TikTok.
[00:02:42] I'll tell you this much.
[00:02:43] I found my new favorite TikTok.
[00:02:44] I'll share this part.
[00:02:45] Yesterday I was scrolling and someone did a TikTok live and it was just Winamp.
[00:02:51] Like playing awesome 90s techno music.
[00:02:53] And it was just Winamp.
[00:02:54] It was just a graphic of Winamp and it brought me back so bad and I literally commented that
[00:02:59] it kicks the lawn of his ass, which is what the Winamp slogan was.
[00:03:02] And nobody got it and it made me cry.
[00:03:04] Yeah.
[00:03:05] Been an ear, an ear, an ear.
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[00:03:37] What's up everybody?
[00:03:38] Welcome to the All Things MSP Podcast.
[00:03:39] I am your host, Justin Escar.
[00:03:40] With me always is my good friend podcast producer extraordinaire keeper of the pirates.
[00:03:47] Eric Anthony Eric.
[00:03:49] How are you?
[00:03:50] How you be doing today?
[00:03:51] Just producing the pirate out of this thing.
[00:03:54] Or pirating the producing.
[00:03:58] I don't know something like that.
[00:04:00] Do you remember when the MPAA put out those like don't pirate ads?
[00:04:11] And then the IT crowd, which if you haven't seen as a British TV show and it's amazing
[00:04:15] and you should watch it, made fun of it.
[00:04:17] And they were like, you wouldn't you wouldn't kill a police officer.
[00:04:21] You wouldn't then defecate in that police officer's hat and then bring it to the
[00:04:25] grieving widow don't steal movies.
[00:04:27] Like it was like the funniest.
[00:04:30] Now, because of copyrights, I couldn't put the actual clip
[00:04:34] that Justin is mentioning from IT crowd into the podcast.
[00:04:37] However, if you go and check out the notes for the podcast,
[00:04:41] you'll find the link to the YouTube video.
[00:04:43] And it is worth watching.
[00:04:45] Go watch it after you watch the podcast.
[00:04:48] Listen to the podcast, whichever you're doing.
[00:04:51] Yeah, I think I still have some either really old DVDs or VHS tapes
[00:04:57] with that ad on it.
[00:05:00] Or it's not.
[00:05:01] Oh, yeah, not the IT crowd version of the ad, but the actual ad of like,
[00:05:05] yes, don't yeah, the MPAA, they mean murder.
[00:05:08] That was horrible.
[00:05:10] Let's talk about some other things that start with an M and end with an A.
[00:05:12] Mergers and acquisitions.
[00:05:14] We have a guest today.
[00:05:15] I love it when we have a guest, Mr.
[00:05:17] Adam Boerth, VP of the Vista business group.
[00:05:21] What's up, dude?
[00:05:21] How are you?
[00:05:23] Hey, doing well.
[00:05:24] Thanks for having me.
[00:05:24] I'm going to turn that as a hot mic.
[00:05:26] I apologize for it.
[00:05:27] We'll see what we can do.
[00:05:28] Adam, real quick, why don't you give everybody two minutes?
[00:05:30] Spill, who are you?
[00:05:31] What's the business business group and that map behind you?
[00:05:34] How many of those places you've been to?
[00:05:37] A number of them.
[00:05:38] Yeah, actually, yeah, a world full of places.
[00:05:44] So two minutes on who I am.
[00:05:47] As you said, VP at Vista, we're an M&A group.
[00:05:51] We specialize in working with IT businesses that didn't always used to be the case.
[00:05:55] But when when Vista, when COVID hit,
[00:06:02] and we had an MSP listed for sale, a restaurant
[00:06:05] and an asbestos removal business.
[00:06:09] And it was very obvious there was continued demand for the MSP.
[00:06:14] And everything else fell apart.
[00:06:15] So like a hard, hard shift.
[00:06:19] And that's what we focused on full time from that point forward.
[00:06:22] So it sounds like the start of it.
[00:06:23] It sounds like the start of a real good joke.
[00:06:24] An MSP restaurant and asbestos business are for sale.
[00:06:29] Yeah, right.
[00:06:29] Yeah, good call.
[00:06:30] We're walking to a bar.
[00:06:31] Yeah, they walk into one.
[00:06:32] Yeah, yeah.
[00:06:33] The owner of the three companies walk into a bar.
[00:06:35] They all ordered shots.
[00:06:36] Um, well, I'm glad you're here.
[00:06:39] I want to talk a little bit about M&A.
[00:06:41] Full transparency.
[00:06:42] Adam and I have tried to work together in the past.
[00:06:44] There is he's brought companies that have potentially been
[00:06:47] interested in buying my company, but then they got to talk to me
[00:06:50] and I screw it up or I've or I've gone to him and we talked
[00:06:54] about potentially buying someone else.
[00:06:56] And I do want to mention real quick, there's an entire
[00:06:58] we're not going to get into today, but there's an entire section
[00:06:59] on M&A in Mark Koteman's book.
[00:07:01] We've had him on the podcast before MSP secrets revealed episode two.
[00:07:05] And yours truly is in there.
[00:07:06] Check it out on page 206.
[00:07:08] All right, enough of that.
[00:07:09] So let's talk a little bit, Adam, about what is it mean?
[00:07:15] Because people throw M&A out all the time.
[00:07:18] Right.
[00:07:18] They, oh, I'll get acquired and I'll merge.
[00:07:21] I'll do whatever.
[00:07:22] But like, I don't think people really understand the crux
[00:07:24] of what it means to be in a deal like that in a merger
[00:07:29] and acquisition because I don't think I think a lot of people,
[00:07:34] especially MSP owners think that you're just handing off
[00:07:37] a book of business.
[00:07:38] Right.
[00:07:39] And like, that's it.
[00:07:42] Here's my here's my contact list.
[00:07:44] Bye.
[00:07:45] And like, that's what an M&A is.
[00:07:46] Right.
[00:07:47] Can you kind of go a little bit deeper into, you know, what
[00:07:51] kind of deals you've seen or how things have happened
[00:07:53] within the M&A, you know, between MSPs?
[00:07:58] Yeah, you bet.
[00:08:00] So regardless who the buyer is and regardless of what
[00:08:03] the business looks like, there's always going to be
[00:08:05] a minimum transition period.
[00:08:08] And for an MSP, that's, you know, three to six months
[00:08:11] for an average MSP and you're, you're providing a soft
[00:08:18] handoff of the business over to the new owner.
[00:08:22] And so, you know, half the time, half the time people
[00:08:29] want to stay with the business, half the time they don't.
[00:08:32] And, you know, for the people that are hearing that
[00:08:36] going, gosh, I don't want an old owner sticking around.
[00:08:39] Like, that doesn't, doesn't sound good.
[00:08:43] You know, it's funny.
[00:08:45] There's there's a lot of times, you know, people, they
[00:08:49] strike off on their own and they want to, they want to
[00:08:52] start their own business and then they hire a couple
[00:08:55] people along the way and then and then they look
[00:08:57] up and look around and go, gosh, you know, I have
[00:08:59] to run a business that sucks.
[00:09:01] That's not fun, you know?
[00:09:03] And so they're and at the same time, they also have
[00:09:09] really strong, they have chops, right?
[00:09:11] They have really strong technical skills.
[00:09:13] So they're more than happy to sell the business
[00:09:18] and then stay on as an employee, you know, assuming
[00:09:21] that there's there's good chemistry between them
[00:09:23] and the new owner.
[00:09:24] So it's about half the time people stay, half
[00:09:28] the time they don't.
[00:09:29] So and then and then as far as to your point, it is
[00:09:36] more than just selling the book of business.
[00:09:39] You know, one guy's like, well, well, but if there's
[00:09:43] an MSP buying my business, they just need the
[00:09:46] client list and that's it.
[00:09:48] And they don't need my staff.
[00:09:49] So we can add all of their expenses, all of
[00:09:52] my staff expenses back to my EBITDA and and
[00:09:55] I can have a need for an office because well, they
[00:09:59] already have an office like, dude, no, not how this works.
[00:10:04] So they are buying the entire business in regardless
[00:10:09] of whether it's an asset sale or regardless of what
[00:10:12] its structure does, an asset sale or a stock sale.
[00:10:16] Either way, it's the whole business.
[00:10:19] And so along along with the names of the
[00:10:23] clients and those relationships, so too goes
[00:10:29] the employees and the rent and everything else, every
[00:10:34] aspect of it.
[00:10:34] So and on the note about on the topic of employees,
[00:10:44] you know, that's a logical concern that a lot
[00:10:48] of folks have is well, what are they going to do
[00:10:50] with my employees once they take over the business?
[00:10:54] 90% of the time 95% of the time they're going to
[00:10:57] want to keep all your employees.
[00:10:59] Unless you're grossly overstaffed, but they're
[00:11:02] going to want to keep your employees because
[00:11:04] that's the engine that makes your business run.
[00:11:06] And if you think about it, they're not going to
[00:11:09] be buying your business most of the time.
[00:11:12] They're not going to be buying your business.
[00:11:14] It's not already successful.
[00:11:16] Yes, there are the occasional people that
[00:11:18] all they're doing is looking for a broken business.
[00:11:24] But those are by far the exception, not the rule.
[00:11:26] So they're going to want to keep everybody in
[00:11:30] place as much as possible.
[00:11:32] I can't answer your question.
[00:11:34] Yeah, no, it totally does.
[00:11:34] Thank you.
[00:11:35] And I can't tell you like we've acquired three
[00:11:37] businesses during the pandemic time, right?
[00:11:40] We acquired another Apple consultant.
[00:11:42] We acquired a training company and another
[00:11:45] Apple consultant who's also an Apple
[00:11:46] authorized service provider.
[00:11:47] And I think every time I did that deal and again,
[00:11:50] full transfer, I did not do those deals with Adam.
[00:11:54] But I structure those deals differently every
[00:11:58] time because I honestly have no idea what I'm doing.
[00:12:00] And the amounts that we paid for these companies
[00:12:04] also were like based on my own willingness to
[00:12:10] pay X amount of dollars, which I can totally
[00:12:12] understand as a buyer, what they're willing to
[00:12:14] pay. But like I didn't even know how to
[00:12:18] evaluate these companies.
[00:12:19] So what if someone's looking to get
[00:12:22] looking to get bought, right?
[00:12:24] Because I've had people once people
[00:12:25] found out that I was acquiring people,
[00:12:26] I everyone under the came out from another.
[00:12:29] I'll sell you my business for three times
[00:12:30] its valuation. I'm like, you can keep
[00:12:32] your $30,000, dude, like leave me alone.
[00:12:35] You know, how does how does an MSP
[00:12:41] value themselves?
[00:12:43] And I know what you're going to tell me is
[00:12:45] there's a form and I should have filled it out,
[00:12:46] but I didn't. But like how can how can
[00:12:49] MSP like quickly value themselves?
[00:12:52] So they have an understanding of like where
[00:12:54] do they stand in the in the scheme of things?
[00:13:00] Yeah, that is an excellent question.
[00:13:04] A shameless plug here.
[00:13:07] If somebody is thinking about selling,
[00:13:10] we're happy to put together a valuation for them.
[00:13:12] And, you know, again, if they're seriously
[00:13:16] thinking about selling, then
[00:13:19] then typically we don't charge for that.
[00:13:22] But but and I just mentioned that because,
[00:13:26] when I have conversations with folks,
[00:13:28] it's always from, you know, 30,000 foot view.
[00:13:32] And we go from that getting down to
[00:13:34] real specifics with the valuation.
[00:13:36] But to answer your question for like a ballpark.
[00:13:41] So what drives the value for an MSP
[00:13:44] is 90% of it is your EBITDA.
[00:13:49] So as as your EBITDA grows,
[00:13:52] so too does the multiple that goes along with your business.
[00:13:57] So I always say multiple for case somebody isn't familiar.
[00:14:00] So there's you take your EBITDA
[00:14:03] and you multiply it.
[00:14:04] You're EBITDA and you multiply that by the multiple
[00:14:08] that's specific to your business.
[00:14:10] And then that's how you arrive at a total dollar amount, right?
[00:14:15] So what drives the vast majority of the value is your EBITDA.
[00:14:21] And as your EBITDA grows, so too does the multiple.
[00:14:25] And that kind of makes sense because
[00:14:28] if you step back and think about it,
[00:14:31] a bigger EBITDA means a bigger organization.
[00:14:34] It's more of a well-oiled machine.
[00:14:37] And ultimately there's less risk there.
[00:14:40] And anytime that there's less risk for the new owner,
[00:14:43] then the seller can charge more of a premium, right?
[00:14:46] So that's why the multiple increases as EBITDA does.
[00:14:52] So that's what drives 80, 90% of the value.
[00:14:56] And then there's factors for certain things.
[00:14:59] And for MSPs that's factors for
[00:15:02] what percent of your revenue is regular occurring
[00:15:05] versus projects and product sales.
[00:15:08] And there's really no super important line
[00:15:13] in the hard and fast line in the sand
[00:15:15] because everybody is different, but if you're at 50 to 60%,
[00:15:22] really like 60% is a pretty good number.
[00:15:26] That's always gonna be more attractive
[00:15:29] than the business that doesn't have recurring revenue.
[00:15:32] And you can also go too far to the extreme on that too.
[00:15:37] Some folks they think that it has to be
[00:15:39] 100% recurring revenue and that's fine.
[00:15:45] But if you take that approach,
[00:15:47] then that means that you're passing up
[00:15:51] on free low hanging fruit,
[00:15:53] get really easy product sales, really easy projects in.
[00:15:58] It also means you're probably turning away a project
[00:16:00] from somebody that's not a client yet,
[00:16:04] and you can get your foot in the door with that new client.
[00:16:08] Yeah, we've covered a lot of that with our pricing episode
[00:16:11] a couple of weeks ago where we were talking about
[00:16:13] doing MRR versus break first versus hybrid.
[00:16:16] And I think these are, okay, you've said EBITDA now
[00:16:18] 45 times and I'm pretty sure
[00:16:23] at least 30 people who listen to this
[00:16:24] don't know what that is.
[00:16:26] Without being super accounting technical,
[00:16:31] what is EBITDA?
[00:16:33] Yeah, it's an accounting figure
[00:16:37] that its purpose is to measure your net cash flow.
[00:16:41] So it's earnings before interest, taxes,
[00:16:45] depreciation and amortization.
[00:16:48] And so basically if you take your net income
[00:16:51] and then add those things to it,
[00:16:53] that's how you get to your EBITDA.
[00:16:56] And then there's also, when you discuss EBITDA,
[00:17:01] there's also adjustments or add-backs,
[00:17:06] that's also what it's called.
[00:17:07] And so it's adjustments,
[00:17:08] there's really like two main categories.
[00:17:11] So one is for personal expenses,
[00:17:13] if you happen to run personal expenses
[00:17:17] through the business for tax purposes.
[00:17:19] I don't know, whatever do that.
[00:17:21] Yeah, all right.
[00:17:23] Then those aren't real expenses of the business.
[00:17:28] And so it makes sense that you would add those back
[00:17:31] to your EBITDA because that's not an expense
[00:17:33] that the new owner is gonna have.
[00:17:35] But the rule of thumb there is
[00:17:38] you want it to be an actual,
[00:17:40] legit personal expense and not just
[00:17:44] like something that's buried in your financials
[00:17:47] where it says Costco, 50 bucks this month.
[00:17:51] Well, what is that really for?
[00:17:54] 50 bucks.
[00:17:55] I'm buying the chocolate chocolate chip muffins
[00:17:57] for the office, which by the way,
[00:17:58] those are the best.
[00:17:59] I've never gotten out of Costco for less than a hundred bucks.
[00:18:03] Did you buy the chocolate chocolate chip muffins?
[00:18:05] Dude, they're microwaved them for 30 seconds,
[00:18:07] I'll change it all.
[00:18:08] Anyway.
[00:18:09] Yeah, you're fine.
[00:18:11] No, I love Costco too.
[00:18:12] But the other major category of add-backs
[00:18:16] is one time business related expenses.
[00:18:21] So if you have my favorite example,
[00:18:25] if you redid the office furniture,
[00:18:27] you're not gonna do that every year.
[00:18:29] That's a once every 20 years type of thing.
[00:18:32] And so the new owner,
[00:18:35] they're not gonna have that expense going forward every year.
[00:18:38] So it makes sense to add that back to EBITDA.
[00:18:42] So when people talk about EBITDA,
[00:18:45] it's the adjusted EBITDA,
[00:18:47] that's really the number that's important.
[00:18:51] And so for a company,
[00:18:53] because we're talking about the valuation number
[00:18:55] for a sale, right?
[00:18:56] This isn't necessarily the valuation
[00:19:00] of how well your business is doing, right?
[00:19:02] Because it's a percentage,
[00:19:04] not necessarily a total grossed amount, right?
[00:19:09] Yeah, so correct, yes.
[00:19:17] No, I know I'm correct.
[00:19:18] I was just saying right
[00:19:19] because I wanted you to pick up this sentence,
[00:19:20] but that's a lot of people.
[00:19:22] Yeah.
[00:19:28] Not sure exactly the direction you're headed with that,
[00:19:31] but yeah.
[00:19:32] So typical EBITDA margins are with add-backs
[00:19:37] for a reasonably well-run MSP,
[00:19:40] it's gonna be around 20%,
[00:19:42] not always some bad, but often around there.
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[00:20:13] And then to pick back up on where we were headed earlier
[00:20:16] on the other factors for what drives the multiple
[00:20:22] for a business.
[00:20:24] So the first one I mentioned is recurring revenue
[00:20:27] and again, around 60%,
[00:20:30] that's kind of an official magic number.
[00:20:37] And then tied to that then is what do your contracts look like?
[00:20:44] Is it month a month, is it annual, is it multi-year?
[00:20:49] In general, the longer the better.
[00:20:52] And some folks they really back at that
[00:20:54] have a huge pushback and it's like, well, my clients don't,
[00:20:57] okay, I'm just telling you, when you go to sell your business,
[00:21:01] there is a little bit of a premium for a business
[00:21:04] that has contracts and again, the longer the better.
[00:21:10] What's funny you're talking about this
[00:21:11] because a little while ago, I had someone come to me
[00:21:15] and they were interested in talking about a merger
[00:21:18] or us acquiring them.
[00:21:20] And my first question always is,
[00:21:24] what's your monthly recurring revenue on contract?
[00:21:29] And they go, well, we don't do contract.
[00:21:31] And I go, then your value is zero to me.
[00:21:34] And they were, and like, I was being a little bit
[00:21:38] of a piss hand about it,
[00:21:39] but like because obviously there's money to be had there,
[00:21:41] but like, I'm like, if you don't have anyone on contract,
[00:21:45] the value of those customers is tied to you, the person.
[00:21:50] And if you're looking to eventually get out
[00:21:53] and even if we do three, six, even a year long,
[00:21:58] after that year, there's a chance that they're gonna bail
[00:22:01] because maybe in during that time,
[00:22:04] you original business owner didn't do a good enough job
[00:22:07] to explain to them that I, new business owner,
[00:22:10] am bigger, better, better.
[00:22:12] And therefore they're still tied to you
[00:22:13] that if in course of 12, and granted, obviously
[00:22:15] there's a couple other pieces involved here
[00:22:17] like it'd be on me or whatever.
[00:22:18] But like the assumption is that I would be getting involved.
[00:22:22] But if they don't do that, let's say it's a short run,
[00:22:24] a three month run, I wanna be out in three months.
[00:22:27] In three months for you to tell all your customers,
[00:22:29] stop texting me, text Justin or whatever,
[00:22:31] like if that doesn't happen, they're tied to you.
[00:22:34] And therefore if there's nothing on contract
[00:22:37] and then you leave and then they leave,
[00:22:39] I now have just spent all this money on your business
[00:22:42] that I might be paying out over the course of one,
[00:22:44] two, five years and I have no income from it.
[00:22:48] So like the idea behind clients on contract,
[00:22:53] and it's funny because we haven't, Eric,
[00:22:56] we haven't really talked about the idea of contract length.
[00:23:00] We've talked about putting things in your contract
[00:23:02] and clients should sign a contract
[00:23:04] but we never really talked about client length.
[00:23:05] And we all know that nobody likes,
[00:23:07] nobody was happy when Kaseya did their three year
[00:23:10] auto renewal contract thing.
[00:23:11] And everybody's like, I'm not gonna be like them,
[00:23:13] I'm gonna do month to month.
[00:23:15] But what you're forgetting is, what you're forgetting is
[00:23:17] if you as an MSP wanna do month to month,
[00:23:20] your valuation may not be as high as you think it is.
[00:23:24] You wanna say something about the Kaseya thing
[00:23:26] I see it in your eyes, Eric?
[00:23:27] No, no.
[00:23:28] I mean, I think that everybody has the right
[00:23:31] to do the contracts however they want, right?
[00:23:33] I think that in the way you execute them,
[00:23:37] the way you renew them,
[00:23:39] sometimes those practices can be predatory
[00:23:41] but I don't wanna talk about that.
[00:23:43] I wanna talk about the fact that yes,
[00:23:46] absolutely the stuff you're talking about, correct.
[00:23:49] If you don't have a contract in place with those clients,
[00:23:52] there is nothing that says those clients aren't going to leave.
[00:23:55] It's the worst thing for you to do
[00:23:57] to spend hundreds of thousands or a million dollars
[00:24:00] or more on a business and have them all walk out.
[00:24:04] And again, like you said, you're left with nothing.
[00:24:07] That's what makes those contracts valuable.
[00:24:10] Now the other side of that is,
[00:24:12] contracts depending on how they're written
[00:24:15] are more enforceable or less enforceable.
[00:24:18] So you actually have to look at the quality
[00:24:21] of the contracts themselves.
[00:24:23] And the last word that I'll have on this part
[00:24:26] is that if you're doing month to month,
[00:24:29] you have to recognize what you're losing
[00:24:31] on the backend in business value
[00:24:34] and make sure you're charging more for it
[00:24:36] to make up for that.
[00:24:40] Absolutely.
[00:24:42] From an M&A perspective, there's a couple of points there.
[00:24:46] One is it's not like it's gonna quadruple
[00:24:52] or quintuple the value of the business
[00:24:54] going from no contract to contract,
[00:24:55] but it does move the needle.
[00:24:57] Like it does.
[00:24:58] That's just the reality of it.
[00:25:01] And really cross the board buyers say
[00:25:05] in countless different ways,
[00:25:07] but ultimately it's reducing risk.
[00:25:10] Why?
[00:25:11] Because there's a higher level of,
[00:25:14] it speaks to there being a higher level of commitment
[00:25:18] that the client has with you as the MSP.
[00:25:21] So and then the other part to that too is,
[00:25:26] if the deal's put together properly,
[00:25:28] then you would think that the seller
[00:25:31] would work with you through the transition period.
[00:25:35] And even before you get to closing,
[00:25:38] hopefully you would have a good transition plan,
[00:25:43] at least a one page plan put together.
[00:25:47] You should have something in the contract
[00:25:48] when you're buying them also
[00:25:49] about a transition plan for sure.
[00:25:53] A lot of times there's performance tied to that.
[00:25:56] And we started out this conversation
[00:25:59] in the beginning talking about how some owners stay on,
[00:26:02] some owners don't wanna stay on,
[00:26:04] but it will reduce the risk if the owner stays on
[00:26:08] to make sure that that transition happens
[00:26:11] in a more orderly fashion.
[00:26:13] Because so many MSPs are small enough
[00:26:17] that the business owner is still the head technician,
[00:26:20] the primary sales person, they're the point of contact.
[00:26:24] They're the main person at the company.
[00:26:27] And so if you don't solve for that,
[00:26:30] it can represent risk.
[00:26:32] Yeah, so what you brought up is,
[00:26:39] it's essentially, it's an earn out.
[00:26:41] And that there's different ways,
[00:26:44] that there's different ways to make sure
[00:26:47] that the seller helps as much as possible,
[00:26:51] one of which being an earn out.
[00:26:54] So an earn out for people that aren't familiar,
[00:26:57] there's a couple main ways to finance the purchase of
[00:27:01] an acquisition, one is cash up front,
[00:27:04] another is seller's note, and then another is an earn out.
[00:27:07] And just on a side note, we typically don't see,
[00:27:12] we really don't see earn outs.
[00:27:17] Probably I'd say for the average MSP,
[00:27:23] the structure, it's typically it's like 85% cash up front
[00:27:28] with the balance being in the form of a seller's note.
[00:27:32] And the seller's notes basically where you're playing banker
[00:27:36] to the buyer and the note, it'll pay out
[00:27:40] over the course of three to five years
[00:27:42] or whatever the two of you guys agree on.
[00:27:45] And then the third way major component
[00:27:49] of financing that we see is just like what you mentioned,
[00:27:53] Eric, it's the earn out.
[00:27:55] So the earn out is very similar to a seller's note
[00:28:01] with the difference being that it's tied to performance.
[00:28:05] So it's saying me as the buyer,
[00:28:08] I'll pay you X amount of dollars for the business,
[00:28:12] but this much is contingent on the business hitting
[00:28:17] these certain pre-agreed metrics.
[00:28:20] And again, we don't see that very,
[00:28:25] where we really see that as like
[00:28:26] if there's a business has a big client concentration,
[00:28:30] like anything above 20% is considered big,
[00:28:33] but something real big like 50%,
[00:28:37] that might make sense for there to be an earn out there.
[00:28:39] Or also if the business is really small,
[00:28:42] we see it in that situation too.
[00:28:46] One of the things about earn outs,
[00:28:47] like usually you wanna tie it to
[00:28:52] if you do have an earn out,
[00:28:55] you wanna tie it to revenue,
[00:28:56] because that's really the only thing
[00:28:57] that the seller is gonna have control over moving forward.
[00:29:01] They don't have any control over how you run,
[00:29:04] what expenses you flow through there.
[00:29:06] So yeah, it's all both sides like tied to revenue
[00:29:11] because it's one of the cleanest ways you can do it.
[00:29:15] So...
[00:29:16] I mean, look, there's a lot to unpack here
[00:29:17] when it comes to M&A
[00:29:18] and we're not gonna really get to all of it
[00:29:21] in a 25 minute podcast.
[00:29:23] So if you are thinking about potentially
[00:29:25] either selling or buying a business,
[00:29:27] please reach out to Adam.
[00:29:29] Adam, where can people find you online?
[00:29:33] Yeah, vistabusinessgroup.com.
[00:29:36] Best way to reach me is to email me.
[00:29:38] And so it's adamborst at vistabusinessgroup.com.
[00:29:43] So it's 80amborst at vistabusinessgroup.com.
[00:29:51] In just in case they don't know how to spell business,
[00:29:52] it's BU and I'm just kidding.
[00:29:55] Yeah, reach out to Adam, talk about that.
[00:29:57] Like Adam said, he'll do a free evaluation of your company
[00:30:01] if you and then potentially move forward
[00:30:03] if it's something that you're really interested in.
[00:30:05] Being...
[00:30:06] If you're looking for growth,
[00:30:09] M&A is a great strategy for growing your MSP.
[00:30:12] I know many MSPs who have done that over time
[00:30:15] and have made, have gone from $100,000 a year
[00:30:19] to $10 million a year just through these different methods.
[00:30:22] And it is a worthwhile avenue
[00:30:28] if it's something that you're willing to pony up for
[00:30:31] and take on the risk.
[00:30:32] There is a definite inherent risk with buying companies
[00:30:37] and you need to take that into account as well.
[00:30:41] Any final thoughts on M&A?
[00:30:43] I was just gonna say, and because of that risk,
[00:30:46] don't do it by yourself.
[00:30:48] Because in full transparency, to use Justin's words,
[00:30:53] I did not have Adam to help me with my transition.
[00:30:58] And so it could have gone better.
[00:31:01] Yeah, it happens.
[00:31:02] Look, and that's the way we learn.
[00:31:04] And that's how we have stories to share with you here
[00:31:07] on the All Things MSP Podcast.
[00:31:09] Join us at facebook.com.
[00:31:11] Slash groups, slash all things MSP.
[00:31:13] Watch all of this happen in real time
[00:31:15] and look at Adam's awesome wood burnt map
[00:31:17] at youtube.com.
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[00:31:32] That's it for us.
[00:31:32] I'm Justin.
[00:31:33] That's Eric.
[00:31:34] Bye.
[00:31:36] Thanks for listening.
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