Deal Review Regional IT Services Firm
This transaction involves the acquisition of a mid-sized, regional IT managed services provider (MSP) located in the upper Midwest, serving over 130 clients across manufacturing, healthcare, education, and professional services. With $3.7 million in recurring revenue and $720,000 in adjusted EBITDA, the business was listed at $2.9 million and acquired through a structure involving SBA 7(a) financing, 20% seller financing on a five-year term, and an additional revenue-based clawback mechanism contingent upon post-close retention of top accounts. The MSP has been operating for over 17 years and provides a full suite of services including helpdesk support, managed cloud infrastructure, cybersecurity, VoIP, and on-premise server maintenance.
At its core, the business is a recurring-revenue service model built on 1–3 year client agreements with auto-renewing service level agreements (SLAs). More than 88% of revenue is monthly recurring, invoiced via automated billing cycles, and collected within 30 days. Clients typically subscribe to bundled services based on employee count, device footprint, and uptime/redundancy requirements. The business operates with a full-time staff of 18, including four Tier 2 technicians, three Tier 1 helpdesk agents, one network engineer, a vCIO (virtual CIO), a sales director, two client success reps, and five administrative, accounting, and support staff. The company’s founder was acting in a CEO/CTO hybrid capacity and has exited post-sale after a 90-day transition.
The deal was structured with 70% bank financing through a preferred SBA lender, 10% buyer equity, and 20% seller financing on a subordinated note bearing 5% interest amortized over 60 months. Notably, the seller financing component contained a clawback clause allowing the buyer to reduce future payments dollar-for-dollar in the event of gross revenue falling below 90% of trailing twelve-month levels due to top-client churn during the first 18 months. The seller accepted this term in exchange for full price realization and to mitigate buyer risk stemming from concentration in the top five accounts.
This acquisition concerns a long-standing regional IT managed service provider (MSP) located in the upper Midwest, primarily serving a mix of small to mid-sized businesses in the healthcare, education, light manufacturing, and professional services sectors. The company, founded nearly two decades ago, has generated a stable base of recurring monthly revenue through multi-year contracts offering a full range of IT services including remote monitoring, Tier 1 and Tier 2 support, backup systems, cloud migration, virtual CIO advisory, on-site maintenance, VOIP systems, and network security. With a book of approximately 130 active clients and a strong retention rate of over 90% annually, the firm was a prime target for acquisition by a buyer seeking predictable cash flow and operational leverage in the IT services space.
The company posted $3.7 million in trailing twelve-month (TTM) revenue and approximately $720,000 in adjusted EBITDA, reflecting a healthy 19.5% margin for an MSP of its size. The business maintained high gross margins due to the scalable nature of its service offering and judicious use of cloud-based infrastructure provided through strategic partnerships with AWS, Microsoft Azure, and a regional Tier III data center for colocation services. The client base was composed of a combination of fixed-fee managed service agreements and supplemental project work billed on time-and-materials terms. Core clients paid between $1,500 and $10,000 per month, depending on complexity and SLA level.
The acquisition was completed at a purchase price of $2.9 million, or roughly 4.03x EBITDA, which was considered appropriate given the recurring nature of revenue, low client churn, and infrastructure in place. The buyer, an experienced technology operator backed by a family office, financed the transaction through a layered deal structure composed of 70% senior debt via an SBA 7(a) loan, 10% buyer equity injection, and 20% seller financing. The seller note was subordinated to senior debt and structured with interest-only payments for the first 12 months, followed by amortized principal and interest over the next four years. This note included a clawback clause granting the buyer the right to reduce principal repayments if total company revenue declined by more than 10% from the TTM baseline due to loss of any of the five largest clients within the first 18 months of closing.
The seller note clawback clause was structured as a dollar-for-dollar reduction against outstanding principal, capped at 50% of the original seller note balance. For example, if the business lost a client contributing $250,000 in annual recurring revenue and the total decline exceeded 10% of pre-close revenue, the buyer would be entitled to reduce the seller note balance by $250,000. This clause provided a backstop against revenue concentration risk while still allowing the seller to realize full value if the post-close transition maintained client continuity. The clause proved pivotal in final negotiations, allowing the buyer to close at full asking price despite their reservations about top-line fragility.
Client concentration was not extreme but still material, with the top five clients accounting for approximately 38% of total revenue. Each of these clients had been onboarded for at least three years, with contracts set to renew automatically under evergreen clauses unless canceled with 90 days’ notice. As part of the diligence process, the buyer requested and received customer satisfaction survey results, net promoter scores, and renewal probability assessments for the top ten accounts. Additionally, the buyer conducted interviews with key stakeholders at three of the five major clients under pre-approved NDAs. Each reported satisfaction with services and no plans to switch vendors.
The transition plan was an important factor in mitigating the seller-dependency risk. The founder had served as the CEO and de facto CTO for nearly two decades and held most of the institutional knowledge relating to client configurations, vendor integrations, and service architecture. To ensure continuity, the seller agreed to a structured 90-day transition period, during which he would work full-time to support the buyer in technical handoff, employee training, and vendor introductions. Following this period, the seller agreed to be available part-time for six additional months on a consulting basis at a discounted hourly rate.
The company employed 18 full-time staff at closing, including four Tier 2 engineers, three Tier 1 support staff, one dedicated network engineer, two vCIOs who split their time across key accounts, one full-time salesperson, and two client success managers. Administrative functions were handled by a part-time bookkeeper and a full-time operations coordinator. Employee tenure was relatively strong for the sector, with an average of 4.7 years across the team and no turnover in senior engineering roles over the previous 24 months. The buyer negotiated and executed employment agreements for six of the most critical employees as a condition of closing. These agreements included retention bonuses contingent upon remaining employed for 12 months post-acquisition.
From a systems perspective, the company leveraged a variety of cloud and on-premise tools to support its service model. The PSA (Professional Services Automation) system used for ticketing and scheduling was ConnectWise Manage, while remote monitoring and management (RMM) was handled via NinjaRMM. Backup and disaster recovery utilized Datto appliances and cloud integration. The accounting system was QuickBooks Online, and internal documentation was managed through IT Glue. Cybersecurity packages included standard endpoint protection as well as managed detection and response (MDR) options, delivered through a strategic partnership with a third-party SOC (security operations center) provider.
The MSP’s tech stack allowed for efficient delivery of services with minimal ticket backlog and average response times under 20 minutes. A 24/7 on-call rotation was shared among Tier 2 engineers and monitored via PagerDuty. Helpdesk operations followed an ITIL-lite framework, with SLAs tiered by client level. Tier 1 tickets were resolved within four hours on average, while Tier 2 tickets averaged resolution within 48 hours. Escalations were rare, and customer satisfaction scores for support requests remained above 95% over the prior three years.
Revenue was derived 88% from recurring contracts and 12% from project-based work such as hardware refreshes, server migrations, and office relocations. Billing was automated via ConnectWise integrated with QuickBooks and executed through ACH and credit card payments. Days Sales Outstanding (DSO) averaged 27 days, and there was minimal bad debt due to upfront onboarding deposits and clear payment policies.
Financial diligence revealed minimal adjustments beyond standard owner compensation, vehicle expenses, and discretionary marketing. The business showed consistent top-line growth, averaging 6–8% per year for the previous three years, driven by both net new client acquisition and organic expansion within the existing customer base. Cross-sells, including VoIP, backup services, and upgraded SLA tiers, accounted for a significant portion of new revenue growth. Churn remained under 7% annually, and most terminations were due to client acquisition, industry consolidation, or relocation.
The facility was leased under a favorable long-term lease at $4,300/month for approximately 4,000 square feet, including a secure data room, training lab, and employee workstations. The lease was transferable and the landlord pre-approved assignment. Although the business operated largely remotely post-COVID, the buyer chose to retain the office space for internal meetings, equipment storage, and maintaining a professional presence for local clients.
Growth opportunities identified by the buyer included:
Geographic Expansion: The business was concentrated within a 75-mile radius. The buyer had plans to open a satellite sales office in a nearby metro to target underserved small businesses with similar profiles.
Vertical Specialization: While the business served a broad base of clients, no focused vertical go-to-market strategy existed. The buyer intended to develop verticalized sales scripts and compliance packages for healthcare and legal clients.
Cybersecurity Upgrades: Adding internal SOC capabilities or deepening the partnership with the MDR vendor would increase average revenue per user (ARPU) by $15–$20/month across many accounts.
Client Portal Launch: Development of a custom client dashboard with ticket tracking, billing access, and user management would improve stickiness and reduce inbound support volume.
M&A Platform Build: The buyer intended to use this acquisition as a regional platform for a roll-up strategy, with at least two smaller MSPs already identified as potential tuck-ins. The existing team had the bandwidth to absorb 20–30% more workload without new hires.
Risks flagged during due diligence included key personnel reliance, customer concentration, and vendor dependency. The buyer mitigated these by locking in employment contracts, negotiating clawback provisions in the seller note, and re-signing key vendor partner agreements for three years. Additionally, the buyer established a $100,000 contingency reserve account to be drawn upon in the event of customer attrition or technology transition issues.
The overall deal was considered highly attractive due to the quality of earnings, predictable cash flows, and operational readiness. The clawback mechanism and seller involvement further derisked the transaction and gave the buyer confidence in long-term success. The business’s embedded processes, high client satisfaction, and low customer churn made it a textbook SBA-eligible deal, and the layered financing model allowed the buyer to preserve cash while assuming limited downside risk.
Conclusion
This regional MSP acquisition illustrates how a well-structured, recurring-revenue service business with a defensible client base, documented systems, and seller-aligned financing terms can be leveraged for both cash flow and growth. The transaction design, particularly the clawback clause and seller note subordination, protected the buyer while offering a path to value realization for the seller. It represents a strong example of how to structure mid-market service business acquisitions through creative debt and risk-sharing mechanisms, while positioning the platform for regional dominance and add-on acquisition scalability.
