There are three cornerstones to any kind of successful business – building a business plan, executing on that plan, and measuring your results. Oh, I forgot. You also have to be able to change course mid-stream, even in some fundamental ways.
In this piece we’ll assume your MSP business is up and running, so business planning isn’t so much about creating a new business as it is expanding one.
Before we get started, let’s start with a bold statement. The biggest mistake too many MSPS make?
They don’t have a business plan.
It’s that simple. Some MSPs want to hit the ground running. To them, the thought of spending precious time documenting mission statements and financial projections seems like time wasted. Who has time for planning when your day is filled with finding new clients, bringing up new services, and hiring a tech or two?
If that’s you, please reconsider. It doesn’t have to be all or nothing. In fact, the most important part of any plan isn’t how complete it is. The most important part is that a plan exists at all ― that you thought through and documented some basic aspects of your business:
Defining a Business Plan
Many experts think of the process as business plan first – what are you, what do you want to be – and then strategy – how are you going to use the resources at your disposal to make your business plan. Others, especially true startups take the opposite approach. They think on a high-level first, and dive into the details later.
TruMethods CEO Gary Pica has very defined views about business planning. “To create an MSP business plan that helps you achieve your growth goals, you have to evaluate where your company currently stands and where it’s been. Take a look at your MSP results and resources over the past few years,” Pica argued.
There are clearly gray areas and overlaps between a business plan and developing a high-level strategy. After all, your business plan wouldn’t be very much if you didn’t have a firm strategy, especially for longer range multi-year business plans.
While many think of quarterly plans, so-called 30/60/90 plans, business planning must have more depth than these short term largely financial views. Your plan defines the structure as to how you do business. And this includes detailing items such as finances, organizational structure, and of course, people.
For startups, the business plan details high-level strategy, and this document can be used to raise money to get your company underway.
In fact, your business plan and your strategic plan should be closely related – they should work as a team.
Business Planning Basics
Business plans, while often focused on finances, should also include detailed sections on operations, marketing, personnel and other issues.
In terms of operations, how exactly will you achieve your short- and longer-term goals? Do you have the right office space, enough people, and are you structured organizationally for the kind of growth you plan to achieve?
Before you can really define your marketing, you must consider what it is you are selling, and how that may change in the future. Then you can dive into the target market and how you plan to stand out versus your competitors, and what marketing tools and techniques you’ll use.
Finances often take the most time to develop, and they should not be given short shrift. First, you need an accurate view of past performance. This can help inform solid projects as to your future numbers.
3 Business Planning Must-Haves
- Identify ideal clients. The first year you’re in business, you may want to take any client that breathes and is willing to pay you money. However, you need to identify your ideal client and make actionable plans to find prospects who match your criteria. Here are a few questions to get you started:
- What size company, both by revenue and employee count?
- Which industry or industries? Are compliance regulations a plus or a minus for you?
- Do they want cutting edge IT services, or do they want to do just enough to keep the business going?
- Define business services scope. No MSP can be all things to all types of customers. You need to strategize on which services your market segment needs that you can offer and end up with a strong profit margin. Then be upfront with both prospects and clients on the services you deliver and how you deliver them. The best way to do this is to document the scope of your business services to minimize scope creep.
Of course you can take on clients who don’t fit the ideal model. But, with a plan, you are now making a conscious decision on a case-by-case basis. Taking on a non-ideal client is no longer something you do automatically because you don’t know any better. For example, perhaps you’ve decided to standardize on the infrastructure – including hardware, servers, desktop, edge devices, OSs, versioning – that you support. If a potential client has non-compliant infrastructure they are unwilling to change, you can still take on the client. However, you know how much of a premium to charge for managing non-standard systems so that you adequately cover the extra work and time required to manage them.
- Establish business objectives. What milestones do you want to achieve over the next year or two. If you don’t want to think five years down the road, that’s fine. But you have to look ahead at least one to two years. How many clients do you want to have and at what type of margin? What actions do you need to do today to reach that goal?
Some of your objectives may be around life/work balance. Take those into consideration as well. You wanted to become an MSP for a reason. If you don’t clearly state your objectives, you may never achieve them.
Making the Right Exit
Many MSP owners can go along for five, ten, fifteen years before thinking about retirement. At the end of the day, there are only a few options – sell, merge, hand the business over, or shut down. Take some time to think these options through realistically, and identify which one you want to work toward. With your ultimate end goal in mind, you can develop your business to move forward toward that direction. Then, when an opportunity presents itself, you’re ready to evaluate it and conduct thorough due diligence.
Of course technology, market trends, and client needs all change quickly. In fact, your own business and personal objectives can just as quickly change. No plan stays current forever. So, review your plan at least annually, even if you review and decide no changes are needed.
Don’t let getting it perfect get in the way of getting it done. Even if your final document wouldn’t win any prizes as the most thorough “business plan” of all time, make sure you think through and write down the most important aspects of your business. That way, the small day-to-day decisions you make won’t inadvertently lead you down a path you never meant to go.
For more advice on exit strategies, let’s turn to a true expert. Philip Vorobeychik, Senior Associate at Insight Venture Partners, has been in the trenches ― on both the buying and selling sides. Vorobeychik has a checklist for improving your company’s appeal:
- “Become fanatically customer centric
- Ensure customer loyalty is to the business (not you)
- Improve processes and improve again (and again)
- Improve your depth of talent and retention rates
- Improve your systems / know your business
- Exit unprofitable businesses and customers”
Perhaps you are considering acquisitions to drive your company’s growth. Here are some danger signs you should look for when evaluating a potential acquisition target, according to Vorobeychick:
- “Misrepresentation of data (financial, etc.)
- Declining revenues
- Customer turnover
- Risk concentration (key employee/customer)
- Employee quality/morale”
How to Value Your MSP
Again, even if you aren’t looking for the exit for some time, it’s important as part of your ongoing business planning to have an idea of what your business is worth. MSPs can be tough to value, as they come in all shapes and sizes, and the markets they serve undergo constant and dramatic change. That means that while metrics have merit, they are not a hard and fast way of determining a definitive value. Instead, the value “is heavily dependent on the individual company’s revenue, margins, service mix, geography, quality of consultants, and many other factors,” argues Mergertech, an investment bank in its MSP Performance & Valuation Report.
“As a general rule of thumb, the most highly valued MSPs do not have a single client that makes up more than 12% of revenue with the top ten clients accounting for less than 40% of revenue,” the firm concludes.
Here are other metrics that help determine the health and value of your MSP operation:
- Revenue per employee — $250,000 is an ideal number
- Rate of growth – positive growth is a must, but there are limits to how fast a labor-intensive business can expand.
- Percentage of revenue based on services – you want services to represent the vast majority of your income
- Ability to retain top employees – your staff is core to your value. Too much turnover shows risk to future health of the business.
The Multiplier Effect
Multipliers, whether of sales or profits, are often used to set a price. EBITDA is often the preferred multiplier to use for valuations. For instance, some experts claim that MSPs with their own hosting infrastructure and guaranteed revenue can sell for 10x EBITDA, while smaller MSPs with no real infrastructure and a small portion of recurring revenue will be offered half that – or less.
But EBITDA doesn’t tell the whole story, of course. An MSP is as healthy as its service portfolio, with valuations tightly tied to recurring revenues growth. If more than half of your revenues are recurring, generally speaking, you stand in good stead.
The way you run your business also matters. Just as you want to automate client’s infrastructure and IT operations, you want your own businesses processes to be automated so you are poised and ready for growth. Furthermore, the more that you are embedded into your clients’ business and perceived as a trusted advisor, versus just troubleshooting problems, the more value you have.
Other Critical Business Plan Components
Every business plan is unique and every MSP business owner needs to find out for themselves what format works best for them. As mentioned earlier, the most important step is to have a business plan versus having the perfect business plan.
Here is a list of other items typically included in a actionable business plan. Many of these items are addressed in more detail in later chapters in this guide.
Prepare for some soul-searching. Define your purpose—why you do what you do—as well as core values that guide the ‘how’ of your business. Then establish a 10-year net worth goal.
Long-Term Goals and Targets
Using a 3-year time frame, determine your company structure and sales goals in relation to your vision. Set priorities and check profit margins to make sure they’re in line with goals.
With targets in place, develop a 1-year plan for sales goals and priorities that are aligned with your vision.
Quarterly Action Plan
It’s time for implementation—the most important part of a business plan and also where the most mistakes are made. Think about quarterly goals in terms of sales, revenue, and new clients. Create a to-do list to move toward your goals. But also make a ‘to-don’t’ list, so that resources are not stretched too thin.
Once you learn how to focus on the most important action items every quarter, dramatic business success will follow.
Gary suggests you’re on your way to being a world-class MSP when you can answer ‘yes’ to these questions:
- Do you have a current business plan that includes a target and vision?
- Do you have a quarterly action plan?
- Is every team member accountable for results?
- Do you schedule one day per quarter for strategic planning?
Once you know your services (including break/fix, reselling hardware or software, managed services, etc.), you need to establish what you will charge for these services. Some may best be charged per user, per device, or as a blanket set-price charge. Even for ongoing services, you will need to consider setup fees.
When considering pricing, certainly consider what similar services are being offered in your market (whether geo- or industry-based). However, Kaseya’s annual MSP Pricing Survey indicates that MSPs that know – and can communicate – the value they deliver command higher prices than MSPs who only consider the cost of delivering services.
You need to understand the target margins you need to achieve your overall business and personal goals. Make sure that you take plenty of time to research the products and services you are going to sell, and work out exactly how much you have to pay to deliver – including supplier, personnel and technology costs. Your suppliers and technology vendors are critical for your success, so make sure you choose vendors who will act as true partners. The technology solutions that are the basis for your managed services need to be easy to use, making your staff more productive and efficient, your clients more satisfied and loyal, and your margins comfortable and constantly improving.
Branding is all about defining who you are and doing so in a way that is compelling to clients. Let’s take a moment to walk through some high level basics of how to market and brand your MSP business.
Your company really should have an identity – an image – that projects the value of who you are and what you offer. Not everyone has a catchy name like Google they can brand around. The more importance issue is that clients view you as competent, professional and forward-thinking.
Your brand should also reflect your company culture, and your culture should represent your brand in a disciplined way. This could include, for instance, a certain style of dress reflecting whether you are more geek or pure business.
It also may involve deciding whether you have a single visible leader or promote a team approach.
Finally, your written materials, web site and blogs should all be done in a particular that reflects the feel of the company.
Personnel and Organizational Structure
After your customers, the most important part of your business is your staff. These are the people who will interact with your most valued possession – your customers.
They are also responsible for the quality of the services you deliver. This means you need to make sure you can afford the right type of people to suit your business. This is of course always a personal choice, and comes down to how you want to run your business.
There are a number of different aspects to the right kind of personnel, from their personal disposition to their location. For the purposes of the MSP Business plan, we are most concerned with the roles that they fill, and the amount that will be required to find the right person.
By thinking clearly about the roles you need to fill in the business, you can then work out how much you will need to allow for each of these positions. There are three main areas MSPs need to focus on to meet the needs of the business, remote services, onsite service and management/sales.
Business Plan Reassessment
Your business plan is not a once in a lifetime creation or an annual endeavor. It should be regularly revisited. And that is the advice of none other than MSP guru Gary Pica, president of the TruMethods. In a recent blog Pica argued the importance of mid-year business plan reviews. This all starts with looking back at how you fared last year, and whether key goals were met. Pica suggests taking a deep look at:
- Gross margins
- New monthly recurring revenue sales
- Average AISP (all-in seat price)
- Average monthly recurring revenue”
Based on this, you can then modify your plans. “Are you on track to meet the goals you set at the beginning of the year? Or, if you’re just creating a business plan now, are you in a position to meet those objectives? If not, you need to right the ship. There are two adjustments you could make: The first is to your goals, and the second is to your performance,” Pica argued. “On the other hand, an inability to reach your goals could be due to the fact that you’re just not operating efficiently enough. Are you wasting time on IT tickets? Are you not generating enough monthly recurring revenue? When facing issues like these, focus your efforts on improving performance. If your sales are lagging, invest more resources in your sales team. Determine where improvements could be made and push your team to make them.”
Remember, a business plan isn’t created so that it can sit on your shelf as an action item you crossed off your list. It’s a powerful instrument to help you keep you, your business, and your employees all on track to achieve your short- and long-term goals.
Want more insight on strategic planning, setting business goals, and hitting the right metrics? Download your free copy of A Winning Hand: 21 Cards to Play for Total MSP Success.