MSP Exit Strategy: How to Avoid the Wall Street Trap

Content by: David Walter from MTS

When every entrepreneur embarks on their journey in the IT industry, they often dream of their exit plan, envisioning the day they will sell their Managed IT Services Company (MSP) for millions of dollars and ride off into the sunset. Just like Gordon Gekko in the movie Wall Street, they see the allure of the big payoff. There’s nothing inherently wrong with building an IT business and then selling it. However, could there be a dark side to some of these transactions, casting a shadow over them as ‘selling out’ in the eyes of those who matter most—your customers? 

Building Relationships and Customer Loyalty 
When a founder pours their heart and soul into their computer business, they often build personal relationships with their customers. They shape their business model, pricing, and services around the best interests of their clients. This often means making tough, unpopular decisions, such as not outsourcing their helpdesk and assigning a lead engineer to each client. These founders often avoid long-term contracts, preferring to earn their clients’ loyalty through exceptional service rather than binding agreements. These choices aren’t driven by the cold calculations of a corporate raider but by a genuine commitment to their customers’ needs. 

The Dark Side of Selling Out 
However, when the big MSPs or well-financed private investors come calling with the allure of making these entrepreneurs’ dreams of an exciting exit plan a reality, they can lose sight of why they started the business in the first place. During the selling process, the painful reality often sets in that the new owners will radically change the company’s customer-centric culture. This often means pressuring long-time clients to sign long-term contracts with significant rate hikes. Many times, this process is sprung on customers at the last minute, leaving them little time to shop around. It’s akin to a shotgun contract signing, with plenty of high pressure. 

Maintaining Service Quality 
At the same time, these new investors, who are often solely focused on the bottom line, will start to water down the level of service. This can begin with outsourcing level one helpdesk support and ending the practice of assigning dedicated engineers. In some cases, they will force customers to communicate exclusively through a ticketing system. I recently met with a CPA firm that felt the investors who bought their IT provider were “putting them in a box” by forcing them to use the ticketing system exclusively. They also complained about losing their assigned engineer and felt like they had to explain themselves repeatedly to different people who didn’t understand their problems. At one point in the conversation, they even called the previous owner of their IT provider a “sellout.” 

Ethical Investors in the MSP Space
MSPs must ask themselves if they are willing to allow the dream of selling their business to cause them to abandon their clients. You might think that I am against the idea of MSPs having an exit plan and selling their companies to enjoy a well-deserved retirement on a white sand beach in the Caribbean, sipping a margarita. Of course not! However, you don’t have to sell out to the too-big-to-fail IT companies that act like 500-pound gorillas. If you search and do your due diligence, you can find ethical investors who understand the MSP space and are willing to carry on your culture without pulling the rug out from under your clients’ expectations.

Key MSP Investors
Several investors specialize in the MSP space, offering not just capital but also strategic guidance to help maintain the integrity of the business. Some notable names include: 

• Martinwolf: A leading M&A advisory firm specializing in the IT industry, Martinwolf has facilitated numerous transactions, helping MSPs find the right buyers who align with their values and business goals. 
• Thoma Bravo: A private equity firm with a strong focus on software and technology-enabled services, Thoma Bravo has a history of investing in MSPs and helping them scale while maintaining service quality. 
• Insight Partners: Known for their investments in high-growth technology and software companies, Insight Partners provides not only capital but also operational support to help MSPs grow sustainably. 
• Vista Equity Partners: This firm specializes in enterprise software, data, and technology-enabled businesses. Vista Equity Partners has a track record of investing in MSPs and supporting their growth through strategic initiatives. 
• Evergreen Services Group: Focused specifically on MSPs, Evergreen Services Group acquires and invests in MSPs with the goal of building a network of high-quality service providers while preserving their unique cultures. 
• Alpine Investors: Known for their people-first approach, Alpine Investors focuses on investing in and building enduring companies in the software and services sectors. 
• Trinity Hunt Partners Fund VI: This growth-oriented middle-market private equity firm partners with small-cap companies in business services, healthcare, and consumer services, driving transformational growth. 
• Summit Partners Growth Equity Fund XI: This fund targets high-growth companies in information technology, healthcare, financial services, and other sectors, providing both capital and strategic support. 
• Lyra Technology Group: A family of industry-leading technology service businesses, Lyra Technology Group partners with companies to drive growth and innovation while retaining their brand, employees, and culture post-investment. 

M&A Terms to Know
Understanding key M&A (Mergers and Acquisitions) terms can help MSP founders navigate the complexities of selling their business: 

• Due Diligence: A comprehensive appraisal of a business undertaken by a prospective buyer, particularly to establish its assets and liabilities and evaluate its commercial potential. 
• Valuation: The process of determining the current worth of a business, using various methods such as earnings multiples, discounted cash flow analysis, and comparable company analysis. 
• Earnout: A provision in which the seller of a business receives additional compensation based on the business achieving certain financial goals post-acquisition. 
• Synergy: The concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts. 
• Integration: The process of combining the operations, cultures, and systems of the acquiring and acquired companies to realize the benefits of the merger.

Conclusion: Balancing Profit and Principles
While the dream of a lucrative exit is enticing, it’s crucial for MSP founders to consider the long-term impact on their customers and the legacy of their business. Just as Gordon Gekko’s ruthless pursuit of profit in Wall Street ultimately led to his downfall, selling out to the highest bidder without regard for your clients can tarnish your reputation and the relationships you’ve built. By carefully selecting investors who share your values and commitment to customer service, you can achieve your exit plan without compromising the integrity of your business.  In the end, the goal should be to find a balance between achieving financial success and maintaining the trust and loyalty of your customers. With the right approach, you can ride off into the sunset with both your profits and your principles intact. Perhaps it’s time to reconsider Gekko’s mantra that “greed is good” and instead focus on sustainable, ethical growth that benefits all stakeholders.