M&A Deep Dive: What You Need to Know for 2025, with Mahen Gundecha (Bristol Group)

[00:00:00] Never assume you're better than you really are. Always have some level of insecurity that you don't know what tomorrow holds, right? Never be overconfident. Never assume you're at your peak valuation. Anything can change on a dime, especially for small business owners. Anything can change. We've talked about a lot of those things. Always be ready.

[00:00:20] Hey guys, Damien Stevens, host of MSP Mindset. Today I'm joined by Mahen Gundecha and we dive deep into M&A for MSPs. Now, there's some shocking things in the next five years upcoming that are going to affect the valuation and a lot of them are outside of your control. We also dive deep into the things that you can control and, spoiler alert, you're not doing them.

[00:00:52] If you want to learn how you can do them and where your competitors may not be, don't miss out on our conversation today. Yeah, so Mahen, tell us about your M&A background before the Bristol group. Yeah, sounds great, great question, Zach. So a lot of my experience has been in really technology-intensive, knowledge-intensive industries.

[00:01:14] So I started out working in pharmaceutical companies, biotechnology companies, sales and marketing roles, and then ultimately moved into corporate development, business development, and alliance management, right? Helping to manage relationships between large companies and small companies and making sure that the interests of both parties are reflected. And I think a lot of those skills I take now into M&A with smaller businesses and MSPs.

[00:01:42] So, you know, having worked on both sides of the equation, large companies and small companies, I kind of get what is in the head of a big company when they're thinking about an acquisition, right? So what are they really thinking? You know, when they put forward a valuation, is that really their best offer or is there something more that we think we can negotiate, right? Are the deal terms their ultimate deal terms? What are the levers we think we can pull?

[00:02:06] What are their motivations and how do we kind of get to a better alignment, you know, for the small business owner and the big company? So, yeah, the biotech experience has been great. You know, I think having that knowledge intensive constant evolution has helped me really in this space where, you know, there's so much going on within the IT services business, you know, cybersecurity, AI, different technology stacks, you know, different industry trends, consolidation.

[00:02:36] So I think that staying on top of those trends is absolutely critical. And I think for any M&A advisor working in this space, you've got to know your stuff, right? If you don't know the difference between Kaseya and ConnectWise, stay home, right? Yeah. Yeah. No, I think that anybody listening understands that and appreciates that. But since you were not necessarily, you didn't grow up as an MSP, kind of on the other side, that gives you a different perspective. Yeah.

[00:03:02] But I'm curious what you could have chosen so many different fields. Why MSPs? Yeah. So we have worked, right? As a firm, we work across multiple businesses. So a lot of my partners will focus on companies other than MSPs. I've kind of gravitated towards MSPs. But I've certainly saw, you know, we've worked on HVAC companies, CNC, you know, manufacturing companies, medical practices across the board.

[00:03:27] We've worked on all types of different companies. I think a lot of those seem just very transactional. There's not a lot of complexity, whereas with the MSPs, there's a ton of complexity. So one of the things I love to do, Damien, is I love to go to the different conferences, right? So I was just at CompTIA. I go to the different, you know, MSP conferences. So I'm just looking at the trips, you know, that I was on this year. Las Vegas, Florida a couple of times, Baltimore a couple of times.

[00:03:54] So, you know, there's always something exciting going on. There's always something to learn. I think it's that passion for learning, that evolution, you know, a rapidly changing industry that really keeps me excited. You know, what's AI going to do for MSPs, right? Is it real, right? Will it have a real impact, right? Should you jump on board?

[00:04:12] How? If you're a, you know, a generic MSP that's kind of, you know, done reasonably well, you know, with sort of a, you know, 5% annual revenue growth trend. What will, how will that change as you move forward, right? Do you need to think about getting a deeper cybersecurity capability? You know, are you going to have to get that, that deeper capability in order to better serve your customers? Because other, other MSPs in your region probably are doing it.

[00:04:42] So, you know, these are the kinds of things that I love to kind of keep track of. And then as I'm talking to MSPs, kind of help them think through these issues, right? So, operationally, how can you make your business better? You know, what is a smart way to grow, right? Rather than spending tons of money on sales and marketing and hiring a huge sales team, is there something you could do, you know, more strategically to grow and ultimately to increase your value? This episode is brought to you by Servocity.

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[00:05:57] Or, you can keep the tech stack you have in place, your existing backup into your provider, and steal my 18 years of knowledge and download that process and add that to your operational maturity today. Yeah, I think everybody's thinking about M&A at least a little bit because there's so much going on. There's so much consolidation. If you're of a certain size, you may be thinking of merging or acquiring other companies.

[00:06:24] You may be thinking of being acquired, maybe some of both. I've found that some MSPs, there's this maybe misperception where they say, well, I'll wait until I'm done. And, you know, I think part of it might be is trying to hit the peak of the market, hit the peak of everything. Sales, revenue, market. So, help us understand why that's probably not the right way to approach this. Yeah.

[00:06:54] That's a really complicated question, Damien. So, I think you're right. Our mindset, we're geared to think that there is a perfect time to sell, right? And it's never now. Right? Yeah. I can always grow my business forward. I just got to improve operational maturity or a little bit of slightly. I just got to land that one big, you know, $50,000 a month MRR customer, and then I'm ready to sell, right? That's, you know, once I get there, I'm ready to sell.

[00:07:24] I think that it's for, look, for a lot of people, that's a wonderful aspiration. A lot of it depends on your circumstances. And when we work with MSPs, so we're exit planning advisors as well, right? So, I'm a certified exit planning advisor, not just an M&A advisor. So, I'll work with businesses. What does that mean? Let me stop you. What the heck does that mean? What the heck does that mean, right? Big scary word, exit planner, right? What does that mean? What's an exit planner? Let's start there. So, really, it's just common sense thinking, right? Put it down on paper.

[00:07:56] When do you want to sell your company for how much, to whom, and what role do you want after you sell? Those are kind of the key questions. So, you know, a lot of people will say, okay, I'm not ready to think about it now. I'm busy running the company. I will think about it when the time comes. And, unfortunately, that time comes for people at an unexpected hour. So, a health crisis could start them thinking about this, right?

[00:08:24] If they're required to be out of the business for six months. A financial situation, right? If they need to liquidate some of their assets to pay some unexpected expenses, that can get them thinking about an exit. And the unfortunate situation about that is that you never end up with your best valuation in those circumstances, right? You're never going to get what your business is really worth. No. And I'll add one to the list. Not the way you want to exit. But I had an MSP that I knew well.

[00:08:54] I considered a friend. And they were growing a ton. It seemed great. But that put an inordinate amount of stress on their team. And they ended up having that one star engineer. They had a bunch of years, but that star that everything went to. Yeah. And the pressure became too much. Yeah. And so, that star engineer who I remember I even talked to after he left. He didn't want to do this.

[00:09:21] But because nothing was really being done to fix the core issue, he left. Yes. And the craziest thing I've seen, the business owner, in the wake of that chaos, they just walked away. Which was the worst thing for their client, the worst thing for the other team members. And obviously, financially, that's not exactly an exit that you want. And so, just to add to that list, I've seen it happen.

[00:09:51] Not too often, but it has happened where there's just folks that have. And I think it was because he didn't know how to fix it. And there was this secret behind-the-scenes buildup of burnout. Yes. And so, then when he had to deal with his other issues, it wasn't ready. So, I just wanted to bring that to conversation. Because we want to get the exit. Let's get into this. Yes. And you're the expert there.

[00:10:15] But to add to your point, Mahan, there are so many different ways that you can't always foresee. Correct. You might be looking for an exit in a far different timeline than you ever imagined. Yeah. And I'll add one more. In this world where everybody is out there investing in sales and marketing activities, you can bet that your competitors are targeting your bigger customers. Absolutely.

[00:10:41] You know, if a customer is worth 10 or 15% of your revenue and they ultimately leave, right? They get a sweeter offer with your competitor. That's a gap that is really, really hard to make up, right? So, A, the margins are probably disproportionately high with that large customer. So, you're going to have to fill an even bigger profit gap when that customer leaves. So, that's an unforeseen challenge that I think can destroy value.

[00:11:08] And as you're saying, right, in this market where talent is so scarce, right, especially, you know, people with the right credentials, CISSP, ethical hackers, you know, those people are poached pretty aggressively. And if you have any of those people on your staff and they move away, it's going to take some time to replace them. So, all of these things can have a material impact on your business.

[00:11:33] So, one of the things I like to tell people, especially when they're of a certain age group, say you're in your late 50s or early 60s, one of the things I want to ask them is, is it possible that you're already at your peak valuation? Is it possible now that the risks of owning your business outweigh the opportunities of growing your business?

[00:11:56] I want you to look in the mirror and really ask that question and frame it from three different perspectives. So, one is from the business, one is from your personal perspective, and one is your financial circumstances. So, look at your business, think about your core value proposition. How differentiated are you?

[00:12:21] What's the reason for your big customers to stay with you for the next 12, 24, 36 months? Is it just that they like you, right? Can they get the same services from somebody else, perhaps at a lower price? Or is it that your business is fundamentally offering something superior than what is available in the market? Are your customer service levels higher, right? Is your turnaround quicker? Do you have a better security capability?

[00:12:47] Do you have industry-specialized regulatory and compliance capabilities, right? Are you deep in healthcare, deep in defense, deep in those really difficult, sticky businesses where once you get one of those customers, it's difficult for them to leave? So, is that your business? Is that what your business looks like? Or is your business sort of a more general type of profile where you've got a number of different types of customers?

[00:13:14] You're offering general capabilities across the board, right? General managed service capabilities. And maybe your MRR is something north of 50%, but it still positions you sort of in the middle valuation spot. So, if that's where you are, then think about the challenges you could face as the industry gets more specialized, more technically sophisticated, more price sensitive moving forward, right?

[00:13:42] Are you going to be able to compete, maintain your margins, grow the business, and maintain your valuation, right? Not even grow your valuation, but maintain your valuation over the next five years. So, that's the business. The second piece of it is your financial situation. So, take a look across your assets. You know, what does your portfolio look like outside the business?

[00:14:06] Think about how much you need the business to be worth in order for you to even think about retiring, right? So, don't think about how much is the business worth, but it's like how much do you need the business to be worth, right? And then think about, are you there? And oftentimes, there's a gap, right? So, if you need the business to be worth $3 million, but it's only worth one and a half, then obviously, there's a huge gap you need to make up. And then you need to ask yourself, is it realistic I'm going to be able to make up that valuation gap, right?

[00:14:35] How am I going to do it? What's the plan to do it? And if the plan is, no, I'm just going to hire a business development person or I'm going to sign on to some SEO strategies, invest a ton of money in sales and marketing activities, that may be a good strategy. But recognize everybody else is doing it. So, you have to ask yourself, how effective will your efforts be, right? And will you be able to make up that million and a half dollar gap within your timeframe?

[00:15:02] So, if your timeframe is five years, is it feasible you'll be able to get there? And then the other question to ask the converse is, if your business actually declines in value for all the reasons we just spoke about, right? Loss of employees, loss of customers, inability to grow, inability to keep up with technology changes and offer a super differentiated service offering in the future. If you're unable to do that, that million and a half could actually shrink to a million. And then you've got a $2 million delta in the future. So, is this your peak valuation, right?

[00:15:31] Is this time for you to think about taking a little bit of risk off the table? And one of the things we can talk about, you know, as we move forward, Damien, is exit doesn't always mean sell all of the business and walk away, right? There are different ways to engineer an exit where you could retain some ownership and some stake in the business. So, if you really feel that the business has a chance to grow, you have a chance to ride that increase in valuation and then have a second exit down the road where you sell your remaining portion of the business. So, that's something that I just want right there.

[00:16:01] I don't think everybody gets that. Yeah, I think that's really misunderstood. I think the mental picture is sell it, walk away. And so many of us have put in a decade, two decades, maybe three decades. It just feels like the other thing is most of us have never sold a business.

[00:16:20] And after a decade, two or three, now you have to be – now we're putting this pressure on ourselves to say I've got to sell at peak valuation, which is – you're explaining it to us, man – has a lot more to do than just with our company. There's a lot of other trends that influence the valuation. So, Daniel, there are some things that are within your control. Unfortunately, there are a lot of things that are outside your control. Yeah, let's talk about that. What are those things?

[00:16:49] And I guess – let me ask maybe a better question. Whatever that valuation is, let's say it was a million and a half using your example. What are those things outside of that control? And how much of that – is it most of the valuation is outside of my control versus – because I think there's a perception that I can just add a little bit better EBITDA. I can add more revenue and then I'm going to get to that number.

[00:17:14] But if there's some other headwinds, I could destroy any gain or make it go backwards. So, what are some of those? Let's kind of get into that. Sure. Sure. Yeah. Let's talk about that. I'll just finish the thought on the third factor that we want people to reflect on when they look in the mirror is their personal situation. So, what's your age, right? Is age an advantage for you or is it going to be a disadvantage, right? Is your energy level going to maintain or is it going to decrease over the next five years?

[00:17:42] Are you going to be able to work the hours you're working right now? Are you going to be as passionate and committed to the business three years from now, five years from now? Because that's critical, right? If you lose your passion and your commitment and your energy, then there's a very good chance you're not going to hit those targets that you set out for yourself, right? So, you've got to really reflect and ask yourself, are you willing to give it what it's going to take? And then the second thing you need to think about is what unforeseen circumstances could come your way. We've talked about a couple. One could be health, right?

[00:18:12] Your health, your family health. If there's something that pulls you away from the business, how will that impact the performance of the business? How integral are you in the business, right? So, that's the other piece you have to ask yourself. Is the business essentially you or have you decentralized the business? Have you put the key players in position, right? Do you have somebody who's heading up your operations? Do you have somebody who's heading up project management? Do you have somebody who's heading up finance, right?

[00:18:38] All of those core pieces, do you have decentralized teams who are empowered to manage their group of clients? So, if that's your operation, then your ability to weather any of those kind of situations is much greater. However, if all of the decisions float to you, right? If there's an escalation and ultimately you're the one who has to resolve it, if every $5,000 invoice has to be signed off by you, then it's a different kind of situation, right?

[00:19:06] Then you need to think about how are you able to weather those unforeseen circumstances? And ultimately, what does that mean for the valuation of your company? So, those are the three pieces, right? The financial piece, the business piece, and the personal piece, right? Think about all of those. And then to get to your question, controllable versus uncontrollable, right? So, I think everybody kind of has on their radar what's controllable. They're hearing a lot about operational maturity, right? They're hearing a lot about tech stacks.

[00:19:36] They're hearing a lot about cybersecurity, AI. One of the things I hear about more and more now when I go to the industry conferences is vertical specialization, right? So, specialize in healthcare or defense industry or financial services or professional services, right? Legal, accounting, you know, insurance. Specialize somewhere where there's a core capability that's a little bit different, where there's a higher bar for compliance.

[00:20:04] There are higher risks associated with noncompliance. So, and there are higher reporting requirements, right? Regulatory and reporting requirements. You've got, you know, FINRA and SOC2 and you've got HIPAA and all of these things. You have to be knowledgeable. Some of the really strong businesses that generate a ton of interest in the market when we bring them to the market are exactly those companies, right?

[00:20:27] That have in-house HIPAA officers, in-house, you know, financial regulatory officers who have that core capability. So, those are some of the things you could potentially control, right? You could build an organization that's aligned with all of those different value drivers. It's going to take time. It's going to take some investment. But that's within your control. You could potentially get there. What's beyond your control is your age, right?

[00:20:56] Age is going to continue marching on. You know, as you get sort of into your late 50s, 60s, age actually becomes a risk, you know, because any kind of hiccup in the road here is going to mean that you just don't have enough time to make up that valuation, right? So, if you lose a big customer who's 15% of your revenue, it's going to be super difficult to then fill that gap, right, within your horizon. What else is uncontrollable?

[00:21:25] One concept I'll put out there is a term called the silver tsunami. So, I'm not sure if your listeners are familiar with this, Damien, but this is a term that's used to describe the huge wave of businesses that will come to market based on demographics over the next 20 years.

[00:21:43] So, just a couple of stats, you know, if I ask people how many people in the U.S. population were over age 65 in, let's pick a rough year here, say, year 2000, the answer is 35 million. If we ask the same question for 2020, right? So, 20 years later, how many people were over age 55? Another 20 million people came into that age group. So, now we have 55 million people in 2020. Wow.

[00:22:13] Then we dial forward and we look at the projections, Damien, right? Just based on the aging of not only the baby boomers, but now, you know, the millennials and the Gen Xers who are kind of behind them. They're all going to kind of get into that age group eventually. And if you look at that number in 2040, it's going to be around 80 million. And then we dial forward even more to 2060. It's close to 100 million.

[00:22:36] So, you can see that, you know, a lot of the population is aging and most of the businesses are owned by people over age 55, right? Two-thirds of the businesses out there are owned by people over age 55. So, that's a core trend that is coming. What it means ultimately for MSP owners and any business owner is there could be a lot more businesses coming to market over the next decade, over the next two decades.

[00:23:05] So, the environment you see now may not be the environment that we have in 10 years, right? So, right now, we've got a supply-demand imbalance, right? There's a higher demand for really good quality MSPs than there is supply. And we see that. Anytime we bring a really good MSP to market, there is tremendous interest from every kind of buyer you can imagine, right?

[00:23:29] Independent sponsors, private equity firms, strategic buyers, everybody has interest in those assets because there aren't a lot of them on the market at any given time. That environment could change, right? So, as MSP owners get into that age group and start thinking about selling their own business and ultimately bring their business to market, there could be three or four businesses in their region on the market at that same time, which puts some pricing pressure on everybody, right? So, that's just one thing to keep in mind.

[00:23:59] That's a huge trend that I think is coming. Big difference, yeah. I think you were saying, you know, there's no guarantees, right? So, even by 2030, there could be a lot more businesses for sale and that doesn't even count the changes that will impact your business like perhaps cybersecurity, perhaps AI, perhaps regulation industry trends. Yeah, I think that's a great thought, Damian, right? Right. So, what's also not controllable?

[00:24:29] So, clearly demographics, right, is not controllable and supply demand is not controllable. But exactly what you're saying, this is a technology-intensive, knowledge-intensive industry, which is going to continue to evolve, right? It's going to get more mature, more sophisticated. The technical hurdles are going to get higher. Your ability to perform is going to have to keep up with that, right?

[00:24:51] So, if you can't keep up with the technical capabilities that your customers require, the reporting capabilities, the service levels that they require, and you're not able to do it at a competitive price, then there could be a point at which you're priced out of the market. I think one of the points you brought up is consolidation, and that's a huge trend we see. So, you know, the bigger fish are getting bigger, right? The large private equity forums continue to build out their platforms. Large strategic buyers continue to do acquisitions.

[00:25:20] So, if your largest competitor in the region is acquired by a very well-operated, well-funded buyer, that means that all of a sudden your competition, your hurdle just rose, right? You now have to perform at an even higher level because chances are that they're going to invest in that company they just acquired, and they want to grow it even faster. They're not buying your competitor to continue growing it at its current rate, right, and to keep its current customer base.

[00:25:47] They're growing it because they want to add customers as quickly as possible and grow as fast as possible, which means that what they're going to do is make it a more technologically sophisticated operation, make it a more service-focused operation, and make it a more specialized operation so that they can offer core capabilities in particular industry verticals.

[00:26:07] And so, there could be a point at which you lose some of your key customers and employees to that newly funded competitor that you have in your backyard. So, I think that's a trend that's kind of out there and maybe beyond your control. So, there are definitely lots of opportunities, right? Let's not kind of be super negative here. Lots of opportunities, right? You have to play your cards well. You have to understand the trends.

[00:26:37] One of the things you have to start off doing. One of the questions I ask is, okay, I'm asked all the time is, well, what do I do? And one of my responses is, look, the way I educate myself is I tend to go to these conferences. You know, that's a great way for me to learn. So, pick one a quarter if you can, right? Just block a day or two off your calendar. You know, you'll learn a lot. You'll make some great connections. And ultimately, you can bring that knowledge back into your operation and, you know, start thinking about how you need to continue to evolve and what your strategy needs to look like.

[00:27:06] And just thinking back, I don't think anybody, if you just think back 10 years, a decade, managed services wasn't as competitive. The cybersecurity wasn't as challenging. We didn't have a cybersecurity stack really a decade ago. Flat fee, everybody wasn't kind of at the same war of trying to do the exact same flat fee model. And so, a lot of MSPs are saying it's tougher than ever to get customers. It's a little more commoditized.

[00:27:34] And M&A was almost a novel thing 10 years ago. Right. Right. Now, it's happening a ton. And I suspect in a few years, we'll think this was the novel time based on the trend there. So, you know, not, again, like you, not negative, but just to, I found that sometimes when I look forward a decade, I go, oh, you know, things will be kind of similar. But I look back and I go, look how much has changed. And that helps me. That's a great lens, Damian, right?

[00:28:03] So, if you think about, here we are in 2024. If you dial back to 2014, right, how has the world changed in that 10-year period, right? So, how were MSPs operating in 2014? So different, right? Half of the RMMs that you're using didn't exist. Cybersecurity tech stack was not a thing. Operational maturity was not talked about by most people, right? That could go on and on.

[00:28:28] There's so many things that are the new normal that back then, you know, that co-managed was not really a thing. There's so many changes. So, that helps me frame, like it doesn't help me answer what's going to change because the future is always different than I expect. But it helps me maybe get my arms around. There is a lot of change that's going to happen. Yeah. It gives you a sense of the scale of change, right? Yeah.

[00:28:53] I don't think anybody's going to argue coherently that there will be less change in the next 10 years than prior. I don't know. I think every industry, right? Every industry is going to go through that level of change. And I think, you know, technological sophistication is going to drive inefficiency out of the system.

[00:29:12] So, if you're operating at the margins, you know, one of the things that, you know, if you look at service leadership and their, you know, surveys that they do and their reports that they put out, a lot of MSPs are just borderline, right? So, you've got a large number of MSPs that are marginally profitable or that are losing money. If you're in that situation, you've got to really reflect. The world isn't going to change until you make a change, right?

[00:29:38] So, what is going to fundamentally change about your operation to make you profitable? And I think a lot of people looked for sort of the turnkey responses, which are the turnkey answers, which are, okay, I'm going to invest in this great sales and marketing program, right? I'm going to spend a couple of thousand dollars a month and that's going to bring me new customers. So, my answer is new customers are going to fundamentally change my value proposition.

[00:30:04] Well, if you're an organization that has a lot of customer churn, bringing in those new customers may not be your answer, right? Or if you're an organization that is not able to optimize your margins, you could bring on a ton of new revenue. But a lot of that revenue may not be realized as profit, you know, to your operation. And so, that may not change you fundamentally. Or is it a training thing? Is it a staffing thing, right? Do you need to up the level of engineers that you have on your team, right?

[00:30:31] Are a lot of your queries being addressed by level one engineers? Do you need to think about putting in a higher level, a higher skilled resource who's more self-sufficient and can provide a faster, better response, right, to your end customer and improve customer satisfaction scores? So, I think a lot of things you need to think about if you're operating kind of at the margin.

[00:31:16] Mm-hmm. You know, am I swimming upstream if headwinds come up? No. I'd say, look, if you're a small MSP, there are a lot of things within your control, right? So, if you're asking me that question as a $20 million MSP with $4 million in profit, it becomes a little bit harder, right, to maneuver and to make those changes.

[00:31:39] But if you're a small MSP, say, a typical $3 million to $5 million revenue MSP generating somewhere in the range of 15%, you know, profit margins, there are a lot of things that are within your control. So, one of the things you might want to think about is what does your book of business look like? How many customers are you serving? Have you ever done a profitability analysis on your customers?

[00:32:02] So, if you kind of put all of your customers in, you know, top quartile to bottom quartile from, not from revenue, but from profitability, what would that picture look like, right? How many of your customers would fall into the bottom quartile of profitability where you could actually be losing money servicing those customers, right? Your team is spending way too much time addressing issues. There are fires going on left and right.

[00:32:28] You're getting calls all day long from this small, you know, $1,000 a month MRR customer. So, take a look at that, you know, as a starting point. Think about what's really driving your profit. And I don't think it would be surprising to say that, look, there are probably 20% of customers, right, the Pareto principle, 20% of your customers drive the bulk of your profits. Treat those customers like gold, right? Do everything you can to keep them.

[00:32:55] And then is there a way that you could better utilize your resources, your staff, right? So, if, you know, 80% of your staff time is spent addressing questions from marginally profitable or unprofitable customers, is it time for you to think of one of two things? A, raising your pricing with those customers to improve your margins. Or B, at some point, just kind of sunsetting those customers, right?

[00:33:22] Is there a point at which you have to think realistically, look, my people time is worth more, right? I should be spending my people time servicing more profitable customers, bringing on more profitable customers. So, I think that's a strategic mindset. It's very hard for MSP owners to think that way, right? Because you want to make everybody happy, right? If you brought on a customer and they've been with you for five years, you want to keep that customer. You want to make them happy.

[00:33:49] But as a business owner, you've got to think very, very clearly and say, maybe that customer isn't right for me right now, right? Maybe there's a different set of customers I need to think about. So, to answer your question, what's within your control? I think that's one of the things that's within your control. The other thing that's within your control is going to take a little bit of time. But can you develop the knowledge and capabilities to build clear specialization in a particular industry?

[00:34:13] And there are many, many industries out there, right, that have a higher threshold for service requirements, for regulatory and reporting requirements. We talked about a few of them, right? Healthcare, medical practices, law firms, financial service firms. All of those kinds of companies are very valuable for a number of reasons. A, you can potentially price your service offering higher, right? Because it's probably a more sophisticated solution that you're going to need to offer them.

[00:34:43] B, once they're with you and you can prove your capabilities, it's going to be extremely difficult for that customer to leave because you're so deeply embedded within their organization. It's going to be really hard. So, I'd say the second thing is really be selective about the types of businesses that you bring on, the capabilities that you as an organization want to have, right?

[00:35:05] So, do you need to bring on, if you want improved cybersecurity capabilities and the ability to offer a cybersecurity add-on solution for $50 or $75, you know, per user per month, do you need to think about bringing on board a CISSP, right, to give you that credential? Do you need to think about offering VCSO services? So, we've seen this done very, very strategically, even for small MSPs, right? There's a small company that we brought to market.

[00:35:33] It was generating barely $3 million in revenue and about half a million in profit, but had very strong cybersecurity capabilities and also VCSO capabilities. So, they had a CISSP who was basically part of the leadership team of their top five customers, right? So, sat at the table every quarter, was part of quarterly business reviews, was discussing, you know, budgets, right? So, how much do we need to allocate to our IT solution, right? How much do we need to allocate, increase our security spending?

[00:36:02] Was actually making recommendations and then was in a position, obviously, to implement. So, I think being much more strategically involved with your clients is something that's within your control. And I think, you know, VCSO services are clearly, you know, the spearhead to get you into that client, you know, much more. So, I think those are three things right there that you can do that can potentially make you much more valuable. So, it's not all about sales and marketing. It's not all about increasing your marketing spend.

[00:36:29] It's not all about hiring additional business development people, right? There are things you can do strategically that could, you know, increase your valuation. It's going to take time, right? So, it's not like it's going to happen over 12 months. But if you've got kind of this three-year plus horizon, those are great things to think about. Interesting. Earlier, we talked about a partial exit. And I think it's kind of foreign to most people. Can you expand on that? Yeah.

[00:36:56] So, one of the exercises that I often walk, as we're thinking about developing an exit plan, one of the exercises that I'll walk a business owner through is, let's say your business today is worth $3 million and you're generating half a million in profit, right? And you've got nothing particularly differentiated about your service offering. Yeah, you've got, you know, decent recurring revenue. You've got decent, you know, customer and staff retention, which makes you a sellable business.

[00:37:26] But, you know, there are many other sellable businesses like you on the market. So, you're probably going to get a standard market multiple, which could be somewhere around, you know, 5X. Call it 5X, right? Everything depends on the quality of the business, but let's just put that out there as a benchmark. So, you're probably looking at somewhere in the $2.5 million range for valuation. Say you accept a million and a half of that as cash, right?

[00:37:52] And say you put the other million into what we call rollover equity. So, essentially, what you're doing is taking the value of that million dollars and investing it in the buyer. So, the buyer, say in this case, the buyer is a larger strategic MSP or it could be more often than not a private equity firm, right? That's building and growing.

[00:38:16] So, if we take a look at some of the, I won't name them, but some of the big industry buyers out there, the big industry consolidators who are doing a ton of deals and sending everybody letters.

[00:38:28] If you, you know, I spoke with some of their business development people and, you know, one of the things they shared that, look, if you were an MSP and you sold to us, say, around 2017, a dollar of equity that you invested in 2017 could be worth six, seven, eight dollars today. So, that's one thing I want people – that's not always the norm, right? So, that dollar invested in a platform today may not return you, right, six to eight X.

[00:38:58] But if you pick the right buyer, the right management team, that dollar invested could net you three, four, five X, right, over some holding period, right? So, say we pick a three to five-year holding period. That's a great way to generate value. So – I've got a friend of mine that was wrestling with selling and, you know, wasn't sure he wanted to and back and forth and back and forth. And every time I talk to him, he's definitely going to sell and then he definitely wasn't. Yeah.

[00:39:28] He kind of on the fence and finally did. I know a lot of those people, Damien. I bet you do. And this is just a really good friend of mine and he did sell. And kind of like you said, except instead of more, you know, almost 50-50, it was – he took about 80% of the value and left about 20%. Oh, he rolled over 80%? No, no. He kept – he rolled over about 20%. Yeah, that's the norm. He took out a lot. Yeah, yeah, sure. Yeah. Sure.

[00:39:54] And so, it was either three or four – now, in his case, he was one of the first. So, he's kind of the – That's the other piece. You've got to be in early. That's a pretty big, important part. Yes. So, he was really like the driver and then they went and rolled up a bunch of others as part of the platform play. Right. And it was either three or four years later that exited. And so, remember, he left 20%. And so, he'd been building a business for over a decade.

[00:40:23] And then four years later, the 20% made him over double what his other – which really means that it's like a 10 times return on his money. Absolutely. Absolutely. So, like you said, there's no guarantee there. There's no guarantee. In this case, he took 80% out. So, he said, I could – I'm going to operate my life like I will never have another penny. And then – but it's funny because later he was talking to me about it and he's like, I spent a decade building this.

[00:40:53] But in the last four years after that, I made more money not working. Absolutely. You hit it, Damian. Right? You hit it. And so many business owners, I have to talk to them about this. And sometimes they're so risk averse. I'm saying, look, you're taking 80% of the value of your business off the table. That 20% that you keep on the table could be worth two or three times what you took off the table. Right? Are you ever going to be able to grow your business to that level organically?

[00:41:18] So, I'll just kind of have one diversion that kind of talks about this a little bit. So, you know, I was talking recently to a business owner in New York, an MSP owner in New York. And, you know, very young guy, super smart, built the company to about $5 million in, you know, five or six years. You know, very profitable organization, you know, close, you know, a million and a half plus in EBITDA. And so, you know, the first conversation I had with him, he said, no, I don't think I'm ready, right?

[00:41:47] I think I'm going to grow this myself. And I asked him, well, what's your goal? Where do you want to go? And he said, look, I'm young. I think I can make this a $20 to $25 million revenue company, you know, based on what I've done. And I said, you absolutely can, right? You absolutely can. A couple of things to keep in mind, right? How long will it take you to get there? How much time and effort and investment will it require? How many different evolutions of your business model will be required, right? Because the business model you have today isn't fit for purpose to run a $20 million MSP, right?

[00:42:17] You're going to have to re-engineer and become a much more sophisticated, operationally mature company. You're going to have to have different skill sets, right? And you're going to have all of these investment cycles where you have to ramp up your investment in technology and people and marketing. And that's going to dilute your margins for a period of time. So are you willing to go through those up and down cycles, right, where your margins are spotty and you're not able to pull as much business, as much, you know, money out of the business as you are today?

[00:42:45] But ultimately, your goal is, yeah, it's going to be a more valuable business. So are you willing to go through all of that? And then the third piece is how much of your focus, right? How much of your energy is it going to require? And is that something you're willing to commit to for the next decade, right? That's one of the things you need to think about. The alternative to doing that is you could do exactly what we discussed, Damien, right? You could take, you know, in his case, young guy.

[00:43:10] If we have the right buyer who's willing to offer this amount of equity, you could take 50% of the value of your business off the table today, right? Which is going to be a multimillion dollar exit. And then you could take the other 50% of it, roll it into equity in the new buyer. And that piece of it could make your business even more valuable in a decade than if you executed flawlessly and got to that $20 million mark yourself, right?

[00:43:35] So you could actually sit on the beach, you know, have some involvement in the business. Obviously, you want some oversight, right? Have some involvement, but not to the level that you have today. Your life will be, you know, significantly improved. And ultimately, you could get a higher value exit than if you went this alone and tried to build it yourself. And so, you know, that's a scenario that we try and get a lot of business owners to start thinking about. But recognize that nothing is free.

[00:44:06] Everything comes with risk, right? So you've got to do your homework. You've got to pick the right buyer. You've got to make sure that they've got a strong enough balance sheet, that they've got a really capable management team that's motivated to grow. And that, you know, if you're going to roll that much in equity, if it was me, if I was rolling that much in equity, I'd want a seat at the table, right? I'd want to have some visibility into what's happening. How are investments being made? I'd want some decision-making rights.

[00:44:33] You know, I'd want some involvement in the business, right? Just to safeguard my equity. That makes a ton of sense. We started talking about buyers. What are my options for buyers? Because I think this is another misunderstood concept. And who are they typically and who are they typically? They're everybody, Damien. They're everybody. When we bring a business to market, we'll get a ton of interest, right?

[00:45:00] So one of the first things we have to do is really understand ability to fund the deal. And, you know, sometimes we'll ask for proof of funds, right? If we're just not sure if it's a buyer that we haven't worked with before. So everybody is interested in buying an MSP, starting off an MSP. You'll get a lot of individual entrepreneurs, right? So, you know, good for them. You know, they're very interested. They'll put their best foot forward. They'll tell you that they've got all sorts of funding.

[00:45:29] It's like, yeah, my college buddy's dad is a multi-cazillionaire who's promised that he's going to fund, you know, any venture that I do. You know, and then if you do go forward, you'll find out that, no, that person doesn't exist, right? There's no money there, right? It's just all the story to trying to get their foot in the door. So one of the first things we have to do is vet the buyers financially. But to answer your question, there'll be three buckets of buyers.

[00:45:54] So you've got your large private equity firms, right, who are well-financed, really strong management teams. They probably have on their board or directly on their operating team people who've owned MSPs or have exited MSPs. And they have access to additional capital. So if they find, you know, a couple of really good assets that they want to buy, they will have the funding available to execute those deals.

[00:46:24] So, you know, large, sophisticated buyers. The other type of buyer, you know, somewhat similar are the large strategic buyers. So larger MSPs, right, who want to buy smaller MSPs. Typically also well-funded, you know, capable of doing the deal. And then the third set of buyers we get are what I would call individual buyers, right? So it could be entrepreneurs. There's a term out there called, you know, search funder or independent sponsor.

[00:46:51] What I've seen a lot come my way is I think because they teach a course at Harvard on how to do this, right? So I get a lot of Harvard grads, like freshly minted Harvard grads coming my way. You know, I've got the funding lined up, right? I've set up my company. I've got, you know, this family office that's going to back me. I've got this source of capital. And they'll put together a really compelling case, right? But it's sort of hit and miss, right? Some of them may be able to actually pull through the funding. Some won't.

[00:47:19] But what I've found is when I engage with those types of folks, it becomes an academic exercise sometimes. They'll ask for an inordinate amount of information, right? And they'll use all of their, you know, their financial training that they got in their MBA program. And they'll kind of throw it at you. And it just ties up a ton of your time, right? Answering a lot of, you know, I think unnecessary questions, redundant questions. The more sophisticated buyers like the private equity firms, the large strategic buyers know exactly what they're looking for, right? They know critical questions that need to be addressed.

[00:47:49] And they know how to work a process to close a deal within 90 days. So ultimately, that's our goal, right? Once we engage with a buyer, once we've got a letter of intent, we don't want the deal to drag on and on and on because that's super taxing for everybody, right? It's just really stressful for the business owner. It takes your eye off the business. So we just want to get to that point. Just get the deal done quickly. Let's talk about that for a moment.

[00:48:17] I don't think people realize what a data room is, how intensive this is, how much time it's going to take. Yep. So can you talk about what I should expect? I'm selling my MSP. Yeah. How much time do I got to spend? The kind of due diligence that's going to be required. Great question. Great question, Damien.

[00:48:41] So I think for business owners who are getting letters from people saying they want to buy your business, and sometimes the letters will include a number, right? I want to buy your business for a gazillion dollars. And you'll say, wow, yes, let's go. There's a ton of work, right? There's a ton of work involved in actually moving a deal forward. So there are different levels of evaluation involved. You know, so if you have interest from a buyer, then the first thing you'll want to do is get some expression of interest, right?

[00:49:11] So get something on paper saying what they think your business is worth, right? This is before they've done diligence. So they may not know a ton, right? They may have seen a profile of your business. They may have seen some high-level financials. And they'll say, look, based on the information you've provided us, this is kind of our expression of interest. We think that your business is worth this much. This is how much we think we can offer you as cash. This is the seller financing component. And then this is the rollover equity component, right?

[00:49:39] And then they'll talk a little bit about their transaction process. We think we can secure our funding and close the deal within 60 days, 90 days, whatever it is, right? So you'll get that letter and that will tell you, okay, so here's somebody who's put some thought into it and thinks they're serious about my business. You know, what we'll do after that is we'll, you know, screen the buyer, make sure that they have the funding, make sure that the business is a good fit for them, right? So interview them almost. It's like, okay, why are you interested?

[00:50:08] We've got a bunch of other buyers who are interested in this business. Why you, right? Why should we go with you? So if we get really clear answers to that and it seems like it's a really good fit, the third thing we'll try and do is do an assessment of culture. You know, do we think based on the people we've met on the buyer side, do we think that there's going to be a good relationship through the transaction? Because the transaction is really tense, right? A lot of really tough questions get asked.

[00:50:35] Once you get to the diligence phase and the contracting phase, landmines come up all over the place, right? And you've got to be able to resolve those pretty quickly and amicably. So do we think that there's going to be a good relationship through the diligence process? And then more importantly, if and when we do a transaction, do we think that there's going to be a good relationship and a good cultural fit after the actual transaction, right?

[00:50:59] Because there's going to have to be a lot of cooperation, a lot of communication, a lot of collaboration in order to make this work for everybody. In order for it to work for the buyer and in order for it to work for the seller's organization. So you've got a team of people who are now going to be part of, you know, probably a larger organization that could have different systems and processes and communication styles and maybe even benefits, right? So maybe the benefits initially aren't aligned.

[00:51:29] So you've got to work through all of those issues and make sure that there's a motivation on both sides to, A, recognize those discrepancies and, B, resolve them, right? So those are things we try and vet up front and make sure there's a really good cultural fit. Make sure that there's an ability to fund the deal and make sure that the transaction process isn't going to turn into a nightmare. Yeah. So maybe 90 days, but I think the part, maybe if you get a good buyer and the deal goes as planned.

[00:51:59] I think the part people miss is how much of that owner's time is going to be involved. Correct. Yeah, that's a really good point. So, you know, we'll often get the question, well, you know, I'm getting direct approaches from buyers. I think I can handle this myself. And we say, great, you know, if you think you can, wonderful.

[00:52:18] If you've got somebody who's going to step into your shoes while you manage this full time, while you, you know, manage the diligence process, the negotiation process, the contracting process, that's great. Just recognize it's going to pull you away from the business. So having an advisor, right, whether it's us, whether it's somebody else, takes that pressure off you. And also what it does is it gives us the ability to kind of play parties off against each other, right?

[00:52:45] So if somebody isn't playing nice, right, say we engage with a buyer and all of a sudden they start to try and renegotiate the price. You know, they'll find all sorts of warps and they'll say, well, we didn't know this. We didn't know this. We are in a much better position to play hardball and say, you know what? We've got three other buyers lined up behind you who are willing to do the deal at this price or even a better price. Right. So if this isn't something that's going to work for you, we need to know now. Right.

[00:53:12] And let's let's just kind of shake hands and move on so we can kind of play the bad cop on behalf of the business owner. We're also in a position to negotiate better. Right. So we can negotiate a higher price because we run an auction process and everybody knows it's an auction process. And there are multiple other bidders. Right. Who are motivated to do the deal.

[00:53:34] But also what we can do is if you're somebody kind of in your 50s, 60s and you're thinking about retirement, we can push the cash component of the deal. Right. So a lot of times, you know, what buyers will try and do is they'll offer you this composite number. Yeah, I'm going to offer you five million dollars for your business, but only two million dollars of that is going to be paid as cash when we close the deal. The rest of it is going to be some kind of contingent payment. Right. Right. It could be an earn out based on the performance of the business.

[00:54:02] It could be a note that's paid out to you over a period of time and there could be some role of equity in there. So there could be a lot of risk in there, especially on the earn out piece of it. Right. Because you have no idea how the business is going to be run once you leave. Your employees could leave. Your customers could leave. And all of a sudden, your top line could take a huge hit and then you won't get paid that piece of it, which which is a huge amount of cash sometimes. So those are things will really push hard and will say, no, we absolutely need this much cash.

[00:54:30] Right. For us to be able to work with you. That's what it's going to have to be. So that's on the negotiating piece of it. But then the actual what's involved in the actual transaction process. So I'll describe this a little bit. Right. Once we get that initial expression of interest, we'll go through this sort of interview process, make sure that there's a good fit with the buyer. If we feel there is, we'll introduce them to the seller only then when we introduce them to the seller. So then there'll be a Q&A between the buyer and the seller.

[00:54:57] Right. The buyer will get much more comfortable with the operations. They'll they'll ask questions that only the owner can answer. We can't answer some of those questions. So they need to get that information directly from the owner. Once they have a really clear understanding of the business, then they're in a position if they're still interested, then they're in a position to put forward a letter of intent, which is a much stronger offering offer kind of document. Right. Well, they're able to stand behind the numbers.

[00:55:26] And usually once we get to that point, Damien, we get a letter of intent in front of us. It's very unusual to renegotiate the financial terms. Right. There might be small issues here and there. Obviously, if you lose a customer or there's some material change in the business, then it has to be renegotiated. But barring that, we typically close at the number that's outlined in the letter of intent. So once we get that letter of intent, that's our signal that, OK, this is a serious buyer.

[00:55:53] There's a really good probability we're going to be able to close this transaction. Then what we will do is set up a data room with all of the documents that the buyer will need. So we'll put, you know, all the historical financial documents, the P&Ls, the balance sheets, you know, cash flow statements. We'll put in there, you know, lease agreements, employee census, customer information. Right. So they'll typically want to see sales by customer by month.

[00:56:21] They'll want to see a breakout of recurring, non-recurring revenue by customer. And it's over a period of time so they can see those trends across your entire book of business. Right. So what is your your customer base look like today versus what it looked like a year ago? And then they'll want to see all of your corporate documents. Right. All of, you know, what your articles of incorporation, everything else that's associated with the business.

[00:56:44] They'll want to see any kind of loan documents. They'll want to see insurance, workers comp, all of those kind of things. So anything you can imagine that's involved in running your business is probably going to be in the data room. And so getting that set up, helping the buyers navigate the data room, making sure they're pulling the right information, making sure they're continuing to progress their evaluation once we've opened up the data room is really important.

[00:57:12] And then one of the things we'll typically do at that point is put in place weekly calls between the buyer and the seller or between between us and the buyer to make sure that we're continually addressing their questions, continually identifying any kind of issues or roadblocks to doing the deal and continually monitoring their ability to fund the deal. So are you moving forward on the financing? Right. Has it been approved? Has your lender kind of provided their commitments? Right. What's the process you need to go through?

[00:57:42] So making sure we have real visibility that this deal is actually moving forward. And then in that process, there are a ton of questions that go back and forth, back and forth. Right. That we're typically the middleman in all of that process. We'll try and answer as many of those questions as we can and keep the owner out of it so that, you know, he or she can run the business. Once we get to the follow- How much time should I expect to spend as an owner? Is it an hour? Well, I would say, you know, once you get deep into the-

[00:58:10] If you're- So I'll answer that question in two ways. If you are running the process and doing everything yourself, I'd say it's going to be a bulk of your time, right? I'd say, you know, probably, you know, half of your time, two thirds of your time is going to be spent doing this. If we're doing it, we'll pull you in as needed, right? So it might be five or 10% of your time. So that's the big difference. That's a really big difference, right? That's the big difference, yeah.

[00:58:34] Yeah, I've talked to a number of people that are like, I did not realize that I gave up, I had to give the folks that did this without an investment banker that did not realize two big things. One, they were unable to do their role, whatever role they were filling. Right. You know, they might still have a sales role. They might still have a management role of leadership depending on the size. But they were basically unable to do their role. They were so consumed with this process. Right.

[00:59:01] And two, they talked about how lonely and isolating it is because you can't share. You might have built a small MSP. Everybody knows each other, but you can't share what's going on or perhaps that it's even for sale until, you know, there's a deal done or certain stakes. And so it's very lonely and isolating because you've now disappeared from your normal role.

[00:59:25] Yet you really can't tell the team that you spent 40 to 50 hours a week for the last decade or two with. It's going to be very lonely and isolating. Yep. So being able to take that time out. And then I know that there was an MSP that didn't hire an investment banker and they didn't really have any teeth in their letter of intent. They told them they closed in 60 or 90 days. It took 10 or 12 months.

[00:59:55] Wow. And did they negotiate a lower price? Was that part of the plan? Well, the buyer got a lower price. What happened is the MSP thought they were closed in 60 or 90 days because there's two things happened. One, because they took their eye off the wall for so long, the business started to decline. They started to lose some of their customers, which caused them to have to renegotiate a couple times.

[01:00:22] And then the unforeseen that you talked about, there was a medical issue. And so that also had them spending less time. And so between the two, they sold for half. Wow. In 10 months? In the letter of intent was. Crazy. Yeah. And so if you take your eye off the ball for 10 months or even six months, you just don't know what could happen. So just, you know, if you don't know what you're doing, right? Most of us have never sold a business. Yes.

[01:00:50] And so since this is so important, make sure you get the right people. I wanted to kind of continue on that point, Mahan. So we need to get the right investment banker. What are the other key advisors that I need to go ahead and surround myself with? Yeah. So I think probably after your M&A advisor, investment banker, probably the most important person is your transaction lawyer. Right. So you've got to have on board.

[01:01:20] And it can't be your general lawyer, right, who's put together your customer contracts. It's got to be somebody who's done M&A, who understands M&A specifically if they've had experience doing technology M&A. There are a lot of complex complexities, right, that need to be addressed in the various documents. You've got, you know, multiple documents that are involved in a sale process.

[01:01:43] And so you've got to make sure that you're decreasing your risks as much as possible. So the buyer will put forward a document where everything in the kitchen sink is written into the document, right? So you're indemnifying this. You're indemnifying that, right? There's this warrant. There's that warrant. It's like everything is in there to protect the buyer because typically the purchase agreement will come from the buyer. And so you've got to work with that template.

[01:02:13] And it's, you know, basically to their advantage. And so you've got to have a good M&A advisor who can, you know, negotiate out terms that are damaging to you that could put you at risk after you sell the business. So if there's something that's discovered after you sell the business that wasn't disclosed, are you going to be held liable, right? Could you be responsible for repaying a significant portion of the proceeds of the sale?

[01:02:43] Because there was something in the agreement, right, that obligated you to do that. So you've got to make sure you understand clearly what you're doing. You've got to have the right indemnification language in there and have the right, you know, caps in place so that your indemnity is capped to a certain level, right? You're not going to pay the full purchase price of the business. It's going to be capped to 15 percent or whatever that number is. So those are things that a good M&A advisor can can help you with.

[01:03:11] And a good M&A advisor will also keep the other legal team on on track and on pace because they're doing multiple deals, right? You're not the only deal that they're working on. So things can really come to a grinding halt on the other side if they're super busy or if they just don't have the motivation to move the deal forward as quickly as you do.

[01:03:36] And so a good, you know, lawyer on your side can really engage with the other team and keep things moving. So I think that's a good advisor you need to have on your side. A third one who's always good to have on your side is a good financial planner, right? So it could be your existing financial planner. But if that financial planner has just been putting your money in, you know, S&P funds for the past, you know, 20 years and maybe a couple of bonds,

[01:04:05] that may not be the right planner to advise you on how to best manage, you know, proceeds from a multimillion dollar sale. So you may need to think about getting a different financial advisor who can then think about different investment vehicles that can decrease your tax liability, maybe, you know, map the right, you know, opportunity risk, you know, matrix for you.

[01:04:30] Maybe now that you have a bigger pool of money to work with, you might be in a position to put a little bit more of your capital at risk and generate higher returns. So, you know, somebody who kind of understands that and is able to work with you at that level is very important. And then your accountant, right? So there are things you need to do, right? You need to report the sale on your income tax. You need to understand how to handle the gains, right? So at what tax level are you going to be taxed?

[01:04:56] You need to have somebody who really has done transactions and understands that process. So I think from my perspective, those are kind of the four pieces, right? So you've got the M&A advisor, investment banker. You've got the transactions attorney. You've got the financial planner and the accountant. Yeah, I think it's easy to get lost in one of those. So I know that the obvious answer is you. Don't miss the opportunity to hire my hen, but how do I choose the right investment banker, right?

[01:05:25] I know the answer could be you, but like it is somebody that if I built my company my whole life and then there's this one big event that's going to make up my wealth, I don't know anything about it. Everybody says I'll help you. Maybe even some of them say they do things with technology, but, you know, things could be one or two deals over the last decade. Right.

[01:05:45] So I'm curious, how do I choose the right, since the investment banker seems like the linchpin here, how do I shop for something that I've never shopped for and actually choose the right investment banker? Yeah. So I'd say select somebody who's fit for purpose, right? So, you know, if you're a small MSP under $5 million in revenue, you may not need to go with a very large investment bank, right? And you may not be the right fit for them either, right? They may need bigger clients. So the word is boutique, I think. Yeah, I think boutique is important, right? So boutique.

[01:06:15] But there are a lot of people out there who call themselves M&A advisors or the other term that's used is business broker who don't necessarily have experience with MSPs, right? So they're out fishing for business. They'll send letters to everybody. They'll make it sound as though they understand your business, that they've got a buyer for your business. They really don't, right? They're just fishing. Somebody who understands MSPs, right? Somebody who understands all the issues we talked about today, right? The technological evolution, the consolidation, right?

[01:06:42] So all of these trends that are happening, how you carve out a value proposition, how you build operational maturity, right? What can you do other than sales and marketing to build value in your MSP? I think that's important. The other thing I'll throw out, Damien, is it's not all about the transaction, right? So on our side, as I said, we are involved in the exit planning process. So we're happy to always talk to people, right? So you could say, you know what? I'm not ready for a sale right now. It might be two or three years from now.

[01:07:08] We're happy to work with you, give you whatever perspectives are helpful to you, right? So we've got a bunch of different case studies, MSPs who've kind of re-engineered their operation and increased the valuation by 20% or 50% over some period of time. What's the roadmap, right? How did they get there, right? So could you get there in two years? Could you get there in three years, right? To, you know, before you're ready to sell. So I'd say that that's important as well, right? It's not all about the transaction.

[01:07:34] It's who can help you build the value in the right way within your timeframe. And then I'd say the third piece is who do you trust? You know, I think maybe the most important piece, who do you trust? You know, is it somebody out there just to generate a commission, just to do a transaction, or they genuinely care about your business? Do they genuinely care about the best outcome for you?

[01:07:57] Are they going to find the best buyer, the best valuation, and the best set of deal terms, which could be the highest amount of cash possible for you? And are they going to work hard to get there? So if, you know, some M&A shops are very, very transactional, right? They'll try and close transactions as quick as possible. Once they get a company under agreement, their goal is to sell that company as quick as possible to, you know, sometimes the first buyer that comes along, right?

[01:08:24] And they'll convince you that the valuation is right and that the deal terms are right. So you've got to make sure that you're working with somebody who doesn't have that same time constraints. So it's not unusual for us, for me, to work with a buyer for nine months, 12 months before we actually find the right buyer for them. And so part of our goal is to make sure that there's a really good match, right? A good cultural fit, a good financial fit, and make sure that it's going to be a great outcome for everybody.

[01:08:52] So I think if you put those things together, right? So what's the right type of M&A advisor for you, a boutique? Have they had experience? Do they understand the MSP cybersecurity world? Do they understand what's happening? Do they understand how you should think about building and positioning your business to increase your valuation? And then the third is that trust and that, you know, collaboration and communication piece. Who do you feel comfortable with? Who do you think is going to best represent your interests?

[01:09:21] And I'd say if those three things are there, stop your search. You found your right partner. I love that. I want to switch gears. A couple questions that I just want to answer or ask briefly. What's the range of valuations you're seeing? What's some of the best in class? What's some of the worst in class? That's a great question. That's a great question. So I'll say, look, it's clearly it's still in my mind for good quality, right?

[01:09:50] That's the caveat for good quality MSPs. It's still a seller's market. So if you've got a great MSP that's generating more than half a million in, you know, adjusted EBITDA and it's good quality revenue that's predictable and it's growing at a decent rate, there are going to be a lot of bidders out there for your business. So your job is to select the best one.

[01:10:20] So valuations are really, I'd say that, you know, there are people love to throw out metrics that, you know, for a half million dollar EBITDA MSP, it should be somewhere in the range of 5x. For a million dollar EBITDA MSP, it should be somewhere in the 7, 8x range. And then once you get over 2 million, you could get into the double digits, right? People love to throw out those metrics. I'd say the job of your advisor should be to get you the best offer in the market.

[01:10:49] And I'll give you a couple of examples. So I've got an MSP in the market right now that's generating 4 million in adjusted EBITDA. The top line doesn't reflect that, right? So people think, oh, wow, it should be like a 20, 25 million dollar MSP. Well, they're not, right? They're kind of half of that. But they've just operated extremely well. They've built the business to run on high margins. They've got really strong capabilities, automated processes, and their price point is quite good.

[01:11:19] And they've got really good specialization, right? In health care, they've got regulatory and compliance capabilities, severely strong cybersecurity capabilities. So all of that has helped to create this really valuable high margin company. And so the range of valuations we get is all over the map, right? So we'll get some buyers telling us the margins are too high. You need to adjust to industry metrics.

[01:11:42] We can't reward you with a double digit EBITDA because we think that there's actually risk. And this $4 million EBITDA is going to come down over time. And then there are others out there saying, look, strategically, this is right in our sweet spot, right? So we're health care focused, cybersecurity focused. We love what they're doing. We love their capabilities. We love their staff. We're willing to come in at that double digit EBITDA number. So I'd say the exercise should be really do a great assessment of the market, right?

[01:12:12] Engage with the right buyers, and then you'll get the valuation you need. So the one thing I'll say to MSP sellers out there is don't necessarily assume that your company is going to sell for the industry benchmarks, right? You could sell for above that. You could sell for below that, depending on what your business and your quality of earnings look like. So with all that, as a caveat, what's the low? What's the high? I mean, what do you see on that? I think so.

[01:12:38] You know, I think obviously as your adjusted EBITDA or kind of your net income adjusted EBITDA goes up, your valuation goes up. And that's just because the risk in the business goes down, right? So you're probably operating, you know, as a much more mature organization. You have a larger set of, you know, more sophisticated customers. You probably have decent customer employee retention. And you probably have a really strong service offering and value proposition, right?

[01:13:08] That makes you a different kind of company than just your run-of-the-mill MSP. So, you know, once you scale up, your multiple will go up. I say where the pressure comes is when you've got an MSP that's, say, kind of in the $2, $2.5 million revenue range, generating less than half a million in profit or EBITDA. That's when the pool of buyers shrinks significantly.

[01:13:34] And, you know, you're probably not a target for the larger buyers at that point. So private equity probably isn't going to bid on you. The large strategics may not bid on you. So you may be in an environment where you're kind of selling to a smaller regional MSP or you're selling to an individual buyer, right? Whatever they want to call themselves, right? Independent sponsor or search funder who's going to have to then hobble together their source of funding.

[01:14:03] And you could be dealing with a buyer who has to get an SBA loan, which creates its own world of complexity, right? There's, you know, a lot more reporting required. There are a lot more financial checks and there's more risk. The funding may ultimately not get approved. So you could be going down this path, engaging with the buyer. You may have completed diligence waiting for that SBA loan to get approved. And ultimately it may not get approved, right?

[01:14:29] So you might have wasted six months of, you know, time to get to that point. So I think the pressure, Damien, really comes in when you're less than a half million in EBITDA because then there's a lot more risk in the business. Once you get above a million in EBITDA, you become a much, much more attractive acquisition opportunity, right? There's less risk in the business. And obviously the bigger you grow, the more valuable you become just based on scarcity.

[01:14:55] There aren't a ton of $2 million EBITDA MSPs on the market at any given time, right? There are even fewer $5 million EBITDA MSPs. Once they come to the market, there's a real auction, right? You could get a hundred different players, you know, bidding, right? Really good players bidding for those assets. So that's when you can really ratchet up the valuation. I love that. What's the final question? What's the biggest lesson you've learned along the way?

[01:15:25] Oh, that's a really good question. The biggest lesson I've learned along the way. Let's kind of put it into the context of this conversation. Never assume you're better than you really are, right? Always have some level of insecurity that you don't know what tomorrow holds. Right? Never be overconfident. Never assume you're at your peak valuation.

[01:15:53] Anything can change on a dime, especially for small business owners. Anything can change. We've talked about a lot of those things. Always be ready. I'd say that's what it is, right? I'd say the biggest lesson I've learned is always be prepared. Always anticipate. Always understand what you can control, how you can control it, and make yourself better, make your business better. And then what can you not control? And of those things you cannot control, have you done a really good SWOT analysis to understand

[01:16:22] what that means for your business? So whether we're talking about the evolving technology trend as it relates to MSPs, whether it's AI or cybersecurity stacks or whatever it is, whether it's the consolidation trend, whether it's this silver tsunami that we talked about, right, which is the aging of the population and this huge wave of businesses that will come to market over the next few years. And the one we haven't talked about is the economy.

[01:16:50] So, you know, there are different schools of thought out there. But do you buy into the fact that consumers are tapped out, right? That, you know, that there is no more money available for consumers to spend? Are you of the opinion that real estate is due for a huge correction? You know, are you of the opinion that there's a global liquidity crisis out there, right? That we've just spent too much money for too long. And now there's a shortage of dollars, you know, especially outside the U.S.

[01:17:16] And are you of the opinion that there could be a slowdown in earnings, right, as we head into next year across the board? So are you thinking strategically, right, about the economy and what that could mean for you and more importantly, what it could mean for your customers? So if we go through another economic cycle where there's a lot of pressure, your customers are going to feel that pressure as well. Well, which means that there could be some pricing pressure on you, which means there could be some attrition, right?

[01:17:45] You could lose some customers in that process. So I'd say the biggest lesson, the biggest lesson I've learned personally is never assume that today is going to be as good as tomorrow, right? Always assume that there's some risk out there that you don't know. Always plan for that risk. And that'll put you in a good position. Yeah, I think that's good advice. Hard maybe as an optimist to hear. But very, very pragmatic. And plan. Have contingencies.

[01:18:14] Wonderful if it doesn't occur. Yeah, wonderful if it doesn't occur, right? Absolutely. We all don't want it to occur. But then don't be surprised. Don't be that guy who's surprised, right? So let your competitors be that guy who's surprised. Yes, I love that. Mahan, for anybody that would love to get your help or just ask your question, what's the best way to find you, connect with you? Send me an email. So it's just Mahan, M-A-H-E-N, at Bristol.group. And then I'll also leave my phone number with you. So feel free to reach out.

[01:18:43] I always take calls. Awesome. We'll make sure to get all your phone number and your email in the show notes. So anybody that's interested, don't miss out. And it's been my pleasure. Thank you for being on MSP Mindset. Thank you, David. My pleasure.