Amy Babinchak | Avoid These Costly Mistakes When Selling Your MSP

[00:00:10] Hey everyone, welcome to the latest installment of MSP Business School. As always, my name is Brian Doyle and I'm here with you to be the guide today. But today we're going to talk about a topic that if anybody's an MSP, you've got to at least have in the back of your mind at this stage. Our guest is really experienced in what we're going to be discussing today and that's really about the time that you exit your business and what that looks like. But I'm going to jump right to it. I'd like to welcome to the podcast today, Amy Babinchak. How are you?

[00:00:40] Good. Thanks for inviting me, Brian. No, no, we're really excited to have you here. For those of you that don't know Amy, she is a huge thought leader within our space. If you've spent any time here, you've probably encountered her either through some of the training she provides, some of the resources she provides for acquisition, her time at NITSP as leading that organization as it started out, and certainly 22 years, I think you said it was, as an MSP? 23. 23.

[00:01:09] 23. So, you know, certainly a long time wearing the same moccasins as many of you out there. But with that said, Amy, I'm not going to do your background justice. Maybe you can kick off by telling us a little bit about yourself. Well, you know, like I said, I had an MSP for 23 years up in Michigan where I live. And I loved it, and it was my baby. And, you know, but there came the time when it was time to sell it.

[00:01:35] And I'm not retiring, not going away. I have two other businesses that I've had for a long time as well. I have Third Tier, which folks might be familiar with as a technical company because we started off doing technical support for other MSPs. They would call us and ask for help. And I had a bunch of experts on staff, and we would get them over the hump of what they were stuck on.

[00:01:58] And I also have a company called Sell My MSP. Sell My MSP is the impetus for this book. And Rand and I have been doing that for 10 years, helping other MSPs one-on-one get their businesses ready for that sale and coaching them through that sale day right to the end. And I skipped over something really important about Third Tier, and that is we don't do technical support anymore.

[00:02:22] What we do now is help MSPs. We help them out by training their staff through different courses that we offer. And then I also do one-on-one consulting with MSPs to help their businesses be better. We run some peer groups, stuff like that. So I'm all about helping people be more successful in their MSP, as you are. Well, I mean, I think as we get, you know, I won't call it later.

[00:02:48] I'll call it later in our careers and not at the end of the careers because I don't think any of us ever want to really go way away. But as we get to the later stages of our career, it also becomes about how do we share what we've learned and the mistakes we've made back with the community so they can avoid them? And how do we provide resources from those lessons learned to help them move faster, right? And this community has been amazing from a giving standpoint, right? It's one of the most go-giving communities probably out in the marketplace.

[00:03:15] And groups like yours in Third Tier that are really looking at providing training, but with that slant of, and you're a managed service provider as opposed to just the technical component, those things are huge because it is such a different approach model. Yeah, you know, as many of us did, are fortunate to have to be able to work in this field because it's just a passion of mine. I love to help, whether it's helping, you know, when I got started in this, right,

[00:03:43] helping somebody get more out of their computer so they can be better, more successful in their business. And now, you know, I still want to help, but I want to help my peers be more successful. Yep. And I think that servant mentality that drives most of this industry is why we keep getting better and better. You know, for those of us that were in the early stages of managed services, I think, you know, as we look back and see the evolution, it's amazing.

[00:04:12] And now with some of the digital natives sitting in the seats where they, you know, for me, when I go back to earlier in my career, we were selling computers to people that never touched them before and having to explain to them the why this is going to be good. Now we have people that have had those in their hands their entire lives, and they're making decisions that are definitely fostered more in efficiency, productivity, innovation, and certainly with an eye on security. And it's changed the game, but also those lessons we went through help form and shape the industry moving in that direction.

[00:04:41] And it's great to have folks like yourself that are willing to share what they've learned. And with that, let's maybe transition to what we're talking about today. I'll show this a couple times, but this is Amy's book here. 20 Questions Every Owner Should Ask Before Selling Their MSP. And I thank you for sending myself a copy. It's great. Even going through an MSP, I look at a book like this and go, man, I wish I had that. But nobody told me that when I went through the process once upon a time.

[00:05:11] It would have definitely changed things. But what I like is you're really telling it through the story of Skyler, who's really kind of a character that is the amalgamation of a lot of different people's process going through the M&A process and really allows you to build the 20 questions we talk about here. But with that, I'm going to transition it to you. And maybe you can tell a little bit about the book's aim and goal.

[00:05:37] And then I'm sure we can get into some discussions of what that means to you, the MSP. Yeah. My goal with this book was to help people start running a better business now and to get them thinking about what the end looks like for them. Because it's a little bit different for each person, right? We've all got different goals in life, different aims. We're coming from different places. What does it look like for you?

[00:06:05] And as I keep telling people, it's never too soon to start running a better business. And if you do the things in this book, you're just going to end up running a better business. And then when you get to the point when you're ready to exit your business, you don't have to scramble. It'll just happen. Right. So being prepared is the thing that this book is all about. And I want really someone to start thinking about it three or five years before they think

[00:06:35] they might sell their company. Because all the stuff in here is going to make your business better no matter what, even if you decide to never sell it. Right. But running a better business is what our goal is. And if you come to the point where you're ready to sell it, you will have done all the things to make that happen to get your highest, best value you can from it. Because this is probably very, very likely the biggest asset that you have.

[00:07:04] And you shouldn't just sell it on a whim. You should get ready for that. And we were talking about this briefly before we started our call today. But the statement of, and you can only sell it once, is truth. Even if you're getting that second bite in the apple, which a lot of the PEs will tell you, it's not the same as that first transition when you really let go. And that probably transitions into how you start the book. One of the things that I really liked about it was, you talked about the emotional toll first.

[00:07:33] And then we get into the tactical things that you need to know about building it. But I think one of the biggest things that you got to prepare for, and I'm not sure if anybody truly can, is what it means to let go. And what that might feel like for each individual, depending on how they viewed themselves within their business. Yeah. Yeah. People keep asking me if I'm Skylar, I'm not Skylar. They keep asking me if, you know, oh, when you sold your business, you realize there were all these questions. I'm like, no, no, no.

[00:08:01] I realize this is 10 years of learning and sell my MSP. But except for that first chapter, that first chapter actually is something that I learned when I sold my own MSP. I've been working with others, taking through all the process, get ready, go through. I don't, you know, and then I don't really talk to them much afterwards to see, you know, what happened. And what happens afterwards is quite surprising.

[00:08:29] And I tell people like, I feel like I sold my cat or I rehomed my cat, right? That's something maybe people can relate to with their pets. Like you're really attached to that pet and now you have to move it on. The same thing happened with when I sold my MSP, right? You're not only selling, you know, this asset, but you're selling relationships that you have with customers

[00:08:56] that you may have had those customers for 20 years. I had customers that started with me 23 years ago and ran all the way with me right to the end. That's a personal relationship. I've got employees that I felt really personally responsible for their individual success, their ability to support their families, all that stuff. So when the business leaves, a part of your heart goes with it.

[00:09:24] And there was a hole and it took a while to get over that. There's a grief sense after you sell your business. I think you're spot on with that. I mean, for many of us, it's a big part of our identity, who we are out public facing to our friends and our family as well. And all of a sudden that piece is gone and we're left with that void that, you know, comes from it. Yes, we may be retained. We might be working through a transition, but we generally know that that's probably not long term.

[00:09:52] So thus it's reshaping your own identity in this process. And I also love the fact, because I think, you know, as a community of servants, we do care about what's going to happen to our employees in that shift. We want to make sure that they're going to find a home that not only, you know, will retain them and make sure that they don't lose their livelihoods, but also afford them the opportunity to maybe grow professionally where we didn't, you know, have that opportunity just because of size and scale in our businesses.

[00:10:21] So there's a lot to consider besides just the cost in this transaction. Yeah, for sure. Actually, I think most of the things you're going to consider in this is not really about the bottom line number. There's a lot, just a lot of other considerations that come into play. I know you've got some questions for me, so I think we can speak on that. Kind of in this process, you kind of introduced the concept that I liked about business market me, right? Because when you start thinking about the sale,

[00:10:50] there is this what's best for the business, how to, you know, where's the market stand? And then what do I want or where do I fit, right? So I'd love to hear your thoughts around that and if that was something directly you or if that, you know, was one of the learnings that you got through talking to others or a combination. You know, I already knew what I was going to be doing because I have the two other companies, right? Yeah. So I'm just transitioning out of one and allows me to focus more on the others,

[00:11:20] which, you know, you talked about it a minute ago, right? As we mature in our career, my need to help people moved away from the client side and more toward other MSPs in this community and helping out other folks. And so I already knew what my next was. But your decision in selling your business, you've got to have a plan for after.

[00:11:49] Like, what are you doing? Why, you know, is it time to retire? You're going to sit on the beach from now on? Not too many people actually do that, right? You need some sort of idea of what you're going to do. I remember somebody told me that they knew a guy who was retiring and he had no hobbies and his plan was to take up a new hobby every month for the next year until he found something he'd like to do because he had no clue what he was going to do, but he knew that he would die if he didn't find something, right?

[00:12:19] You've got to have something to fill the time, right? Yeah, you've got to have a purpose in life. So what is your next purpose? What's it going to cost, right? What does the sale of your business have to fulfill in order for you to be successful in whatever your one next is, right? There's probably some dollar value there. There's some emotional value there. It's got to all come together so that you can be successful

[00:12:47] in whatever you're going to be doing from now on. Yeah, I think a lot of folks see that you do have to have a next chapter. I think all of us have found people that were forced into retirement maybe earlier than they wanted to and unfortunately did not stay with us much longer after that. And I'm a big believer in that you've got to have a purpose to get up every single day. It doesn't have to be the same one that you're doing today, being an MSP. But if you're not thinking about what that's going to look like and what it's going to take to get you there,

[00:13:17] you can find yourself short of goal. And if you're short of goal, you might not get to do what you want to do next. And that's the thing that I think your book's really teaching. How do we prepare so we don't fall short of goal at that point in time, even if the market might dictate what goal looks like? One of the things that I like that you talked about was running it like you're going to sell it myth. The reality is, you know, that you need to go beyond just thinking about what the sale's looking like

[00:13:45] and look at where you are in that process. So I'll kind of turn it to you because I don't want to, you know, give my thoughts on this. I'd love to hear yours. But I really like kind of the concept you went there. I wrote a blog post on this a few years ago because, you know, we go to a lot of conferences, right? And I hear these people on stage say, you know, you got to run it like you're going to sell it, right? The thing is, though, when you're going to sell your company, you're making decisions based on a different goal outcome

[00:14:15] than you are when you're running your business, right? So when you're running your business, you need to take risk. You need to be on top of the thing that's coming next five years down the line. You've got to, you know, you have to be out there. You have to be really in tune with the market, what's happening, all that, all that, all that stuff. If you're thinking about selling, you're really thinking about

[00:14:44] entering a period of stabilization in your business. Because when a buyer comes along, they want to see that you've had a little steady growth for the last five years, right? A nice little, a little gentle upward trend. They don't want to see any hockey sticks because that looks like risk that might not stay there forever. They don't want to see a decline because it might look like, yeah, you guy kind of exited his business a few years ago and isn't doing much. They want to see stability.

[00:15:14] And stability doesn't lend itself to the long-term growth and success of a business. But stability is where a buyer wants to pick up your business so they know what you've got is stable and then they can run with it from that point on. So you're making different types of decisions. If you're running it for the long term or you're running to sell it and run it like you're going to sell it, I think is a way to run your business into the ground. If you did it for 10 or 15 years,

[00:15:43] you need to do it for the last couple of years. Get all your ducks in a row so that you're ready to be ready and prepared for that exit. Yeah, I mean, it was such a truism when I read that because it is that challenge where if you start thinking about the sale on day one, you're not going to take the bold steps that you got to take to grow a business. And that growth in the beginning, those, you know, the triple digit growth can only happen in the first few years, the lost small number. So to exactly what you're explaining, you know, a savvy buyer knows

[00:16:13] that in the last few years they want to see steady growth, but they don't want to see all of a sudden this accelerator where you've gone too far. But the other thing I often hear when I talk to folks that have gone through the process, the last couple of years too, you're trying to maximize EBITDA. So then you're pulling back some of that bold spend that you might be doing through the growth period to then obviously pretty the picture and certainly maximize the exit for you and your, you know, your executive teams or other partners. So, you know... That's exactly it. You know,

[00:16:43] you do things differently when you're getting ready to sell. It's not a bad thing. Your business is absolutely fine. The growth is happening, but it's different. It's the reality, but there's that transition point that happens somewhere there in between, right? And I think that's really what I took away from, you know, run it like you sell it myth being the... If you do that from day one, you're not going to get the progress you need to get it to that point of stabilization to there to where you can then go through optimization and then obviously

[00:17:12] work on the exit. So, you know... Every business has a maturity cycle. Yeah. You have to go through that maturity cycle. Your business did not go through that maturity cycle. It just won't be as successful as it could have been. You know, the other thing you talked about was a little bit about your number versus the valuation and, you know, and that took into account also lifestyle and timing, right? We all exit our businesses as you alluded to earlier at different times of our lives and depending where you are really does make a difference

[00:17:42] on what your needs might be. So, you know, maybe you'd like to expand a little bit on that. Yeah. I remember the day that I went to my financial advisor and started, you know, thinking about, well, gosh, what is my retirement actually going to look like? You know, not that I was ready to do it, but, you know, when you reach about 50, you got to start to think about that. Like, am I actually, am I on the right path here? And, you know, they ran the numbers and said, well, you know,

[00:18:12] you're on the right path. Things are going well. You need about this many more dollars to make it happen, right? So we figured out, you know, what's my income going to be later in life? And you go through all that stuff with your financial planner. I encourage everybody to do that so you can figure out what your number is. And, you know, part of their process is they're going to ask you, well, what are you going to do? You know, are you going to buy a second home? Are you going to

[00:18:40] become a world traveler? Are you, you know, is that not you? You know, you need the RV to do some traveling. You know, you're going to build a big garden. You know, what's your plan, right? Because that all, that all comes into the number that you need. And is it your business that's going to feed that entirely? Or does it feed it partially and you need to do something else to, you know, get there? You need all that information to figure out what your number

[00:19:10] actually is and then know when you've hit your number, right? It's time to execute. Just like in your business and also in life, it's, you reach a goal and it's time to execute. So I remember sitting with my financial planner and they gave me, they gave me a number and said, okay, you're, you're getting close. You know, here's, here, here's a number that you'll need in addition in order to get there. And I looked at the number and I thought, I bet my business is worth

[00:19:39] a little more than that. And, um, that then got my brain turning, you know, maybe it's time for me to move this along to somebody else because my interests were starting to change over toward third tier and sell my MSP anyway. So, it made sense once I knew what my number was and I knew that the goal was there. Time to execute on that goal. And, you know, I think each person, if you're thinking about that, you really do got to look at that

[00:20:09] individually and say, you know, it's everything that you've kind of alluded to right to this point today. Do you know what your next chapter is going to be? If it's one that you're running towards, that might make the sale something that you might want to do a little bit earlier as long as you're getting a number that satisfies. If you don't know what that next step is, maybe it's continuing to do the thing that you're doing while you sort that out, right? And, you know, it's really amazing when you get to that stage with your business that those are things you do have to look at. And then the market

[00:20:38] does play into it to a degree as well. Is it a buyer's market? Is it a seller's market? You know, if your need's not urgent, you might want to wait until the buyer market swing comes back into play if it is the seller market at that time. Yeah, but if you don't go through that process, you don't know. Yeah. Right? So, you know, one of the reasons I wanted to write this book and so for everything we talked about, you know, is it just in section one and then we start to get into more the traditional questions when people think about M&A,

[00:21:08] right? Exiting their company. It's usually the only thing you hear from the stage is about numbers and papers and financial documents and blah, blah, blah, blah. You got to do all that stuff. There's so much around it. So, in this book, I put together not only the, not only my answer to the question but then a series of questions at the end for you to come up with your answer to these questions. Right? So, there's a little bit of a workbook process in this and amongst the 20 chapters it's not a story.

[00:21:38] You don't have to read it from 1 to 20. Whatever question is speaking to you right now, dive into that one and get those things answered and start to prepare that item. And, you know, I don't want to short, we've talked a lot about the emotional toll, we've talked a lot about the planning of it but you do devote a good portion of the book to the tactical, the things that, you know, that people might not know especially if they haven't gone through this process before, you know, the concepts of where does EBITDA need to be, how to understand

[00:22:08] how you might be evaluated, looking at the things that could be red flags to a buyer that can decrease your value and, you know, things about contract, owner dependency, tribal knowledge that can impact as well. Maybe we can spend a couple minutes talking about some of the more tactical measures that you talk about in the book that people can gain from as well so they know that that's in there as well. Yeah, you know, you brought up the red flags. I think I list 12 of the 12 red flags in there

[00:22:38] in that chapter. That's what I recalled. Yeah, and it's a lot, right? Anything can be a red flag to a buyer, right? A buyer wants to see, they want to see stability, consistency, things that you might not think are red flags the buyer, the buyer thinks are a red flag and that's what's important, right? It's not like what your red flag is. It's like, what is the buyer going to think a red flag is?

[00:23:08] So, some of the things that are in here, right, weaker, missing contracts or not having contracts, the high client concentration. I talked to a really surprisingly large number of MSPs that have a whale of a client. They're very proud of that whale and I keep saying, right, if you have a whale, you got to get yourself a pot of whales or you need to get rid of the whale. Replace that whale with a bunch of clients

[00:23:38] that are like the rest of your client base because one big client is a problem, right? If you've got, think of it from the buyer perspective, if that represents 30% of your business, they've got a risk of losing one client and a third of their revenue out of the company that they just bought. Depending on how they're running it, that could equate to the actual profit from the investment going away in that. Or more.

[00:24:08] It's definitely a scary process. I know, you know, as I was growing my MSP, we were always being advised by our financial folks that nobody should be more than 10% of your business. And as a software vendor now, I even see that more. Really, no customer should be more than 1% of your business. You know, obviously there's a little bit more churn on the software side than we experience as MSPs, but those things are real, right? And it can make a hit. And I think we've also heard that story from people that are still

[00:24:38] in the swing. The whale is what got them to be an MSP. They started building based on that whale being part of the collection and then they lost that whale. And some of them went into the fire sale or the distress sale mode at that point because they knew they couldn't sustain the overall business anymore. Yeah, it's a scary proposition and a buyer does not want to be in that proposition because if it's 30% of your company, and I use that number because I keep seeing people with that situation,

[00:25:08] that's more than the profits of typical MSP. Yeah. Right? They're usually somewhere between like 12 and 20-ish. So there goes all the profits side of the company. You just bought it. You paid 4, 5, 10, multiple on that EBITDA and you are screwed, honestly. Most of the time you're factoring that cash into how you're going

[00:25:38] to pay down either the debt vehicle that you took on during that piece or funding it right out of the profits to close the gap. And when those types of events happen, it's tough to overcome. most can put in a 5-6% loss because you're going to have some folks that might move on just because of the relationship. Yeah. The first couple of years that you buy a company, you're going to have some journey. maybe somebody was thinking about leaving that MSP and then the

[00:26:07] sale happens and that pushes them to it, right? Or there's change. People get nervous about change. Anyway, there'll be a little bit of churn and the buyer expects that. I've been on both sides of the equation, both as a seller and an acquirer. And sometimes we would acquire an MSP knowing that, hey, out of this roster, there's probably half a dozen companies that just don't fit the profile of our clients and we're going to have to move them on somewhere within the next 12 to 18 months. Right.

[00:26:36] There's probably some red flags that people don't really think about either. You know, one of them is if your tech stack is old. Yep. Right. Sometimes we see owners that have been in business for a long time, they do things in a certain way, but they haven't been adopting new technologies and therefore their clients haven't been adopting new technologies. And the buyer needs to bring all those clients up to the new technologies because they're going to

[00:27:06] hopefully take them another 20 years forward. So, you know, so if they're not cloud, if they're not AI, if they're not on a good security stack, they've got to bring all those clients up to that point. They're going to devalue your business fairly dramatically because of that. And that's really what this speaks to. It's really the levers, right? You know, if we use that, and I think you kind of spoke to that three to three and a half times as kind of the common, you know,

[00:27:37] traditional MSP that might be at, you know, of a certain scale and size, that's selling to a regional buyer, that that's kind of where you might be, you know, be living. We all hear about the numbers on the top end, but those are usually for larger scale MSPs getting acquired under PE blankets, things like that. If you look at that, you know, I've heard things like, hey, you know, we'll pay an extra X if they've got an actual bona fide sales engine and it's not owner-led sales and they've got a true sales process. We've heard it the other way, ancient tech stack. I know 40% of those

[00:28:06] customers are not going to be willing to make the investment into what we're asking them for. And as a result, they're going to fall off and we have to account for that. And it's really amazing things that you don't think about that come up in the process that also might tell you this isn't the right time to sell. Yeah, right. If you want your business to be successful in its sale, your clients need to be modern. Right? It's because if they're not, right, you've spent

[00:28:35] time training those clients to think that they don't need to modernize. Now the buyer comes along and says, hey, you need to modernize. And they're like, well, what do you mean? Joe said the server is just fine and we don't have to worry about that stuff. Yeah. Yeah. Well, Amy, we're getting near the end of our time, but I do want to offer the opportunity if there's anything else that we haven't covered that you want to cover before we wrap up, please, I throw the floor to you. Oh,

[00:29:05] well, you know, if you go over to my website, you can get the go to sellmamsp.com or thirdter.net. You can buy the book from there, direct from the publisher, which sends a little bit of more money into my pocket, or you can go to Amazon and get it as well. I think you should get it now. I really, really want people to start to think about this three to five years out from when they're actually going to pull the trigger of selling their company. There's a

[00:29:35] lot of stuff in here that's going to just help you run a better business, period. So even if you don't think you're ready, you should probably be starting to get some of the things in order. It's only going to help your profitability down the line. I will say, in addition to this, if you go to Sell My MSP, there is an assessment over there. It will take you through a bunch of questions, and you can actually figure out where your business is on a scale of zero to ten, being ready to sell. Beautiful.

[00:30:04] Amy, thank you for sharing so much here, both during this podcast and certainly within the book. Listener, as always, the links to both websites that Amy just referenced as well as her LinkedIn will be available within the show notes both on YouTube and anywhere you get your podcasts. I encourage you to connect, get to know or follow some of her teachings, especially as you're thinking about potentially leaving the industry at some point. Go get her book. Amy, I want to thank you very much

[00:30:34] for joining me today. This is a topic I could have easily done another half hour with you on, but I really appreciate you sharing that. Again, I really like the way you structured the book. I think you really covered off not just the tactical but really almost the spiritual side of selling an MSP. It's a wild ride when you go through that process. Yeah, you know, my focus is educational, so I'm really pleased that you picked up on that because there's a lot of brokers out there that just want to talk to you about the

[00:31:04] numbers. I want to talk to people about the real reality of what it is to get your business ready and to go through that process and feel it afterwards. Awesome. Well, Amy, I wish you the best. Again, folks, those links to both Amy's websites with Tier 3 and Sell My MSP will be listed up there and go get her book. I think it will really help you get prepared if you're even starting to think about what's going to be the next chapter

[00:31:35] and get your mind right as well as your books and do the things that you need to do to have a successful exit. Amy, with that, I want to thank you again for joining us. And listeners, we'll see you all again next week.