Earlier this week I spent about an hour with an MSP (managed services provider) that is currently considering potential takeover bids. The company began the potential sale process in 2011. Fast forward to the present and the MSP has learned quite a bit from this exploratory process. Here are three potential mistakes he says MSPs need to avoid during merger, acquisition and exit discussions.

Challenge 1: Be careful with your long-term financial forecasts. Many MSPs come from a reseller heritage, where margins, profits and revenues were not very predictable. A good number of those resellers joined peer groups 2008 through 2010, learned the recurring revenue model, lifted profits by 2011, and are now offering very optimistic long-term revenue forecasts to potential buyers.

The problem: Many sellers don't effectively explain how their margins and profits showed dramatic improvements in recent years. Without the proper context, buyers may think your long-term forecasts are just too darn good to be true -- based on your legacy profit information.

Challenge 2: Runaway discovery processes. I spoke to an MSP that hired a financial advisor for the potential sale process. Generally speaking, that's a great idea. Without a financial advisor in place, you can wind up spinning your wheels trying to organize your business information, understand your potential valuation, and find potential buyers. Then, the back-and-forth between  you and potential buyers can go on forever.

A financial advisor ensures you won't spin your wheels.  In one particular MSP's case, he has had more than 600 email exchanges with his financial advisor since retaining the advisor in December 2012. That's 600 conversations that MSPs don't have time to manage on their own. That's 600 potential opportunities to find a buyer for your company that you don't have time to do on your own. Go find a financial advisor who understands the M&A process. Then, you can make sure that the financial advisor -- rather than you -- are driving the M&A conversation with prospective buyers.

Challenge 3: Defining where your revenues come from. Generally speaking, you'll get a higher valuation based on your recurring revenues rather than your product-related sales. Some potential buyers may be turned off if they see  a big portion of your revenues come from product sales. It's up to you to describe how continued IT product sales blended with managed services ensures your long-term business growth.

The same challenge exists in the data and telecom market. Many MSPs are managing scores of broadband connections that come in and out of data centers. Some potential buyers may view those connections as legacy CLEC or telecom connections. Boring, low-margin stuff. It's up to you to explain how your high-speed network interests are pipelines that allow you to fuel and grow demand for your cloud services and managed services.

In other words: Explain how each piece of your revenue puzzle snaps together to create an even strong business.

Side note: I can't imagine selling a business without a true financial and/or M&A advisor in place. While I can't directly recommend or endorse any of the advisors in the market, a few names I've heard include:
And keep in mind: Not all MSPs are pursuing M&A strategies. It's a hot topic, but the vast majority of MSPs will remain independent, with real growth opportunities for years to come.