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[00:00:09] Hey everyone, welcome to the latest installment of MSP Business School. As always, I'm Brian Doyle here to be your Sherpa as we go through this conversation. But with me today, I want to welcome back a guest that you may have seen here before. With me today, I've got Shawn Walsh from Encore Strategic. Shawn, thanks for joining me today. Hey Brian, thanks for having me. Always a pleasure. Sure. So, Shawn, for the listeners that might not know you, why don't you tell us a little bit about your background and how you ended up in the crazy world of MSP?
[00:00:40] Yeah, so I actually came out, came into the MSP world through law enforcement. I was a police detective, wound up doing computer forensics and computer crime investigation. That's a different path. Yeah, yeah, most people go, how did you make that leap? And it wasn't as hard as you would think. Had an MSP, started in the basement of the house, grew it to locations in four states, got a private equity offer at the end of 2017 and started up Encore.
[00:01:08] I had always said the next phase would be a teaching role. And I've taught high school, I've taught college, I've worked as a scuba instructor for many years. And so, just being in a teaching position was kind of a natural continuation for me. It is funny because, you know, consulting really does have so many elements of teaching built within it as well.
[00:01:31] You know, while you might not be forcing the hand, if you will, with a customer, you're trying to give them the guidance they need to move forward. And maybe we'll kick things off with something that we talked about a little before the show. So, you know, what is one of the bigger mistakes you see an MSP make, especially an MSP that's thinking about the endgame someday? Sure. So, one of the biggest mistakes we see is that they haven't really planned for the endgame.
[00:01:56] A lot of times we have clients come to us and they say, hey, I'm ready to sell my MSP. And we go through evaluation and we have to look at them and go, hey, this isn't worth near what you think it's going to work. It's worth and it's going to take several years to get it there. And, you know, we use the tagline for our company, Profit Grow Exit. And people get hung up on the exit when I tell them that because they go, well, I'm not ready to exit, so I'll call you what I am. I'm like, no, no, no, that's not how this works.
[00:02:25] We want to start that planning on day one. And if it's not day one, you know, you should be doing it at least 10 years before you're thinking about exiting. But, you know, one of the things that I've learned doing consulting for so many entrepreneurs is the key difference that I've seen between serial entrepreneurs and those of us working through our first company is that when a serial entrepreneur starts their third or fourth company,
[00:02:54] they know exactly what the end game is on day one. So it's and I'm writing a new book that's going to be coming out in a few months and it's called Profit Grow Exit. And the first chapter is called Begin With The End In Mind based on these observations that I've seen. So, you know, if you're if you plan on selling your company at some point, you need to start planning now.
[00:03:19] You know, and that's really an interesting perspective, right, because a serial entrepreneur is usually coming in with the end game in mind because they also want the end game to usually be sooner than a lot of our traditional MSPs are looking at because they look at their business as an investment. And I know one of the bigger challenges for a lot of MSPs is they internalize. The company becomes part of who they are.
[00:03:40] So, you know, as you're talking, I think you've got a system that you shared previously that you really walk the customer through that they need to be thinking about as they go through the journey of owning an MSP business. Yeah, absolutely. So we take clients through what we call a value builder assessment. It comes from the book Built to Sell by John Warlow. You know, when we talk about the value of a company, most people kind of get tunnel vision on EBITDA.
[00:04:07] And EBITDA is important, but it's one of the eight factors we look at. So EBITDA gives us the number. The other seven factors give us the they're what influences the multiple of EBITDA that you're going to get. So if you think about it, if you're only focused on EBITDA and you're not thinking about these other seven factors and you have a one million dollar company, let's say you have one million dollar of EBITDA and you add a hundred thousand.
[00:04:36] So now you're at one point one. And your multiple might be three. Three point five is the average. I'm going to use three because I'm bad at math in my head. So now you've increased the value of your company to three point three to one point three million. That sorry. One point one million. See, I am bad. So but if you if you work on the other seven factors, now you can get up to an eight X multiple. Maybe more depending on the circumstances.
[00:05:06] But now that that hundred thousand of EBITDA that you added is now the value of your company is at eight point eight million dollars because you worked on both the EBITDA and the other seven factors involved. And what are some of those other factors that a business owner needs to consider? Right. You know, we've always talked about everything going through them, but there's probably more to it than that, I'd assume. Yeah. But you know what? That is one of the biggest ones, especially for MSPs, Brian.
[00:05:36] And we call that hub and spoke. And hub and spoke is when everything goes through the owner. And when we talk to owners about this, so many of them wear this as a badge of honor. Yeah, I'm the I'm the lead escalation point. When something goes wrong, I'm the one they come to with answers. And, you know, nothing nothing happens without it going through me. And that's that detracts value for the company.
[00:05:59] That is that is not viewed positively for a buyer, because when you sell the company, you should want to walk away with your money as soon as possible. But the more that goes through you, the longer you have to stick around and the lower the offer is going to be. And oftentimes you're also going to get into an earn out situation where you have to stick around and you're responsible for hitting certain metrics. And, you know, we were speaking a little bit before we recorded today.
[00:06:29] Those metrics don't always match either. Right. You know, the the buying MSP is now in charge and that can create quite a different dynamic for the the person that's being acquired, but also being retained. Absolutely. I call that the step parent role because, you know, when you're a step parent and you try to tell your step kid to do something, what do you get? You get you're not my real dad. You have the responsibility, but you have no authority. And earn out is kind of the same thing. You've sold the company.
[00:06:57] You're responsible for hitting those metrics, but you don't have the authority to make changes anymore. It's a terrible position to be in. And, you know, there's another factor of getting locked into a buyout that people don't think about. One of the things that we do with our clients and we do with teams that I find highly effective is personality profiling, using things like disk driving forces and emotional intelligence.
[00:07:22] And you have to know whether you are even capable of being an employee after how many years of owning your company. I knew I couldn't be. And luckily, I had been working a 10 year plan to exit the company. We were in year six when I got the offer. I had gotten myself out of a job. The only thing I the only thing I did was I was a glorified politician. I went around, shook hands, kissed babies.
[00:07:50] And during the during the due diligence, they asked me, they said, well, how long do you plan on sticking around for? And I said, till your check clears. And they all laughed and they said, no, really? I said, no, really? I said, I can't be here and not be in control. And you don't want me here not being able to be in control because it will not go well. And they said, well, we got to check on that. And they they checked out what I said. And they said, yeah, you're right. We don't need you.
[00:08:17] At that point, my company, the only hat that I had left was sales manager. And that company had a sales team. They had a sales manager. They didn't need me. So they said, yep, you can you you can we want you to meet with these three or four companies after the closing. And then you can go. And that's and it was like I said, it was a good thing that I did. So so that's something that each person has to has to gauge for themselves. But you have to really be honest with yourself.
[00:08:46] It's funny because it's really having enough ego to know that what your ego really is. It's very contradictory. It's like you're building a business saying to yourself, I got to let go of my ego because I need to not be the roadblock later. But then it's coming around on the other side saying my ego is way too big to stay here. But it's a great way to think of that because it's so true. I've been on the other side. I was retained after our second acquisition.
[00:09:14] My first acquisition I stayed on as one of the partners and did still have a good voice. But it does transition at that stage. So those of you that are thinking about the second bite of the apple, there's definitely a transition step that comes with giving up some of your responsibility. And then there's the hey, I just got to help segue these customers. That's really what my role was on the second one. And then I'm out, you know, and that was an important one. And at that point, I certainly made sure I was not a key part of that customer relationship any longer. Yeah, yeah, absolutely.
[00:09:43] So what are some other things that people should be thinking about? I always hear that one of the things that gets valued higher is truly having a strong sales engine. Yeah, you know, a buyer wants to know that the funnel is not dependent on the owner. And so many MSPs are still owner-led sales. And the MSPs struggle with building a sales team because most owners come from a technical background. They're not really comfortable in sales.
[00:10:13] It's not their core competency. And they think that if I just go out and hire a professional salesperson, they'll just sell. And that's not the case. Salespeople need to be managed as just as much, if not more so than your engineers. But I see so many MSPs that they have very clear metrics that they hold their engineers accountable to. And when it comes to the salesperson, I go, well, what are they doing? What activities are they doing? How are they generating leads?
[00:10:43] Well, I don't know. And they just let them go off. And, you know, I jokingly say that out of the first several salespeople that I hired, the last thing they ever sold was me. So, you know, I had a coach years ago who gave me great advice. And he said, when asked, when should I be hiring a salesperson? The answer was always the same, when you're ready to manage a salesperson. And that's very true in the MSP world. And you need to be doing that management.
[00:11:12] You need to be holding salespeople accountable to very specific metrics. You know, I've always said that if I ask an engineer, did you do something? I get yes or I get no. If I ask a salesperson, did you do something? I get a 45-minute story that ends with me still not knowing whether they did it or not. Yeah. It's, you know, that sight of hand show at that point. Let's see how we can build this story so it never really gets to a conclusion.
[00:11:42] And, you know, but again, that comes back to the personality profiling. Salespeople are naturally social animals and they like to talk and they like to storytell. But, you know, we have to remember that while that's all good, that doesn't take the place of objective metrics. And I think also a consideration for the owner is understanding that the metrics are going to be far different than what they may have experienced as the owner-led sales engine.
[00:12:09] You know, you're working off primarily referrals, so that's already a little bit different. Your close rates are going to certainly be higher. Your take rates even for meetings are going to be higher, you know, at the onset. The other thing is you can make decisions in that room that your sales team can't make. And that's often forgotten too. You know, you were talking a little bit about some of the problems. And one that you mentioned was, you know, in our pre-chat was a little bit about undervaluing services too.
[00:12:36] And that can be a killer within the world. And I've seen that with a lot of owners because they're in that room and they have command. If they want the deal enough, they can discount down to whatever they feel like. And, you know, that hurts the business too. But let me expand on that with the bigger picture point of view. Well, so in my book, my previous book that I wrote with Dave Kava, The Pumpkin Plan for Man and Service Providers, I have a chapter in there. And it's called, you know, discounts are like diamonds. They last forever.
[00:13:05] And that's one of the things we tell people, don't be discounting. Because once you give a discount, two things happen. One, the prospect in front of you goes, oh, so that wasn't the real price. So now you've lost trust. But the other problem is now you've also let them know that everything is up for negotiation. And it becomes a problem. If you need to do something to close a deal, give something for free.
[00:13:35] Waive the onboarding fee, a one-time cost. Free is not, nobody assumes that free is going to be forever. It's assumed a one-time cost. So much better way to go about it. The other thing is please raise your prices. MSPs undervalue their services more than any other type of business that we work with. And I think it's because we know how to do something. So we see it as being easy.
[00:14:05] And we don't really appreciate the value that we're providing for the other person. But there was a line in Alex Hermosi's, one of his sales books that kind of stuck with me. And it says, you have a moral obligation to charge more for your services. Because if you're not charging a premium price, your clients aren't going to take it seriously.
[00:14:26] And in this day and age of IT security issues and all the threats that are out there on the landscape, IT needs to be done properly. IT is the money printing machine in every business now. Okay? We're not going, nobody's going back to yellow pads and number two pencils. So your IT infrastructure needs to be managed properly. And if you charge too little, your client's not going to take it seriously.
[00:14:55] And they're not going to put the focus on it that it needs. So you need to charge enough that they know that this is important. And this is something they need to be paying attention to. Yeah. You know, we see it all the time, right? On the software side of life, you know, too good a deal, not enough investment being made, lower adoption, right? And it's a similar type approach when you talk about the MSP world. If you really want your users to kind of implement, use you appropriately, think of you as the trusted advisor,
[00:15:24] you've got to be charging enough that they feel that they're going to extract that value from the relationship as well. Yeah. Yeah. And, you know, when I got my MBA, there was a simple concept that they teach in business school. And it's that you can be a price leader or you can be a value leader. But you have to pick a box. Walmart is a price leader. Okay? But in every major market in the U.S., you've got a Walmart and you've got a Nordstrom's.
[00:15:53] And you are never going to see the sign at Nordstrom's lowest prices guaranteed. And you're never going to buy a Rolex at Walmart. So, but yet they're both successful businesses. And, but they serve very different people in very different ways. Walmart was built to be a price leader. It takes scales of economy to be a price leader, right? We don't have that.
[00:16:21] Most small business people, MSPs included, we need to play in the value leader box. But the problem is we straddle the line between the two. And that's no man's land. We go in and we say, we're a premium product. We're going to take care of everything for you. And then the prospect pushes back and we immediately discount the price and we come in lower. Now, guess what? It takes money. It takes profit to deliver a premium service.
[00:16:50] Now you're charging too little. So you don't have the money to provide the premium service that you promised. Now the client's upset because they're not getting the premium service. And you're upset because you're not making any money. And the relationship becomes contentious. And usually those are the businesses where you see the owner burnout become very prevalent as well. Absolutely. Absolutely. We see it time and time again. You know, don't be afraid to walk away. You know, Michael Porter from Harvard Business School, one of my favorite quotes.
[00:17:19] You don't have a strategy until you can tell somebody no. And you know what? There are a lot of people we told no that came back later on. And, you know, funny thing was I worked for law firms mostly. Our MSP specialized in law practices. And lawyers love to argue and, you know, play the power card. And if anybody likes to usually negotiate price, it's starting out. I learned a long time ago, don't negotiate with lawyers. You know, it's like rolling around in the mud with a pig.
[00:17:48] You both get dirty and the pig likes it. But I would walk in to, you know, to deliver a proposal and I'd get the, hey, I just want to let you know, we're getting bids from three other MSPs. And I learned in time, my response to that would be, I'm just going to let you know, I'm going to be the highest price one. Should we bother to talk or should I go get an early lunch? And then they didn't expect that pushback.
[00:18:15] And so that verbal judo and all of a sudden they want to know why. And then you have a chance to explain the value proposition and tell a different story. And that's the other thing MSPs need to do when they do their sales proposals. They need to learn how to tell a better story so that they are not sounding like every other competitor in the market. Because when you all sound alike, the buyer goes, well, they also, or the prospect says, well, they all said the same exact thing.
[00:18:44] So therefore I can safely go with the low better. Yeah. Price becomes the consideration at that point because you put yourself in the commodity spot. Absolutely. And, you know, it's always about the people though. Right, Sean? You know, our people are better. It's my favorite. So, you know, one of the stories that I use for this when I'm doing a keynote on this is I'll use a prop and I'll hold up a can of liquid death water. And I'll ask people, what's in the can?
[00:19:15] You know, people go, water. Well, great. How much does this can of water cost? And typically liquid death goes for about $3 or more a can. And sitting right next to it is a bottle of Dasani for 69 cents, which same product. Yeah, water. All liquid death did was tell a better story. They have better marketing. You know, people will, of course, if you go to their website, they'll tell you, well, it's in a can and we're helping the world because we're going to recycle.
[00:19:44] And as a scoop instructor, I am very happy that they're helping put less plastic in the ocean. But here's the reality. The story that they're telling is you can go to the neighborhood barbecue and hold this can and people aren't going to come up to you and bust your chops because you're not drinking and going, oh, you're drinking water. Oh, wait a second. Have a beer. Sure. They've removed the peer pressure from not drinking alcohol and people will pay a premium for that. So can you as an MSP, you've got the same thing.
[00:20:14] You're both selling water, you and the other MSP that they're talking to. But can you tell a different story about what you do and how you do it so that it doesn't sound like everybody else? So, Sean, we're getting near the end of our time today, and I just want to make sure if there's anything else you wanted to cover off on, we do. Any other points or any closing thoughts that you might have for the MSP community before we wrap up today?
[00:20:41] You know, really just ending on that differentiation thing. You know, MSPs need to stop going into prospects and having server room conversations, and they need to start having boardroom conversations. They need to know how to translate technology to business goals and objectives because that's what the C-suite wants to hear about. Amen. They don't know technology, and they don't care about technology. They care about the results of their business, not yours.
[00:21:11] So have that conversation. Yeah, and with that, Brian, I've given you a link. If anybody would like to do a value builder assessment, which will give you a back-of-the-envelope valuation of your company, but it will also provide you with a roadmap that will show you where the gaps are between where you are and where you want to be.
[00:21:34] We're happy to provide that, and they can follow the link there, or they can email me at info at encorestrategic.io and just put value builder assessment in the subject line. Perfect. And listeners, as always, in our show notes, you'll be able to get a link to the free value builder. There will also be a link to Sean's LinkedIn profile.
[00:21:57] So if you want to connect with them directly, you can certainly do so, and I encourage you to go through that exercise if you haven't because it's never too early to start planning for the exit. Sean, I want to thank you for joining me today. It's always great to catch up with you and see what's going on in your world, so really appreciate that. And I will see you all again next week. Thanks so much, Brian. Always a pleasure.