This episode addresses key financial management strategies for Managed Services Providers (MSPs).
Dan Welling emphasises the importance of understanding whether you want to apply pressure or take pressure when it comes to your finances, suggesting that those on top of their finances have leverage over banks. He highlights common financial misconceptions and problems faced by MSPs, such as over-relying on bank balances, misrecognising revenue, and not regularly reviewing profit and loss statements. The session delves into the significance of management accounts, explaining the concept of a chart of accounts and its role in accurately tracking revenue, costs, and overall financial performance. Dan provides practical insights into valuing MSP businesses using various methods like annual recurring revenue and EBITDA multiples. Lastly, the discussion covers the MSP market landscape, considerations for mergers and acquisitions, and the importance of contractual revenue and deal structure for building and realising business value.
00:00 Introduction and Warm-Up
00:05 Understanding Financial Management for MSPs
01:03 Common Financial Mistakes in MSPs
01:49 Introduction to Management Accounts
03:34 Chart of Accounts Explained
04:38 Revenue and Cost of Sales
11:52 Valuation Methods for MSPs
13:51 Market Overview and M&A Insights
27:28 Importance of Contracted Revenue
34:15 Q&A and Closing Remarks
Listen on Spotify or Apple Podcasts
Connect with Daniel Welling on LinkedIn by clicking here – https://www.linkedin.com/in/daniel-welling-54659715/
Connect with Adam Morris on LinkedIn by clicking here – linkedin.com/in/adamcmorris
Visit The MSP Finance Team website, simply click here – https://www.mspfinanceteam.com/
We look forward to catching up with you on the next one. Stay tuned!
We created It’s a Numbers Game Podcast to help MSP owners learn and understand how to build and maintain a financially healthy MSP business. In this podcast series, MSP business owners like you will learn the fundamental steps, the tips and tricks, the dos and don’ts to achieve MSP financial growth.
Transcript:
Adam or Daniel: . Hello, everybody. thanks again for joining us. we just got a quick warm up here. one of my favourite quotes. really, this is about, working out what side of the finance, divide you want to be on. So, do you want to be applying pressure or taking pressure?
Adam or Daniel: If you’re on top of your finances, then there’s a good chance you’ll be able to be in that second camp, of it being the bank’s problem. If you’re not on top of your finances, it’ll be your problem.I think Adam’s already covered this a little bit about our background. We’re former MSP owners. We,we only work with MSPs now.
Adam or Daniel: And, We support MSPs pretty much of all size from a 100, 000 through to 10 million is our largest client. most of our clients, in fact, most of the MSP marketplace are their origin is they are engineers, their technicians. Therefore, they are certainly not bookkeepers, financial directors, managing directors.
Adam or Daniel: And, what we see in the MSP marketplace is, very much, a mixed bag. But we sort of picked out some of the, the basic problems that we see. Firstly, most MSP owners will be purely looking at their bank balance as the sanity check for their financial security. we will talk about later is not appropriate.
Adam or Daniel: They’ll only have a limited view of their, of their sales and their costs by not having a properly structured chart of accounts. We’ll talk more about that later. They will be misrecognizing revenue and costs, which will be further masking the underlying financial performance of their business.
Adam or Daniel: They will not be looking very regularly at their profit and loss. They might look annually at their balance sheet. And all of this leads to, difficulties in managing their business full stop, and especially ever reaching a firm and reliable valuation. The answer to this, ladies and gentlemen, boys and girls, is management accounts.
Adam or Daniel: And anyone that knows me will,be bored of me talking about this. So hopefully not many people know me in the room. So we’ll start off with what exactly are management accounts. So very simply, it’s a profit and loss. It’s a balance sheet. The key point here is that it happens monthly rather than annually.
Adam or Daniel: And, management accounts, P and L and balance sheets, are made up of what’s called a chart of accounts. I’ll talk more about that in a moment. The key attributes of management accounts should be that they are accurate, so we don’t want to see, the cost for a PC in March and the revenue for that PC sale in April.
Adam or Daniel: We want the, the margin recognized in the same period.we want them to be timely. So a good level of, performance here is to have by the 15th of the month, a full set of management accounts.at that point in time. An MSP owner, the senior leadership team, the management of the business should be reviewing that P& L, that balance sheet to extract insights that is actionable for them to make changes and affect the future outcome performance of their business.
Adam or Daniel: During M& A, this information will be feeding the historical performance and also, as we aforementioned, budgeting forecasting, we’ll be able to tell or predict what the future performance of our business might look like. And of course, when you’re buying or selling a business, the seller is selling the past, the buyer is buying the future
Adam or Daniel: chart of accounts. Then sounds pretty scary, pretty accountancy. it’s actually very simple. the best way to think about it is as buckets. and these buckets we’re putting our different, revenue costs, our assets, our liabilities. all of our financial terms are going into these buckets. Chart of accounts, there are some industry,examples,I’ve mentioned service leadership, SLI, true methods have, smart numbers, so not quite chart of accounts, but gives us guidance as to what these buckets should look like.
Adam or Daniel: the key thing about a chart of accounts is that they are bespoke to your business, and they are useful to you, and they’re not an incumbent to actually producing management accounts. So, if we go too granular, you’re going to have an overhead of working out what invoice should be spread where and what the date is and various, you know, you’ve got to apply extra labor to, to, to manage it.
Adam or Daniel: So, we want to get the optimum level of granularity, with the optimum usability. So, we want to keep it simple. We have,a very simple method for this, which is to have a mirrored revenue and cost of sales. you’ll see the term there, COGS, which is another common term, cost of goods sold, or cost of sale.
Adam or Daniel: Different people will reference it, but it’s the same thing.at a simple level, we want to have a difference between recurring and one time and resold products and services and our core services. is important because one of those numbers in particular feeds one of our valuation methods, which I’ll talk about a little bit later on.
Adam or Daniel: So, to bring that to life, we have,actually this is a budget for a fictional MSP, possibly, maybe something I’ll do, if finance team doesn’t work out and I get back into the MSP game. well managed IT limited, and, you can see here demonstrated our mirrored system. accounts, for revenue and cost of sales, COGS.
Adam or Daniel: I’m gonna zoom in on this, so you’ll see that we’ve basically broken into four categories of revenue. the aforementioned recurring and non recurring, resold products and services, and our core services. We COGS category, so very simply we can look at, and if there were numbers to the,to the right, we’d be able to see the daylight between that, which means we can calculate what our gross profit, our gross margin is on a line by line basis.
Adam or Daniel: You’ll see though, and this we often describe as our Fisher Price, my first chart of accounts, the beginner’s place to start,we’ve got a, an extra cost here, direct labor cogs. this is where we would put all of our delivery staff costs. we’re putting it just in one row for the time being, because we want to make this usable and easy to produce.
Adam or Daniel: Over time, once we’re a bit more sophisticated, what we’ll actually do is apportion our direct labor costs across the relevant,revenue cost of sales categories, so we know exactly what, for example, Our cost of labor is against our core managed services and indeed against our project work, for example.
Adam or Daniel: But just with this simple implementation of a chart of accounts, we’re able to see what our gross profit and our gross margin percentage is. and, that’s the first lever that we need in managing our business and indeed describing to someone our financial performance and therefore our value. Can I just ask a question?
Adam or Daniel: You certainly can on this down. It’s actually to the audience. So I’m interested to know who here and put your hand up, please. who is currently putting their direct labor costs in with their standard administration and overheads on their chart of accounts. So, cause most, as far as I understand it, most accountants use this model.
Adam or Daniel: They don’t generally do what we’re recommending here. And pretty much everyone we talked to. it’s a surprise to them to create what we call in the industry labor loaded gross margin, where we’re actually taking into consideration the direct labor costs. So, I’m sure there’s a few more of you, that are probably doing it that way, but,it’s generally speaking something that we always see.
Adam or Daniel: So it’s a really important point. Thank you. Thank you, Adam.so moving, moving further down our chart of accounts,we have below the line, so we’re a little bit less, concerned about overheads generally,and, and again, often this will be developed very much customized to a particular MSP, but you can see the sort of things we’ve got in there, our office, we’ve got our sales and marketing costs, and we’ve got our, team costs that aren’t directly delivery related,
Adam or Daniel: the final part, the final third of our chart of accounts,on the P& L view, we’ve is, our net profit EBITDA, which is no doubt a term that you’ll have heard and, potentially, become accustomed with. adjusted EBITDA, you’ll certainly have heard of. And, Adam and I like a term of normalized EBITDA.
Adam or Daniel: and normalized for us, I’ll explain in a moment, but it’s crucial when we’re working out what the value of a business is, if we’re acquiring them, or indeed demonstrating our value to someone else, if they are acquiring us. So, to zoom in here, and there are some, some simplifications here, but basically, our net profit, in our P& L budget here, is, is at the top, we’re then going to take from that, corporation tax allowance, I’ve used 19%, but if we had a business at this level of performance, we’d be paying 25, today,then we remove dividends, and, And then that leaves us with our retained earnings for that month.
Adam or Daniel: those retained earnings will then move to the balance sheet, and our, net asset figure will grow by that amount. now, that is the standard, day to day accounting view when we’re running the business for ourself. when we start talking about, comparing ourselves to others and in, indeed engaging in M& A, we then need to start talking about EBITDA.
Adam or Daniel: You’re welcome. and EBITDA in this situation is the same number. and EBITDA, for those of you that aren’t familiar, is earnings before interest, tax, depreciation, and amortization. And effectively, we have very little,interest. we’ve obviously not taken away the corporation tax at EBITDA line.
Adam or Daniel: And, we have very little in the way of depreciation and amortization. so effectively our EBITDA number is the same as net profit in this example. Then what we’re going to do is adjust the EBITDA and you’ll see here, the number’s gone up and the number’s gone up because in our model, we had a basic, salary and pension contribution for the shareholder to the amount of, 1, 500 pounds or thereabouts.
Adam or Daniel: adjusted it, we’ve added it back. however, we need to make another adjustment, which is to add back the market competitive rates of the roles of the active shareholders. so, if I’m, new business, or I’m the MD, I might even be involved in delivery in some MSPs, I can’t just take my costs out.
Adam or Daniel: and produce that EBITDA, or I have to be replaced. And this is where a lot of the EBITDA adjustment goes wrong when you’re dealing with M& A valuations. Because basically, MSP owners are going to be the hardest working, employees you’ll ever have. They’re probably going to be the most capable.
Adam or Daniel: They’re certainly going to be committed. They’re not going to be clocking off at five o’clock and going home. They’re going to be put to put in lots of hours. And therefore the replacement cost of a, an active shareholder in an MSP business is probably more than you think it is. and the news therefore for most MSP owners is they are actually underpaid.
Adam or Daniel: and if they were to go and get a job elsewhere and not have their business, they’d probably earn a lot more money and have a lot less stress. But, moving on from that just for a moment. When you see what we’ve done here, we’ve now taken away the replacement cost for the active shareholders.
Adam or Daniel: We’ve basically halved our original EBITDA number, and you’ll see a, a glimpse into the valuation methods at the bottom of this tracker, and one of our valuation methods is annual recurring core services times one, which in this example was fifty thousand pounds, so that gives us, a valuation of six hundred thousand of our business.
Adam or Daniel: by comparison, the We’ve used an EBITDA normalized, and we’ve applied a multiple of EBITDA of five times, and that’s got us actually a better valuation, if we’re the seller. it’s a, we don’t like it if it, if we’re a buyer. but, that just gives you an example of, the importance of getting that EBITDA normalized number right, either when you’re buying or selling, because it can make a huge difference.
Adam or Daniel: I’ll explain the difference between annual recurring revenue times one and EBITDA times five and How best to use those in a in one of the forthcoming slides So don’t Daniel just a quick question. You may have said it. I may have missed it. What did you? assume was the Appropriate pay or remuneration for the owner in this instance.
Adam or Daniel: in this case we were adding back, 10, 000 a month. So 120, 000 per annum as a compensation package. Yeah. what do the audience think of that? Do that, do the audience think that’s about right? For an MSP owner of this scale? What’s the total revenue of this MSP? 90, 000. Not yet. A million?
Adam or Daniel: A million. It’s a million revenue MSP. People think that’s about right? 120, 000 a year? Reasonable? One. That’d be lovely. Yeah. Okay. Yeah. Good. Okay. So, that’s,that’s the, the chart of accounts, management accounts part. now we’re going to move into the,the valuation,elements. so, first of all, just to warm us up, what does the MSP market actually look like?
Adam or Daniel: so, in fact,just at this event alone, I’ve heard people talking about the MSP market being 2, 000 in the UK, we had a recent government report which said there were 12, 000, and generally I like to think there’s probably 000 MSPs in the marketplace in the UK. the majority, the overwhelming majority of those MSPs will be small or in what I would refer to as the tail, very few will be at the, at the scale of 5, 10, 20 million.
Adam or Daniel: the majority are gonna be. Half a million, probably to five million and even more in that smaller bracket.a good number of these businesses, the owners have been in the market for 25 30 years, so they’re approaching retirement age. They’re hoping that the business they’ve built up is going to give them a pension.
Adam or Daniel: It may not. a good number of them struggle with sales and marketing, so generally their growth is flat. and,When we take the normalized EBITDA, ethos that we’ve just talked through, a lot of them are actually producing a living to the owner, but actually, not a particularly good living, if they were to go and become gainfully employed.
Adam or Daniel: the other key aspects for these smaller MSPs is, and Adam and I are hoping to improve this position, is, very low knowledge of mergers and acquisitions. they hear about, larger businesses. multiples and and value that’s generated there, but they don’t really have a, an appropriate reference point for their own size of business and stage of growth.
Adam or Daniel: so then let’s think about, what the actual market looks like in terms of who’s involved. and, we might in, indeed have,just a selection of some of these people, at the show today. so we’ve got brokers of businesses of finance. we have, investors, we have private equity,we have the staff, the team members of the MSP, most importantly we have the customers of those MSPs, and, today we’re focusing on the small subset of the sellers and the buyers.
Adam or Daniel: And just to paint a little bit of a picture about the, how a buyer and a seller might, might come together and what they might look like,some of these points are actually quite aligned. So both seller and buyer care about the staff, they care about the customers. both seller and buyer probably are thinking about what the, what the other party is going to do beyond the, the transaction.
Adam or Daniel: we are naturally though going to have a point of friction between seller and buyer, which is price. and, price we, we begin, at valuation. So. If we imagine that,seller has a, a number in their mind, they want a million pounds, and the buyer has a number in their mind, they think it’s worth a hundred grand, we’ve obviously got a big, divide to,to build a bridge across.
Adam or Daniel: So, the very purpose of this, presentation is to educate both sellers and buyers. And to provide a framework for them to come together. and so we’re going to use a valuation as an anchor point to very quickly establish, is this a business I want to buy? And is this a buyer that I want to sell to?
Adam or Daniel: And are we aligned at value? And if not, then we don’t want to spend our time exploring a transaction. we actually want to spend our time working on our business to, to make it worth the money that we want to achieve when we come to exit.so,valuation methods, again, we’ve got some, some simplified, models here.
Adam or Daniel: and the first one we already talked about, annual recurring revenue. This is the core service. So the per user, per month, per as. We did have servers per month, per device per month. the network infrastructure per month value.we want to annualize that and times it by one. This valuation method really only works for MSPs below a million in overall revenue.
Adam or Daniel: it exists to,to show, that there is a value in even a smaller business that perhaps is in not as perfect as the larger business, doesn’t have the same level of recurring revenue. and, And over time, as the business grows and it matures and its numbers improve, the annual recurring revenue multiple actually drops away and gives a worse, number to the seller, or a better number to the buyer.
Adam or Daniel: our second mechanism is the same number, but we’re looking at the gross margin achieved on that core revenue. And we have this because, if you imagine. some MSPs might be selling at a premium to a particular subset of customers, so their sale price is higher, but they might have the same cost price as another MSP that, that is selling to a less premium customer, and therefore, naturally, their margin is going to be less, I’m sorry, more, in the case of the premium one.
Adam or Daniel: So, we want to be able to represent that in a fair valuation. So again, if we take our gross margin and we times that by two, then that’s, if it’s 50 percent as a gross margin, then effectively we get the same answer. If their gross margin was 60%, then the valuation would be ever so slightly higher to represent that extra margin that business is generating.
Adam or Daniel: our third method is generally what is considered to be the de facto standard for valuations. within the MSP space. and this is where we are taking our EBITDA number and we are applying a multiple to it. EBITDA as we’ve already talked about, lots of different ways of approaching it. the right way is to take that normalized or adjusted EBITDA number.
Adam or Daniel: We must have the appropriate market competitive compensation in there for the EBITDA multiple to be right. you’ll see there, multiples. Generally the market will talk about five times as the sort of median. But, you’ll have been in a bar, at an event such as this, and someone in the bar will have said, well my mate got ten times, my mate got eight times.
Adam or Daniel: And I’m not saying that didn’t happen, and I’m not saying that it’s not possible. But,I wouldn’t bet my retirement, but I’m going to get 10 times or 9 times or 8 times and, you’ll note there a little bit of extra narration around, the different types of buyer and actually what their strategy for buying is and I’ll come on to that in a moment.
Adam or Daniel: our fourth method which is very difficult, to, simply,provide an example for. plan methods. So, this is a method that I’ve used in transactions that I’ve been involved in, where effectively we’ve been buying a business, and the, the ARR times one or the EBITDA with a, an appropriate multiple, just doesn’t quite give the number that the seller needs to get the deal across the line.
Adam or Daniel: And therefore the buyer is really looking hard to say, you Where’s the extra value here? How can I bridge this gap? You know, we’re a hundred grand apart. We’re 200 grand apart. What can I do to make this deal happen? And so with the business plan methods, you’re actually going away and working out. I’m going to get this margin.
Adam or Daniel: I’m going upsell this extra service that they don’t currently, the current seller doesn’t provide to their customers. and I’m going to be able to over a period of time, increase the margin contribution by adding this business into my own. business plan can often give the best results. so, the eight times in the bar, the cheeky two times EBITDA,for the unfunded buyer.
Adam or Daniel: those examples aren’t particularly,productive to, to fuel the market.and the final thing to say is that, when we talk about valuations,you’ll hear a term of,cash free, debt free. but, in very simple terms, if a business is worth a million pounds, but it has a negative balance sheet, then, and it’s negative by half a million, then the consideration for the business is half a million.
Adam or Daniel: if the goodwill value of the business is a million and they have a million pounds on the balance sheet, then the consideration for the business is 2 million.so, if you’ve been, we talked about retained earnings earlier on, so every year I’ve effectively saved, put away money, I’ve not wanted to extract it from my business, because I’m already at the higher tax rate and it’s gonna cost me more and more to take the money out.
Adam or Daniel: Actually I’ve just left the cash in there, and I’m able to perhaps extract that in a more tax efficient way when I come to exit.we’ve then got a couple of examples. I think we’re okay for time aren’t we? Yeah, we’re good. I think it’s is it 22? 22, yeah.so we’ve got a couple of examples here to sort of bring this to life.
Adam or Daniel: we’ve got a small MSP. Small, draw your own judgements as to what’s small and large. and we’ve got a larger MSP on the next one. So, here what you see, we’ve we’ve got our valuation examples, and we’ve got some attributes of the business. so in this case, a million pound business. We’re saying that there’s a 10 percent EBITDA, which, you could and should argue that 10 percent EBITDA is at the low end.
Adam or Daniel: however, we do see MSPs out there that have an EBITDA of nothing, or minus if they are not appropriately re numerating the active shareholders. So, in that sense, a 10 percent EBITDA is actually okay.we’ve got 400, 000 pounds of annual call service, and we’ve got zero net assets. So, our valuation examples are 400 grand, we’ve got 400 grand again because 50 percent is our gross margin.
Adam or Daniel: we’re using a four times multiple here. Now some might argue that, well, that four times isn’t what you said a minute ago, Daniel, you said five times was the middle of the road. Well, yes. five times for a business, in the right state of growth, which we’ve not talked about here. and,so four times is probably more,an appropriate number for this size of business.
Adam or Daniel: And conveniently, it’s the same as the other valuation methods. our fourth model, you’ll see I’ve gone a little bit off, off piste here, and I’ve estimated a higher number really just to demonstrate the fact that you can find more value when you properly, plan out how you’re going to integrate the business and what the synergies are going to be and what extra revenue and margin you can generate.
Adam or Daniel: If we take an average of all four of those, we end up at 450. which again, some of you might think, well that’s a bit low Daniel, for a million pound business. You know, it might have taken me 20 years to, to build that business to a million pounds. but, yeah, you take that number and use it as you will.
Adam or Daniel: the final quote at the end of this presentation is probably the most poignant one in this altogether. Thanks for listening. Which is a business is ultimately worth what someone is prepared to pay for it. So you should be asking yourself continually. How much would I pay for my business? Would I be able to take 450, 000 of my hard earned folding and give it to this person for their business?
Adam or Daniel: Am I going to get that money back? And am I going to make money on it? Because I don’t just want to get my money back. I want to make a profit. Our second example. This probably, probably gives a slightly better outcome to the, well certainly better outcome to the seller. we’ve, we’ve got a larger business here, and size, does matter.
Adam or Daniel: if we’re going to go through the expense and, overhead of buying a business, we’d probably rather buy one at four million than buy four one million pound businesses. So therefore there’s extra value in a larger business. There are other benefits to a larger business as well. It probably is less reliant on the owner and we’ll have got to a stage where it’s developed a senior leadership team and I won’t go through all of the mechanisms again, but you can see our EBITDA multiple has now gone to six from four.
Adam or Daniel: And again, in the bar, my mate got 12 times. Okay. Not saying he didn’t, but we’re representing, we’ve got a slightly bigger number here and for good reason. Our business plan number again gives a slightly better position, but, not as much, as,as we had looked at before, because a larger business is probably more effective at selling, there’ll be less on the table, which is good because it means that’s translated down to their EBITDA, but, there’s probably less options for us to gain synergies and sell more.
Adam or Daniel: So there’s two, two examples, no one’s got up and walked off in a huff, so I’m taking that as a positive, so, some of the variables, I’m not gonna run through these line by line, but hopefully there’s some here that actually make sense to you, some of them we’ve already talked about, uh,some of them we haven’t talked about, I’d like to focus on a couple.
Adam or Daniel: The first I’d like to focus on is, contracted revenue. So go back to that, small MSP first example. I’m paying 450, 000 pounds of my hard earned money. how likely am I to get that money back? Well, if I’ve got contracted, revenue with customers of good standing, then I’m more assured that I’m going to get money coming in, if I don’t have contracted revenue and the customers are not of good standing, then I’m less assured of getting that income and generating that margin and getting my money back.
Adam or Daniel: So contracts, strength, length and health is really important and something that every MSP should be working on today, regardless of when you plan to sell because the more guaranteed your income is, the more stable your business will be. to run and keep, let alone to convince someone else to hand over money to you for it.
Adam or Daniel: deal structure. So again, let’s go back to this small MSP scenario. I’m paying 450, 000 pounds of my own money. I’m not really convinced, or assured that I am going to get my money back, but there’s enough there to make me want to do the deal. So how can we bridge the gap there? Okay. If we agree that the value is fair, but perhaps the payment terms are not in my favor.
Adam or Daniel: So if the seller is confident that I’m a good buyer and that they have a good business, then we can share the risk some somehow. And therefore we get into, what’s known as deferred consideration. and, effectively it’s where we’re going to pay a bit of money later on. And that value can be contracted or it could be performance based.
Adam or Daniel: So it might be, in the seller’s interest, it might be in the seller’s interest to,to take a performance model because the buyer is going to generate way more margin than the seller has, and therefore the business is going to make more money in that initial period. And therefore my valuation is higher.
Adam or Daniel: equally, if I’m not confident about. the buyer, and the buyer is happy to pay me a chunk of money, then I might take a lower valuation or a lower price from my valuation anchor point, because I’m getting all the money now, and therefore that’s an advantage to me.we only have five minutes left, so, does anyone want to pick out anything from that list and ask a question, agree or disagree?
Adam or Daniel: Go for it, Gareth. What is the Switzerland structure? if I may, Dan, just so I feel, if I may, so I feel included in this presentation. please do. Okay. Switzerland structure is, do you know what, I’m not entirely sure I know why it’s called the Switzerland structure. Something to do with their place in Europe, unique position in Europe, but it’s where you’re dependent on a particular vendor or a particular client.
Adam or Daniel: So, for example, you might be a one million business, but you’ve got one client that you get 900 grand from, for example. or 750 or something, or your technology is really niche, you’re dependent on a single vendor or a couple of vendors. There’s a big risk in your business because of that dependency.
Adam or Daniel: Yep. Very good. So, very good question. It’s all about contractual commitment. And we’ve alluded to value being built with longer term contracts, which is reducing risk for a buyer. So Dan, how would you advise MSP owners around The length of contracts that they should look to tie their clients in bearing in mind there’s a sales component here and a tension between the longer contracts that you’re trying to sell to a client.
Adam or Daniel: Yeah, good question. For the keen eyed amongst you’ll have seen the word balance on the Adam and Daniel Bingo and this is one of those this is one of those terms where balance is the key word it’s probably easier to win a new customer to them, we won’t tie you in, there’s no commitment, give us 30 days notice, so we’ve taken the advantage at the beginning of that relationship, but, we’ve set ourselves up for, pain further down the line, when three years later, that customer, had they been on a, an annually committed contract, might just give us 30 days notice, not because of something we’ve done, but someone else has come along, their business has changed, their priorities have changed, perhaps they’ve been acquired themselves, and so we could end up with, customer attrition more than we wanted, but they were easier to win the customer to begin with, and we’ve had three years out of them, so, you know, there have been benefits, so, ultimately I think this is, a confidence thing, whilst you’re, you know, winning new business with, regularity.
Adam or Daniel: every new win you get, I would be advising to improve the terms, at the beginning of the relationship. and not just commitments, but price. So, if you, if you win a seat at 60 pounds, a month, then why not the next proposal? Make it 61 pounds. And the next proposal after that, 62 pounds.
Adam or Daniel: and make a 12 month commitment as the minimum. And then an 18 month commitment as the minimum. And as your confidence grows, and a pipeline does wonders for your confidence, as does regular closing, you’ll find that what you thought was an advantage at the beginning, where you had to say, no commitment, 30 days, actually you didn’t need to say that at all, that was just you.
Adam or Daniel: not being confident that you could close the business with the more attractive terms. And I think it’s also fair to say, if you, there are parts of the market that want longer term commitments.you know, if they’re serious in your services, they want that. So don’t just assume they want something more, more flexible because they’re taking a risk as well in, in, in, in, you know, they want that assurity that you’re going to be around and delivering those services.
Adam or Daniel: And I know for a fact, because it happened to me, that buyers will, where there are short term commitments monthly, for example, quarterly, they will absolutely look at those and look to beat you back or share some of the risk where there isn’t those long term commitments in place. So my advice is 100 percent get to one years, if you can, three years, as soon as you can, if you’re looking to build value in the business, because it will make a big difference.
Adam or Daniel: any other questions or are we, have we got any more slides or is this? Yep, we’ll just rattle through, well, we’re on, questions, comments, the key phrase there. if you’re considering what the value of your business is, then,then,that’s absolutely the right thing to be doing continually.
Adam or Daniel: And what would I pay for it? and what would I, what would I want to, give me assurance that I’m going to get my money back? well, those are the things you should be working on improving in your business.There is a follow up as well. Yeah, so, so, well, first of all, I’d just like to thank, Daniel for delivering that.
Adam or Daniel: I thought it was excellent. we have got some more time for questions. and I’d be really interested to, to get some more questions from the audience. But, if you’d like,a chat with us afterwards, feel free, please just drop us an email. Very happy to have a, a one to one chat where we can dig a bit more deeply.
Adam or Daniel: and actually, we do have, if you hit another slide, Dan, oh, we’ll come back to that. Let’s just hit another slide. Oh, no, this is it. Everyone will leave now. Yeah, no, this is it. Let’s do a selfie. Yeah, no, this is it. So, we are actually just doing, we’ll also do some dedicated valuation sessions where, we can dig into the numbers formally and properly, but we are limiting those to the first six that sign up.
Adam or Daniel: So, if this is of interest to you, I do suggest you, fire something off to us, back to the hello at MSP finance team. so yeah, we have got a few more minutes for some questions, any questions anybody?
Adam or Daniel: You’ve got one more? yeah, we’ve got,
Adam or Daniel: yeah.
Adam or Daniel: what do we think of as good and bad numbers for profit? So when you say gross profit, you’re referring to gross margin? Yeah, so, so gross, gross, well profits, you, with the example there today, so this is your bottom line. The example there today from Dan was 10 percent and 15 percent 10 percent in the 1 million business and 15 percent in the 4 million business.
Adam or Daniel: Yeah So they’re okay. They’re okay I think if you can hit north of 17 18 percent in that 4 million business and in the 1 million business to be frank If you can try and hit 20 percent that’s gonna command a much higher Valuation because you’re likely to get probably a higher multiple on it as well because your profit is bigger Yeah In terms of gross margin, again, if it’s labor loaded gross margin and you’re factoring your direct costs properly, which you should be, you, overall, you want to be looking for 41, 42 percent would be a good number to hit.
Adam or Daniel: Does that help? Yeah?
Adam or Daniel: You must have a question. Come on, you’ve got a question. No? Or a comment.
Adam or Daniel: Right. Dan, this one for you. What would you say are the biggest pitfalls you find for businesses that are acquisitive? okay. biggest pitfalls I would say, first of all is actually,deal origination as they say in the M&A world,or,lead generation as we would say.
Adam or Daniel: so it’s,those 4, 000 MSPs we talked about, there’s a lot of effort that’s going to go into, being in front of those 4, 000 MSPs at the time when they’re ready to sell. educating them. and you probably don’t have 4, 000 prospect or suspect database necessarily for your organic new business.
Adam or Daniel: So, let alone doubling that with with MSPs as well. So, find, finding targets is is I would say the number one problem. and if you crack that,win the next set of, challenges, which is, how you finance it,how you actually,go through the integration process, without, affecting the natural, course of your business anyway.
Adam or Daniel: and,and probably, you know, probably the final parts of that is how you actually recover if you make a bad acquisition. because, the chances are you’ve not done it that much before. The seller probably hasn’t done it that many times before as well, so therefore the chance of everyone getting it right, is pretty low, you would argue.
Adam or Daniel: so, yeah, I would say, that’s a pretty pessimistic,view, but if you can get past all of that Brilliant. Would you agree with those points, Isabel? Yeah. Perfect. Okay.