Selling Your MSP: How Much Cash You Actually Get at Closing

▶️ Watch: Selling Your MSP: What Will You Actually Walk Away With?

https://youtu.be/2NXXQKrH9B8

Prefer to read? The key ideas from the video are expanded below.

When someone offers to buy your MSP, the headline purchase price is naturally going to get most of the attention. But the purchase price is not necessarily the amount that shows up in your bank account at closing. Some of that price may go to pay off debt or transaction fees. Some may be held in escrow. Some may depend on future performance. Some may be paid in equity instead of cash. And the final amount may still change because of working-capital or other closing adjustments. So before you agree to a deal, you need to understand not just what the buyer is offering, but how that offer actually turns into cash for you.

What Happens to Revenue and Expenses at Closing

One of the most practical issues is what happens to revenue and expenses around the closing date. Suppose the deal closes on the tenth of the month. A number of your customers may have paid you on the first for the entire month of service. You already received the cash, but after closing the buyer is now responsible for delivering the remaining twenty days of service. That issue can be even bigger if customers pay quarterly or annually in advance. From the buyer’s perspective, they are taking on the cost of delivering service even though you already collected the money.

Now think about the opposite situation. Maybe some customers pay after the work is performed. You delivered the service before closing, but the customer does not pay until afterward. You need to make sure the agreement clearly says who gets that money. There is not one answer that applies to every deal. Accounts receivable and accounts payable might stay with the seller in one transaction and transfer to the buyer in another. Prepaid revenue, deferred revenue, accrued expenses, and working capital can all be treated differently depending on the agreement.

The bigger point is that the closing date does not neatly divide every dollar of revenue and every service obligation. You need to know who keeps the cash, who gets money collected after closing, and who is still responsible for delivering the related service.

How Working-Capital Adjustments Can Change What You Receive

A lot of transactions also include a working-capital target. The basic idea is that the buyer expects to receive a functioning business with a normal amount of working capital. They do not want to pay for a healthy company and then immediately have to put more cash into it because receivables are missing, bills have not been paid, or prepaid customer obligations were not properly accounted for.

Usually the parties agree on a target before closing, and then the actual working capital at closing gets compared with that target. If the business delivers less working capital than agreed, the purchase price may go down. If it delivers more, the price may go up. That sounds pretty simple until you start defining what actually counts. Which receivables are included? Which liabilities count? How are prepaid customer amounts and deferred revenue handled? What happens to old receivables that may never be collected? Those details matter, because a working-capital adjustment can change the amount you receive even though the headline purchase price never changed.

Escrow and Earnouts Mean Some of the Price May Come Later

And even after all of that, not every dollar of the purchase price is necessarily paid to you at closing. Some of the negotiated amount may be placed in escrow or held back for a period of time. That money may be there to cover claims if the buyer later says something you represented in the purchase agreement was not accurate. If no claims come up, you may get that money later. But until then, it is not cash you can use.

Part of the price may also be an earnout. That means you only receive that additional amount if the business reaches certain targets after closing. Those targets might be based on revenue, profit, customer retention, or something else you and the buyer agree on. Escrow and earnouts are different. Escrow is usually money that has already been negotiated as part of the deal but is being withheld for a period of time. An earnout is money you only get if certain future conditions are met.

An earnout can be useful when the buyer and seller disagree about value, but it also creates risk for you. Once the deal closes, you no longer fully control the business. The buyer may change staffing, pricing, expenses, sales strategy, or even the way financial results are measured. All of those things can affect whether you actually earn the earnout. So if a meaningful part of the purchase price depends on future performance, you need to understand exactly how that performance is going to be measured and how much control you are actually going to have over the outcome.

Rollover Equity Is Part of the Deal, but It Is Not Cash at Closing

You may also have rollover equity. This is especially common in private equity deals, where the buyer may ask you to reinvest part of your proceeds into ownership of the acquiring company or the combined business. That equity might become very valuable. It might also become worth less than you expected, or potentially nothing at all. Either way, it is not cash in your bank account at closing.

So if someone says your deal is worth $10 million, but $2 million of that is rollover equity, $1 million is an earnout, and $500,000 is held in escrow, you are not getting $10 million in cash when the deal closes. That does not automatically make it a bad deal. The rollover equity may give you a chance to participate in future growth, and the earnout may eventually get paid in full. But you need to separate guaranteed cash at closing from money you may receive later and value that is still at risk.

Build a Proceeds Schedule Before You Sign

Then there are debt and transaction costs. Your proceeds may be reduced by debt that has to be paid off and by legal, accounting, investment-banking, brokerage, quality-of-earnings, and other deal costs. Those costs can be substantial.

So the headline purchase price is really just the starting point. Before you sign, I want to see a proceeds schedule that takes that headline number and walks all the way down to what you actually expect to receive. How much is paid in cash at closing? How much goes to debt and fees? How much is held in escrow? How much depends on an earnout? How much is rollover equity? And what adjustments can still change the final number?

You may decide the total package is worth accepting. There may be very good reasons to take some rollover equity, agree to a reasonable earnout, or leave money in escrow. But you should understand which parts are guaranteed, which are delayed, and which are still at risk.

Because the headline purchase price matters. But so does how much you receive, when you receive it, and what has to happen before the rest of it actually becomes yours.

This article is for educational purposes only and is not tax or legal advice. Every business is different, and you should talk with your own professional about what makes sense for your situation.