When it comes to how to sell managed services, the difference between an average deal and a truly profitable exit comes down to how well you prepare your business for valuation. At the 2023 IT Sales And Marketing Boot Camp, I had the opportunity to moderate a panel of successful MSP owners who have been through the selling process, and their insights were gold. Whether you’re thinking about selling in the next year or simply building a more valuable business, these lessons will put you ahead of the game.
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The Power Of A Niche: Why Specialization Pays Off
One of the biggest takeaways from our discussion was the undeniable value of having a niche. One panelist, who built his MSP in the legal industry, shared how being fully vertical in that space positioned him as the go-to expert. This focus didn’t just help him attract better clients—it dramatically increased his business valuation.
When an MSP is specialized, buyers see stability, expertise and predictable revenue, all of which drive higher multiples. The more your company is a well-oiled machine in a specific industry, the more appealing it is to an acquirer in that same space.
Bottom line: If you’re running a generalist MSP, you may be leaving serious money on the table when it comes time to sell.
Setting Realistic Expectations: Your MSP Is Not Worth $100 Million
One of the most common mistakes MSP owners make is overestimating their company’s worth. Everyone wants to believe their business is worth tens of millions, but the reality is buyers rely on cold, hard numbers—not wishful thinking.
Panelists stressed the importance of getting a real valuation early, working with experts like Greg Crabtree, and understanding what truly drives multiples. If your business is not structured properly, if you’re inflating numbers, or if you have inconsistent financials, expect a rude awakening when a buyer does their due diligence.
Pro Tip: Bring In A Third-Party Firm
A couple of the panelists hired third-party valuation firms before going to market. These firms ran their numbers as if they were buyers, helping them see a realistic valuation rather than just guessing. This insight helped them negotiate from a position of strength, ensuring they got fair deals based on true financials—not hype.
Keeping Your Books Clean: Stop Treating Your Business Like A Piggy Bank
One of the biggest red flags for buyers is messy financials. Running personal expenses through your business—whether it’s your car, groceries, or other non-business-related costs—can be a deal-breaker.
If your financials are all over the place, a buyer will see risk and uncertainty, which means lower multiples and tougher negotiations.
What Buyers Want To See:
- Clean Books: Buyers should be able to easily understand your revenue, expenses, and profit without digging through personal expenses.
- Consistent Profitability: If your EBITDA fluctuates wildly year over year, it’s a red flag. Buyers want steady, predictable earnings.
- Proper Categorization Of Expenses: If you do run personal expenses through the business, make sure they are categorized properly so they can be easily removed when calculating true EBITDA.
One of the panelists shared how he moved all questionable expenses into a separate category in his P&L statement, allowing buyers to see the core MSP profitability without confusion. This simple move made negotiations smoother and increased buyer confidence.
The EBITDA Myth: What’s A “Reasonable” Salary?
Another key factor in valuation is how much you’re paying yourself. Many MSP owners undervalue their own compensation, thinking a lower salary makes their EBITDA look better. But here’s the catch: buyers will adjust for that.
If you’re only taking $100K or $150K in salary, but a buyer determines they’d have to pay a replacement CEO $200K or more, they’ll deduct that from your EBITDA. The trick is to pay yourself a reasonable salary while maintaining profitability.
One panelist pointed out that what’s “reasonable” varies depending on who you ask:
- Your CPA might tell you one thing.
- The IRS might have a different number in mind.
- A private equity firm will have their own standard.
The key is making sure your salary aligns with industry norms so that your valuation holds up under scrutiny.
Understanding Add-Backs: Negotiating Your True Valuation
When MSP owners try to justify a higher valuation, they often rely on add-backs—expenses they claim should be removed from the EBITDA calculation. However, not all add-backs are accepted by buyers.
One panelist shared how he structured his P&L statement to clearly separate business-critical expenses from discretionary ones, eliminating the need for excessive add-backs. This built credibility and helped smooth negotiations.
The more add-backs you claim, the more scrutiny you’ll face. Buyers don’t just take your word for it—they’ll question every dollar, and that can lead to lower offers or stalled deals.
