Last week I sat down with a group of smaller MSP owners and asked a simple question. What does your exit look like?

The answers were all over the place. Some wanted out in a few years. Some had a vague sense of “someday.” Most had never even thought about it. That’s normal. When you’re keeping the lights on, an exit feels like a problem for future you.

Future you will be much happier if you spend some time planning what your exit might look like.

Quick note before we get into the math: I’m not a financial advisor. The numbers below are simplified and pre-tax on purpose. Talk to your CPA and financial planner before you make real decisions.

Why You Need an Exit Plan Early

My biggest fear for MSP owners is that they build themselves a job instead of a business. A job pays you as long as you show up. A business can pay you after you leave. If you don‘t build your business to run without you you may be unpleasantly surprised by what you find.

Many owners don’t think too much about their exit until they’re actually ready to hit the eject button. They go get a valuation, see a number far below what they expected, and realize they’re playing from behind. By then they may be aging out or burned out, with very little runway to fix anything.

An exit plan lets you aim the business in the right direction while you still have time. It doesn’t have to be perfect, but a rough target beats no target.

If you don’t have a plan let’s talk about a two numbers to get you started.

What Are the Two Numbers?

You need to answer two questions.

Number one: when do you want out? One year, five years, ten, fifteen. Every answer is fine. Pick one, because the date tells you how much runway you have. A long runway gives you room to find your weak spots and fix them. A short runway with a big gap leaves you very little room to maneuver.

Number two: what income do you need after you leave? Start with what you need to live on, not the dream number. Dreaming comes second.

Here’s how I turn that into a target. A conservative rule of thumb is that you can pull about 4% a year from an investment portfolio without eating into the principal. I think 5% is largely doable, but its better to plan on the safer number.

At 4%, if you need $120,000 a year, you need about $3 million invested. Keep in mind that’s across all your investments, not just the MSP. Still, your MSP is likely to be the lion’s share.

If the sale comes in above your number, great. The extra can fund the dreaming, or it can be invested to produce even more income.

Sizing the Gap

Now compare your target to where your business is today.

Say your MSP has $300,000 in annual revenue and you need $3 million from a sale. That’s a big gap. You’re not getting a 10x multiple on that size of MSP (or really any MSPs).

This is where the type of revenue matters, because buyers don’t value all revenue equally. Managed services revenue is worth more than a dollar of value for every dollar of revenue (probably around 1.5x). Almost everything else, including break-fix, hardware, projects, and resold cloud and Microsoft 365 licenses, is worth less than a dollar, and some of it a lot less. Your hardware and cloud revenue is worth like $0.15 on the dollar. That’s why I keep pushing owners toward fully managed services clients. It’s the revenue buyers pay the most for, and it also makes the business saner to run. That said, CAPTURE THAT REVENUE AND MARGIN. Just don’t count on it for your company valuation.

If you want a quick gut check on the business, look at your revenue mix. A break-fix-heavy company is the one most likely to get shocked by its valuation. For a real number, talk to a professional who does valuations. My conversation with Reed Warren in MSP M&A Masterclass: Essential Strategies from an M&A Expert is a great place to start, and I cover the practical side in How to Prepare Your MSP for Sale (Before You Get an Offer).

Bridging the Gap

Once you know the gap, build the plan backward from your exit date to today. What does the business need to look like in year one, year three, year five? Which clients move to fully managed? What has to change in your pricing, your team, and your sales process?

Also plan for what happens after the sale. Many deals include an earn-out, as many buyers want you around for a while. Your sale might not be the end of the road. Decide now how long you’re willing to stay and what you’ll do next.

If you’re still early, you have an advantage. Planning ten or fifteen years out gives you room to experiment, make mistakes, and recover. If you need to exit in three to five years, the plan has to start moving now.

Your Homework This Week

Write down two things. Your exit date, and the annual income you need after you leave. Multiply the income by 25 and you have your target. That’s the whole exercise.

Then share it. Drop your exit date and income number in the comments on the video, or send them to me directly. I’m curious how far apart these answers are across the MSP community, and saying the numbers out loud makes them real.

Once you know where you’re headed, every decision gets easier. That’s what an exit plan is for.