Lots of VARs and MSPs who were in business for at least 20 years are starting to talk about retiring. How will they do it and what is the best way? The valuation of a VAR’s business today has little to do with the actual annual turnover of product or even break-fix sales. It seems that today, if a VAR wants to get top dollar for their business, they have to figure out how to convert their current clients into a subscription model. Recurring revenue is king!
Unfortunately for many, the value of the hard work of building clients and relationships over the past two decades seems to have faded in the eyes of investors. On top of that, it requires more investment and more work to transition into a recurring revenue business model. Time, effort and money that they do not have, or want to invest, especially when they are planning to retire soon.
They also talked a lot about handing over the business gradually to the younger staff, but this had no guarantees of success either. And, some of the top employees were already planning to do their own business. One VAR told me that one of their top sales reps left to start their own business and was successful in “stealing” away one-third of their business. Maybe the VAR exaggerated a bit, but the probability is real.
VARs who decide to stick to the traditional ways of doing business are susceptible to this sort of competition. Companies can now offer more cost-effective IT solutions to end-users through Cloud and managed services. “Born-In-The-Cloud” VARs are popping up with minimal overhead infrastructure and a powerful IT business case for operational instead of capital expense.
From my discussions, it seems that roughly 14% of the VARs are planning to retire within the next 5 years. Whatever the final number ends up being, thousands of VARs will be looking for an exit strategy.
I discovered that there are roughly four basic “retirement” plans that VARs were considering – each with their own pros and cons.
Plan A: Sell the business for as much as they can and just move on.
Pro: Fastest way to cash out and enter full retirement
Con: May not get as much money as they want for the business, and it not easy to sell an IT business.
Plan B: Keep on working as usual to milk as much money as possible from the company. Prepare for the day when they simply cannot go any further and have to close the doors.
Pro: Make the most money doing the same work with known resources
Con: Need to continue working longer
Plan C: Sell part of the business to their staff and help them with the transition.
Pro: They spend less time working and could make more money
Con: They are dependent on their staff and their ability to grow the business successfully
Plan D: Transition the business into recurring revenues and then sell (or, depending on workload, they may actually be able continue in business longer with more time to enjoy life).
Pro: They could sell for the most money or they may be satisfied with maintaining the recurring revenues with less workload.
Con: Takes time, effort and investment to transition the business.
Did you find your Plan A or B? If you are planning to retire, I would advise you to seek professional help (including tax planning). Whatever you decide, it is something that requires proper consultation and planning.
If none of these four plans are appealing, there might be a fifth exit “Plan E” for you. We are exploring this fifth option to help retiring VARs transition their customer base and assets into a recurring revenue stream with near-zero effort from their side. This may allow them to retire sooner with more money and less risk. If you are planning to retire and want to learn more about this “fifth Plan E” option, please contact us.