EP238 - M&A Mastery – Part 2 – Preparing To Sell Your MSP with Ken Roulston & Ian Luckett

IAN LUCKETT: In this episode of the IT Experts podcast, we're talking episode two of M and A Mastery. We are helping you understand the whole M and A link landscape for your MSP.

INTRO: Welcome to the IT Experts podcast, the only podcast to help MSPs scale to 1 million, and if already there, get to five and go faster at the end of the day. Isn't it all about building a business that works for you rather than you for it? I hope you enjoy the show.

IAN LUCKETT: So good morning, good afternoon, good evening. Welcome to the IT Experts podcast today, this is a two out of the three podcast trilogy all on M and A with Ken Roulston. Good afternoon, Ken. Welcome back to the show.

KEN ROULSTON: Hi, Ian. Good to be back

IAN LUCKETT: And great stuff. This is session two now. It's like we've got everybody on a workshop. Ken and I have decided to run a three podcast series all around M and A mastery, understanding M and A for your MSP, all the acronyms all in one. If you've just jumped straight into the podcast on this show, please go back and listen to the previous episode which is all around the foundations of M and A overview of the buying, selling a really inspiring story all about Ken's story on why he's talking here today. And in today's episode we're going to talk specifically about the selling process.

However, before we do the reason that we're talking on this podcast is because we talk to many MSPs and a lot of them plan to exit or they have an idea that they want to exit at some point or another, but there's not so much of a plan, so I've been having some amazing conversations with Ken, who is an M and A channel legend, I shall call him, who should probably cringe at that. And to help us to understand and distill the foundations, which was episode one, the selling Process, episode two, and next week we're going to be looking at the buying process. But for everybody on the call today, Ken Brief introduction, who are you, what do you do? And who'd you help?

KEN ROULSTON: Thanks, Ian. I'm a long-term veteran, maybe not a legend of the, in case first having been working in it for 45-46 years now. Started off as an engineer, moved into sales and then laterally as, an MD I got more involved in the whole process of growing a business through acquisition. Initially, it was in the nineties through third party maintenance activities, but in 2009, I started an MSP from scratch and I made six acquisitions over the next 12 years, and then sold in 2023 when we were up to 17 million of revenue, 2 million of EBITDA employing 120 staff between Northern Ireland and the south of England. Since that, I've been spending some time working with some vendors on helping their partners understand the M and A process, put together a web tutorial with good friend of ours, Mark Copeman, M and A dot com is a site for that. And I've been working with a number of clients directly just trying to help them understand how to either buying or indeed selling an MSP.

IAN LUCKETT: Fantastic.

KEN ROULSTON: So that's the background.

IAN LUCKETT: Great stuff. And if you want to learn more about Ken's story, go and listen to the previous episode. It's very inspiring. It will certainly give you it'll either knock you in or out of gear with regards to mergers and acquisitions for your MSP. And yeah, nice little shameless plug there. M and A dot com with our great friend, Mark Copeman. We are going to share with you all the details around what that is, how it can help and help you understand, take this podcast and your M and A journey to the next level at the end of the show. However, today we are talking about the selling process now I hear it so many times, Ken. I thought my MSP was worth more than that. I can't believe that that's all they valued me on and the 80% of the work that we do at the Growth Hub will help you get a decent valuation in terms of owner not needed, your automation, your team, your SOP and all of these kind of great things. But there's many more aspects to the valuation in the last show, we talked roughly about some of the EBITDA figures and the multipliers around that, which gets quite exciting when you start layering on and buying, another MSP and integrating it and everything. But in your view, Kent, how does an MSP improve their valuation? How do they build value into the business?

KEN ROULSTON: The value really comes from the profitability. So it comes from, first of all, acquiring clients, acquiring revenue, either organically or through acquisition. Maximizing the margins that you're achieving on that revenue by buying whale. From vendors streamlining your cost of sales as much as you can, standardizing to try and maximize your procurement spent. And then of course, running the business as efficiently as possible. Yeah, because most MSPs probably spend 70% of their cost on labor. And therefore the biggest opportunity to maximize your bottom line is to maximize the productivity of your labor. And that can be done through various mechanisms. Of course, the most effective, I think is automation outsourcing, as two ways of looking at how you maximize output that comes from those resources, but it's about good general management, good general governance. You've got to look at every aspect of the business from the top of your P and L to the very bottom of it to make sure that you're getting the maximum value from that business that you should be getting. And you have to be aiming for at least getting 10% to the bottom line. Because below that, you're really not moving forward. So if you're below 10%, then you've got a bit of work to do. And that means looking at all those things, if you're above 20%, you're probably running very efficiently and there's maybe not much scope to do more, but it could also be assigned to a buyer that you're running too hot. If that is based on that level of profitability, is based on really sweating your resources to an unacceptable level and therefore putting client attrition, employee attrition in focus as an issue, yeah, and look, it all comes down to, if you want to maximize the value you get for your business, it's all about getting the bottom line to be as good as possible, along with making sure that your recurring revenue percentage is as high as possible. And in particular, you're recurring revenue from labor based services is as high as possible. And the two figures for that, as covered in the previous episode was, is 70% and 50%. Yeah. So you need to be aiming for those sort of levels. And it's not easy any business isn't easy. MSP work isn't easy, organic acquisition is difficult a winning new business. And I think every MSP owner I've ever spoken to, and I've spoken to hundreds now, has said the same thing. New business, new local acquisition is very difficult, and that's why there's such a thriving marketplace for acquisitions of companies which is driving a very exciting industry, I think at this point in time.

IAN LUCKETT: So, just from a clarity point, when we're talking about profitability, we're talking about EBITDA, aren't we?

KEN ROULSTON: Yeah. Look, in most cases, profit largely speaking equals EBITDA. The definition, behind those letters, it's earnings before interest, tax, depreciation, and amortization. And for earnings, you mean it means profit. A business in the MSP world is valued, largely speaking on its EBITDA. So it starts off with your profit and then you add back things like interest in tax depreciation, amortization to get an EBITDA number. But of course, then there's another stage which is adjusted EBITDA, which is where you can make alterations to that EBITDA number based on what is the likely recurring profitability of that business. Post acquisition. So if you are an owner of the business that's taking costs out of the business, but are no longer a necessity to be in that business, then post acquisition, you're going to be leaving the business and therefore you can add back what costs you are taking out of the business to the bottom line.

IAN LUCKETT: Got it.

KEN ROULSTON: You can also add back to the bottom line. One-off costs that are not of a recurring nature. So if you have, for example brought in specific consultants for a period of time to do one-off exercises like preparing your business for sale or otherwise, that's a cost that will not be recurring afterwards. So therefore that can get added back. So one off costs that are not a recurring issue for the business can be added back. So you got these three levels then of profit, EBITDA, and then adjusted EBITDA. And it's the adjusted EBITDA number that then gets the multiple attached to it, depending on how big a number it is to start with.

IAN LUCKETT: So what you've basically just said there is focus on your EBITDA, your profitability. But there is hundreds of levers that you can pull every single day with your teams, with your systems, with your clients, with your account management, with every single thing that you are doing to help, drive that forward. And last time we in the last episode we talked about the importance of vision. The importance of what do you want to walk away with, what does that look like reverse engineering back. And those are the things that create, that yearly, monthly, weekly momentum to make those little changes different. Every little, change makes such a big difference, once it's all compounded up into the profitability. I've got a question, Ken. This is a question from me.

KEN ROULSTON: Right?

IAN LUCKETT: Because I've always wondered this when I've been talking to MSPs. What's the impact of, and you just mentioned it, which is why I'm picking it up and it's not just a random question about cars or something like that. What's the impact if an MSP had an outsourced help desk, would that be attractive to a buyer or would that be not very attractive because they're not your own staff under your control? How's that kind of viewed?

KEN ROULSTON: I personally believe that it's not a big issue nowadays. I think that there's a wide understanding in the marketplace, that outsourcing, as I mentioned there, is a very sensible tool to be used to help run a business. Because acquiring talent is almost as difficult as acquiring customers and particularly good talent.

IAN LUCKETT: Yeah.

KEN ROULSTON: And the marketplace being what it is at the moment it's very tight for resource. And the cost of resources going up all the time. So many MSPs have been looking at and are now engaged in utilizing external service desks for the delivery of their services. It was a concern at one stage before we started going down that route. My chairman at that stage thought it would devalue our business to some degree. I didn't believe that was the case. But ultimately, when it came to our own exit, the company that acquired us was bigger than us, but hadn't done any outsourcing. And it was actually very interested in our model. And whereas we had 10 engineers outsourced when we sold, I believe that the company who acquired us earned now up to something like 25 engineers.

IAN LUCKETT: Yeah.

KEN ROULSTON: Because they saw what we did and they valued it and have gone on to use it since. So I think it's neither going to add value necessarily or distract or take away value specifically. But I think that it's just a necessity nowadays, for companies to look at because people and labor are expensive and they're variable in terms of what they deliver for a business.

IAN LUCKETT: The most important thing is that whatever business you are running, whether it be an outsourced or an insourced or whatever it is, it's running efficiently, right? That's what they're looking for, is can you walk away from it and us plug and play and it work?

KEN ROULSTON: And actually in many respects it could be looked at as a positive thing for an acquire for a different reason. And that is, if it's an outsourced arrangement, it probably is easier to get out of that than it is to let staff go. And if you have already got a very sizable service operation, whether insourced or outsourced.

IAN LUCKETT: Yeah.

KEN ROULSTON: The fact that you can turn that contract off, at any given point in time after an acquisition can be, a positive thing because, they're not necessarily going to pay more for it but they as a buyer are going to achieve more synergies potentially as a result of it. And therefore it's worth more to them than perhaps Yeah, it is to you.

IAN LUCKETT: Isn't that funny though? because you could also lose it from the flip side of you, which was what happened with you, which was like, do you know what? We're struggling with our service desk, but there's a service desk that's already plugged and played here. We could just expand that really quickly and that could get us out of the brown stuff. If that stuff's not, if it's not working, if that area's not working very well. So it would, we're going to talk about selecting the right buyer in a moment. But before we do that, let's talk about how do you prepare the MSP for sale? Now, I've heard, it takes a year, two years. One guy who was speaking to it took six weeks with no buyout, which was quite unbelievable and quite incredible. That was an extremely run business, what do we need to do if we think, yeah, I want to get out in the next year or two years, or something like that. What does that thinking process need to look like?

KEN ROULSTON: It starts from ensuring that at whatever point in time that you're going to exit, that you have put in place a strategy to maximize the valuation of the business, which means running it as efficiently in that period of time up until that stage. You know what buyers like to see is a business that is moving forwards, not moving backwards in the wrong. So they will tend to look back one to three years. So that's why I've always said to anybody, if you're only giving thought towards selling and you haven't put any preparation in place, you probably need at least a year to get your house in order, that means lots of different things. It means certainly making sure that all of your contracts are in place with your customers because buyers and particularly the advisors that buyers have love to see contracts. So you may have had customers for many years but they may not be up to date in terms of their contracts. That's something that you really want to try and get in place as much as possible. Yeah, as soon as possible that you want those in place, signed and current reflecting the service that you're currently providing. Similarly, you need to have that in place with your employees with all of your vendors, because when you get into this process of due diligence, that's the level of depth that they go into, they will want to see everything about your business and all of your relationships, whether with customers, employees, or with vendors. As documented as possible you want to also be showing to a potential buyer that you are running the business professionally. So therefore you should have records and an audit trail of major decisions that you've made in the business. Okay? Ideally, you should be having at least a quarterly board meeting or management meetings where you can demonstrate to a buyer the process that you went through when giving consideration to taking on more staff or expanding your service lines or otherwise, because again, what you're wanting to demonstrate to a buyer is that this is a well-run business. It's hasn't been run off the back of a fag packet. It's running to professional standards because that will give them a feeling of comfort that when they acquire the business, nothing nasty is going to come out of the woodwork. Yeah. So they want to see professionalism. They want to see the business being run ethically. They want to see, that you've got good customer retention. You've got good employee retention, which are two key factors as to whether a business is running properly or not. So, if you put yourself in the other position whereby as a seller you imagine you are actually trying to buy your business, you look out and say what would you like to see? And what you want to see is very professional accounts, professional contracts, corporate governance in place. In some respects you mentally flip it around in your head and think if I was buying this business, what would I want out?

IAN LUCKETT: And just a quick another question from Ian. Contracts, client contracts. We speak to people who have 30 day contracts. I don't want to tie people in because it's easier to close someone in a new business if they're on a 30 day contract. But yeah. Is it true that if you've got everybody on a 30 day contract, your business is literally worth 30 days revenue?

KEN ROULSTON: It certainly is a negative factor for the advisors that are involved in acquiring business, and I mean by that the solicitors and the accountants and so on who are almost certainly going to be part of the process because, they take the view that if that's the length of contracts in place.

Then that's the only amount of revenue that's guaranteed.

IAN LUCKETT: Yeah.

KEN ROULSTON: And therefore it's very risky to buy the business because when you think about it, the EBITDA is actually, and the multiple attach, it is the number of years of sustainable profit that business is likely to generate. Yeah. So whether it's a multiple of four or five, six, seven that translates to the number of years.

So if you've got a, your customers on a 30 day contract, that's very hard for a buyer to justify spending giving you four, five, or six years worth of profitability. Of course, it is a challenge to get customers onto longer term contracts. It used to be the norm that customers were on three year contracts, that kind of changed in the, so was the earlier days of MSPs to more like 30 day contracts and therefore viewing it as a service. But I think that the way the market has developed and matured, what buyers are looking for now is as customers that are generally speaking, at least a one year contract, a rolling one year contract, or a contract that will give them the maximum length of time to basically assimilate that customer and convince them of the viability of the acquisition for them going forward. In my own situation, we had some customers that weren't on long-term contracts, but what we were able to demonstrate to the buyer was that they had been with us 7, 8, 9, 10 years.

IAN LUCKETT: Yeah.

KEN ROULSTON: If they've been with us for that long and the service continues to be at a level that they've been enjoying in the past, there's no reason why they should move away. But if your customers are generally speaking, one, two, or three years in length, that's more risky. So yeah. Look it's a gray area and it does sometimes depend on the nature of the buyer and how much they listen to the advisors, but certainly, the longer term that you can have the customers on, the better. Another aspect of it is this term called client concentration. If you've got any customer that is more than 10%, particularly if you're recurring revenue, that's also deemed to be a risk to a buyer, right? Because that could be a disproportionate level of revenue to the business, and therefore, for those larger customers that you have, it's more important that they're on longer term contracts. So if you can get your top sort of 20% of customers by recurring revenue onto ideally a three year contract that will potentially add more value when it comes to the to that aspect of it than if they're on 30 day terms. Particularly I would say, it might be difficult to get all customers on to three year contracts or even one year contracts, but focus on those 20% of your customers that are probably giving you 80% of your recurring revenue and focus on getting them onto it.

IAN LUCKETT: Lovely. Great stuff. Let's talk about finding the right buyer now. It's quite interesting actually because that was the question that we'd come up with was finding the right buyer which makes me think, do you have a choice? If you want to put it up for sale, do you not just sell it to the first person that you see? Does this transaction work in a different way? What does the whole identifying the right buyer, mean to you?

KEN ROULSTON: First of all it's a challenge because most sellers are very nervous about advertising their business being up for sale.

IAN LUCKETT: Yeah.

KEN ROULSTON: Because there's a threat to both their customers and their staff from competition in that scenario. Assuming you have found through either your network, through a broker or through some sort of advisory body or a consultant, you find potential buyers in your business. What you want is you want to have a good fit culturally between your business and their business because most MSP owners will want to ensure that their business is being acquired by somebody who has similar values to them in terms of how they view their customers and their employees. So I think MSP owners will want to review the culture and the values of the acquired to see is it going to be a good fit. Yeah. But particularly if there's an aspect of the deal whereby some of the payment is going to be deferred for a period of time and maybe subject to

IAN LUCKETT: Yeah.

KEN ROULSTON: Revenue retention. So if they acquire, makes a mess of the acquisition and loses revenue, loses good staff that could put at risk the payment that is due to the seller down the road. So a lot of it can come down to the data structure as well as to how much money is upfront, and how much money is deferred.

IAN LUCKETT: Yeah.

KEN ROULSTON: Certainly in our situation we did not accept the highest value that was put on the business because either the data structure or the culture just didn't fit for us. Yeah. We definitely could have got more money if we had been prepared just to go with whoever was offering the most. But I think it's like most things in life, sometimes you will look at something from an emotional viewpoint and feel invested in that aspect of it. And therefore the money becomes a secondary aspect.

IAN LUCKETT: And the deal's not over until the deal's finished. And that could be what, one, two, I don't know whether it goes a three year buyout, that sort of thing. And you've got to, you've probably got to work harder in your MSP for those one, two, or three years to get your earnout maybe.

KEN ROULSTON: Again, this is where you get into lots of different options. You may be an owner who wants to get out pretty much at completion stage, or the buyer might want you out at completion stage, in which case they're taking responsibility for the next number of years of the business. In that scenario, then it's very difficult as a seller to agree to an earnout arrangement where you no longer have any control over the business.

IAN LUCKETT: Got it.

KEN ROULSTON: So I, I tended to find that when we were acquiring companies that the owner. And we wanted the owner pretty much to leave, in most cases because we wanted to integrate the business into our systems and processes. It was became more of a deferred consideration model than an earnout model. And that just means you are pushing back the payment terms down the road. But yeah it's not abnormal for that to be stretched out over three years. Now, if, of course you are going to be part of the management and control of business moving and have a degree of, then an earn out becomes potentially more acceptable and can be more rewarding because you could actually earn more by achieving that than you would get from a deferred consideration model. So again, it all depends on what you want, whether you're prepared to stay on, and whether you want to leave. It all depends what the buyer wants, and then that's where you end up through negotiation, agreeing a compromise, where you end up at that point.

IAN LUCKETT: Brilliant. Okay. Just before we wrap up again another show full of absolutely golden nuggets to help people understand the selling process. We talk about owner not needed here removing yourself from the operations side of the business or the functioning side of the business. And we've got clients in the growth hub who have got targets to work 5, 4, 3, 2, 1 days a week, over the next, months and years and things like that. What's your take on the whole owner not needed? If you walk out and the business can operate and, do you have to be working one day a week or four, four days a week, or three days a week, what's in your experience of what you've seen have you found that there's a kind of a balance or a perfect kind of line of how much you are actually involved in it to get a really good sale?

KEN ROULSTON: I think if I take my own situation as an example I had said that I wouldn't want to work in the business post-sale because I'm a great believer in that the employees can't have two masters. The staff that we had would be confused if I was still in the business in our situation. And of course there was going to be another MD overall charge. So I'd made the very conscious decision that I didn't want to be working full-time in the business. But what I did agree was a three, which became six month period, whereby I was available to the acquiring business on a consultancy arrangement. To be there to help with the integration process and to make it as seamless and smooth as possible, after which then I exited and therefore I wasn't involved in it afterwards. It all depends. I was 63 at that point in time and me, I wanted to carry on working, but I didn't want that responsibility of managing 120 staff any longer with all the joys that can come with that, which every MSP leader I'm sure is totally aware of. But I did want to stay in the industry and still work, but in a role doing something that I really enjoy, which is the M and A piece. Because I just love the whole aspect of the deal making side of it and trying to put companies together that are complimentary. But I've also been involved in acquiring businesses myself, where in some cases the owners stayed on because they weren't necessarily the managing director of the business. They were a shareholder, they were an owner in the business, but they weren't the MD of the business and therefore they on within a sales capacity or a service director capacity. But I've also seen where owners have exited at a relatively young age, in their forties. Certainly young compared to me, and have wanted to get out and take their proceeds and do something entirely different with their life. They've wanted to go into a totally different industry, and of course it's, there's going to be restrictive covenants put in place as part of any acquisition that's going to stop an owner from competing with the buyer down the road. Your options are either to leave and do something entirely different or do something that is certainly not competitive to the buyer's business or to stay in the business with the acquirer. If the opportunity is there to do that and to extend your journey for another 3, 5, 10 years, whatever it might be.

IAN LUCKETT: Excellent stuff. A great show. Again, Ken, thank you very much for all of your wisdom on that, and hopefully that's helped the listeners understand a bit more about the selling process. Before we come to a quick summary from you tell us a little bit about the MSP M and A training course that you're doing with Mark Copeman right now.

KEN ROULSTON: Yeah we put together a series of more in depth tutorials on the whole M and A process. So these are what, three half hour podcasts that we're doing. The course is eight hours worth of content. Going a lot more in depth into this, the whole subject from both a buying and a selling perspective, and you know how to prepare and also how to deal with when you've sold your business or how, and the issues that can bring or the whole integration process afterwards. So yeah, we can go in, it goes into a lot more depth in that regard, but we're also extending it out into being more of a services marketplace for people who are in the M and A or the MSP industry, I should say, who bring added complimentary value to the equation people like yourselves, of course, who, bring a lot of strategic value to the whole growth aspect of it, but it's also a place where we're hoping to put together a confidential marketplace for people are interested in buying or selling, as I was alluding to that where people can feel comfortable that their information is secure and will be used in a professional way. And it's not going to have any charge allocated to it. It's a free service that we're wanting to put in just to try and help MSPs with their objectives.

IAN LUCKETT: Brilliant. So just for clarity, the matchmaking service is potentially a free service, but the training course there is a small fee, I think you said eloquently in your accent. It comes across a lot softer when you say that than others. And we'll put the link in the show notes. So you can go and check that out and see what those guys are up to there, we're just scratching the surface on these podcasts. Yeah. Which is super exciting. Final thoughts on the selling process. What's the kind of the top tips that you're going to give to the MSPs today? From this one?

KEN ROULSTON: I think top tip is, if you're thinking about it and to prepare for it is to make sure you get your house in order. I think the second point is be patient when it comes to the actual process. because it can take a bit of time to go through, particularly when advisors and legals and financial people get involved and the due diligence, can be quite in depth. So you need to be prepared for that. But I think that the last point touched on the way through there is compromise. Yeah, you are as a seller, wanting to get the maximum value that you can for all of the effort and hard work that you've put in all the blood, sweat, and tears. But you have to bear in mind that a business will only have a value that somebody's prepared to pay for, and a buyer will always be wanting to come from the other side of the equation.

IAN LUCKETT: Yeah.

KEN ROULSTON: They want to pay as little as possible. So what I found is that they're between the two extremes of the buyer and the seller. Somewhere in the middle there is a compromise position where it is not a great deal for either party, but it's a good deal and more importantly it's a fair deal. So I think that be willing to compromise to get a good deal for you, for your staff and for your customers as a seller is the key thing that you need to aim for in the whole process.

IAN LUCKETT: Fantastic.

The next episode we're going to record is all around the buying process and that concludes the trilogy, I think we could call it a trilogy. I think it's that valuable. It's a trilogy. But for today, Ken, thank you ever so much for your time and effort in recording and preparing and sharing us with your wisdom. Look forward to catching up with you and the listeners on the next one. Great stuff. Enjoy it mate, See you soon.

OUTRO: Oh, but one last thing just before you shoot off. And if you're curious about how this episode links with the ability to scale your MSP to a million or, or if you are already there, accelerate to five, then we want to invite you to come and take the MSP Mastery quiz. And in just three minutes, you're going to get a 360 degrees scan of your business where you can identify the one or two tactics that can help you find more time engage in, align your people and help generate more leads in your MSP. It's really simple. Just click on the link in the show notes. And if you have enjoyed this episode, we'd love to get some feedback from you by means of a rating review on Spotify or iTunes, or your podcast platform of choice. We really appreciate every single one of them. Now, you can go and enjoy the rest of your day, and we look forward to catching up and connecting with you soon. All the.