The Lean MSP – Episode 04: Exit Your MSP FT. Cayse Llorens of Brockhurst Capital

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Introduction

Kevin: “What’s up everybody? This is Kevin Clune. Welcome to The Lean MSP where we look to take on the challenges of operating in MSP in today’s economic landscape. That means staying lean, working smarter and doing more with fewer resources.

In today’s episode, I want to help MSP Owners and Partners that may be looking to exit their business. Times are tough for a lot of people and it’s possible that this is one of the few good options that you may have to really secure your situation.

Whether you need to sell for personal reasons, maybe you want to retire, or maybe you’ve just had enough and you’re throwing in the towel, there’s always a way to cash out. So my guest today is Cayse Llorens of Brockhurst Capital and he’s going to shed some light on exactly what these exit opportunities look like and how to find them.

Cayse, so why don’t you tell us a little bit about Brockhurst of what you do over there?” 

Cayse: “First of all, Kevin.Thanks for the opportunity to sit down with you and your team. I’m a big fan of what you guys are doing, your ebooks, your material. Really appreciate your subject matter expertise and the opportunity. Thank you for the time.

To answer your question, Brockhurst Capital Partners, we are a group of Equity Investors,

Operators, Executives and we’re looking to find a great business in the IT/MSP space. Our focus is to find a great company with a great strong team with differentiated service lines and expertise, you know do a full buyout or whatever transaction structure is the best fit for the Owner who’s looking to exit.And actually integrate myself with the employees, the community

and the legacy of the company. And really just, you know, operate and grow strong business.”

Why Investors Acquire MSPs

Kevin: “That sounds like the perfect opportunity for an MSP that’s looking to step aside from their business but I’m sure a lot of them that are listening are probably scratching their heads right now, wondering why anyone would wish this upon themselves, especially someone as smart as you Cayse.

So what is it about the Managed Services market that is so attractive to investors right now?”

Cayse: “Yeah, so that’s a great question. At Brockhurst, we see positive industry growth in the IT/MSP space outpacing GDP over the next several years as mobile data, security, IOT and other demand scale. Businesses increasingly do a cost-benefit analysis. As you know, as your listeners know, I’m sure. 

What we find compelling in particular are the fact that it’s service and skill oriented and it’s not just, you know a help center or call desk work and tickets things like that. And instead there are clear areas where MSPs can offer a high quality deliverable to certain segments of the market.

For example, the Google Cloud, AWS, endpoint protection, dedicated server management, etc.These are all areas where there’s a tremendous value add above and beyond just outsourcing for you know, staffing or head count or just saying we don’t want to hire the FTEs.

You can actually bring in someone with the scale, the skills, and the specific expertise, to help you deliver on wherever your company wants to go. On the buyer side there are certain things you look for and then on the seller side there are certain things you look for as well.”

What Investors Look For 

Kevin: “Yeah, that’s actually the perfect lead into my next question. You know, what do buyers often look at when evaluating an MSP? 

Cayse: “So it’s no secret that everyone is seeking recurring revenue. Many people when they build their valuation models to put a price tag on the business, a large fraction of what they look at is how much of the revenue is recurring.

And why is that? It adds predictability to cash flow projections, the ability to plan growth based projects, lowering customer acquisition cost, and just in early lowering the risk, right? And if the revenue isn’t a recurring you have repeat revenue built on strong relationships and ongoing projects with the same firms and departments.

And also we look at growth, customer mix, specialization, (which is valuable ability to upsell and cross-sell), the sales engine and marketing engine that the companies built, and last but not least the company culture. 

And I think you’ll provide a link to your audience, but we actually recently published a white paper covering this topic and more at brockhurstcapitalpartners.com/msp So we go into some of these details as well and hopefully that’s helpful answer.

COVID-19’s Effect on M&A Market

Kevin: “For anyone interested, we will drop a link to this paper within our post description. I checked it out before the call and it’s definitely a great first step for anyone that’s looking to educate themselves on this topic.

Something else that you mentioned Cayse was the ability to sell and cross-sell. This is obviously difficult for everyone at the moment. 

So what effect has the global economic state had on the M&A market as it relates to IT Providers? Is the MSP index high, low or about the same right now? Especially with the inability to sell”

Cayse: “Right now with most M&A activity, a lot of investors are taking a wait-and-see approach. Am I buying a business where cash flow is going to stay the same, increase or decrease? It can make it a little bit tougher.

For some very large Acquirers, they’re staying very active and what they focus on in terms of which companies they might want to acquire depends in large part on things like the scale of the operations are perceived synergy with their infrastructure. Their current portfolio. And then as we mentioned earlier, you also want to consider what’s valuable to you as a seller.

So there may be certain people that are still acquisitive right now, but is that the right buyer for you and that’s a question only you can answer. Who’s taking over your business? What is the post exit environment look like for your employees, your customers, etc.

You know, at Brockhurst when we think about this, we look to work with Owners to structure in the uncertainty in the market and arrive at a mutually agreeable (not just price) but arrangement. Transaction structure, you know, there are different ways to structure a transaction that can make it more or less attractive to the buyer or seller. 

I’d segment the market and so very large MSPs, much smaller MSPs ($5 million in revenue or below) and then the middle based on where you are kind of on the spectrum. The answer varies a little bit.”

Significance Of Verticals In Valuation

Kevin: “It’s definitely great to hear that there’s still a market out there for these types of acquisitions. You know, a lot of the MSPs are specialized to one or a few different verticals. Some of which have been deemed non-essential in the current economic shutdown.

So as you can imagine an MSP servicing the healthcare industry now has a high demand and then once a servicing the restaurant or hospitality industry, the demand is much lower.

So will this have an effect on an MSPs valuation if they wanted to exit their business right now?

Cayse: Yeah, great question. So specialization can help improve margins and customer  retention by doing a better job. Thanks to Industry expertise experience, especially regulated Industries, but you mentioned Healthcare.

So an MSP that’s skilled in HIPAA assessments the handling of data, that can transport data that’s in storage and the database. These are different things where you can not only deliver to your on what they asked for but maybe see around the corner for their needs and help them. And especially folding new technologies into existing business models to push them ahead and make them more competitive.

Different investors will have different projections of the post-COVID landscape and various Industries. So someone that sees a strong correction happening and say the financial sector, may value that highly depending on where they’re positioned to capitalize on that market opportunity.

At Brockhurst, We believe that in many industries, there’s going to be a full recovery (or close to it) over time. As always, when there’s any big change some business models become deprecated and some new ones come to life. You know, we’re very focused on working with Owners to provide a fair and forward-looking valuation.

We look at businesses based on the fundamentals. And try to look past the current market disruption. And industries like healthcare you can say demand has spiked with things like telemedicine. I think another interesting lens to analyze things through is as demand surged on an ongoing basis or as demand being pulled forward to the present? And therefore there will be a dip in the near future.

And as a specific example, let’s say respirators and the N95 masks right? Demand for those has spiked. Is that telling us what demand is going to be on a going forward basis? Or is that just saying hospitals are hoarding some of those things now. And for ticketing systems that are being overwhelmed, is that the new level of demand or is that just a momentary spike?

And so things like this factor into someone’s outlook on the industry and the valuation because cash flow kind of needs to be smooth which hopefully should help a provide a more fair valuation, not one that looks to capitalize on current market disruption.” 

Preparing Your MSP For An Acquisition

Kevin: “So let’s say that I’m an MSP Owner that has taken a few lumps lately and I’m really considering just hanging up my cleats (so to speak). 

What should I do over the next few weeks or months to prepare my business for an eventual acquisition?”

Cayse: “First of all, get your financials in order. Everyone that’s looking at your business is going to want to know what is the revenue recognition policy? What is expense recognition? Are you recognizing revenue as you close the sale? Are you recognizing it when you deliver the service? 

When a potential Acquirer goes to analyze your financials are you gap or are you cash? And understanding trends and EBITDA revenue growth and changes in the business. Has your sales strategy changed? Has that had a positive or negative impact?

Also, you want to look at how you can diversify your client mix. Maybe that’s adding expertise and new industry verticals as we mentioned. Maybe that’s adding expertise above and beyond your Google Cloud expertise into AWS. Maybe it’s going from how do we implement the solutions to how do we architect the design the solutions are maintained them post-implementation.

Less diversity of end markets, diversity of service lines again, you want to know what kind of exit you’re looking for. So if you’re an Owner who is saying, you know, maybe this COVID disruption is the last storm I feel like weathering. What exactly are you looking for post-acquisition?

Are you looking to reduce your workload? Would you like to shift into more of a business development or sales capacity and rainmaker and capitalize on your relationships you’ve built out on a commission heavy basis. Are you looking for a full exit that you care about who’s going to operate your business after the fact?

Because that factors into what types of buyers you’re considering and willing to spend time getting to know. And just understanding what are your motivations for exiting? Are you looking to sit on the beach and sail around the world in your yacht? Are you looking to pursue other business interests?

Because this can actually affect what structure of transactions going to be best for you in the long run. That’s before we get into things like tax considerations for how you actually get paid and things like that.” 

Kevin: “Thank you Cayse for all your great insight. This information can prove to be invaluable when preparing your business for an exit. And one of the most important things to know is that this is a process that really requires effort.

You know, I personally put hundreds of hours into organizing our QuickBooks file, getting our PSA reporting to reflect accurately and documenting standard op procedures. The more of this that you can provide to potential Investors, the lower your risk is in the sale and the lower their risk is as well.

Think about this just like selling Managed Services. Everything you do is to build trust and minimize the risk of your prospect to speed up that sales cycle.

That’s all for episode 04. Thank you all for listening and I hope you have a great week.”