There are two fundamental ways to go about creating an MSP business. First, you could meticulously construct the business from the ground up, building out a list of clients and services from nothing.
Or, you could go out and buy an existing business - an approach that is often faster, and requires less bootstrapping, than launching your own MSP company from nothing.
Keep reading for tips on deciding whether buying an MSP business is the right approach for you, as well as what to consider before purchasing an MSP company.
What are the Benefits of Buying an Existing Business?
The main benefit of buying an MSP business is that it’s the easiest route to creating an MSP company. You get a turnkey operation with an existing location, brand, assets, team and intellectual property. Even if you can create those things yourself, buying a business instead of building it saves significant time and effort because you get everything you need up front.
The Disadvantages of Buying an MSP Company
On the other hand, there are downsides to the “buy” approach to creating an MSP company.
Beyond the obvious fact that buying requires upfront capital investment, there is the issue that you will inherit an existing customer base and service list, which may not be an ideal fit for your preferences.
You may want to specialize in a certain vertical, for example, but the business you buy has some clients in a different industry. You’ll have to continue serving those clients, at least until their contracts expire.
Keep in mind, too, that you buy a business’s reputation along with the business itself. You’ll be inheriting any connotations – positive or negative – of the company’s brand, and you may need to work to update its image over time to suit the vision you have for the company.
Prior IT Experience is Critical
Whether you choose to build or buy an MSP company, one critical factor to keep in mind is that you need IT experience either way. MSPs are not like laundromats or car washes; you can’t simply buy them and start repeating profits if you do not know how MSP companies should operate, or you lack understanding of the technical requirements behind their services.
It’s not to say that you need to be an expert in the ins and outs of every technical process or tools that your business depends on. To some extent, you’ll always lean on external vendors and tools to help you deliver important services.
Still, any MSP business owner must understand how to protect clients’ data, manage hardware, handle incidents and so on. If you don’t have at least a basic IT background, running an MSP company is probably not for you, even if you buy a company that is already successful.
Evaluating Profits
You’ll want to think carefully, too, about the profitability of an MSP business before you buy it. Look closely at the accounting books, or better yet, hire a CPA who specializes in a business evaluation and deals with MSPs.
Here are some questions to ask:
- What is the company’s EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)?
- What are the revenue sources, e.g. product sales, consulting and maintenance?
- What is the owner’s salary, and what is the current pay structure for the remaining employees
- What is the total value of the equipment, in-house and leased to the clients?
Legal Considerations
Another facet to consider is the contractual activities and obligations. Consider hiring an attorney who is familiar with the MSP industry. Look for existing insurance claims and potential litigation against the company, compliance problems, and business risks. Perform thorough due diligence for software licensing and review any existing patents and intellectual property agreements. Also, ask the attorney to review existing HR policies, especially non-disclosure agreements and foreseeable employment law violations.
Assess the Client List
MSP clients typically have a close relationship with the MSP that serves them. For that reason, there’s a risk that some clients will leave after a business is acquired.
Although some client attrition is to be expected, you’ll want to do your due diligence to ensure that you will not lose half your customer base overnight with no ability to replace it quickly.
To mitigate this risk, ask questions such as:
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- What's the average tenure of existing clients?
- How many clients come every quarter/every month?
- What are the customer acquisition sources, e.g referrals or advertising?
- What is the client mix? Is there an easily identifiable industry?
- Are there any clients from high-risk segments, like healthcare and accounting?
Earning customer loyalty as the new MPS owner might be a challenging task, but setting the right expectations and bringing innovative solutions will give you a competitive advantage.
Conclusion
Buying any type of business is a complicated proposition, but MSP companies require special evaluation prior to purchase. Ensure that a company you are considering buying is a good fit for the type of MSP operation you want to run, that you have the right background to run it and that the company’s finances, legal standing and customer base will put you in a strong position for long-term stability.
Remember, too, that it’s critical to have trusted vendors, like MSP360, on your side to ensure long-term success for any MSP company. MSP360 helps MSPs of all types and sizes to provide managed backup and recovery services that are profitable, flexible and adaptable to meet any business strategy or requirement.
Simple. Reliable.
