Buying a client book: what to check

Buying a small MSP or a retiring owner's client list can add recurring revenue faster than organic sales. It can also bring clients who leave in the first six months, agreements that cannot be assigned, and a cost to serve that is higher than the seller ever measured. The work before signing is mostly financial, and much of it can be done by an operations manager or controller with access to the seller's records.

Start with the agreements, not the revenue report

A revenue report tells you what the seller billed. The agreements tell you what you are actually buying. Ask for every client agreement and build a simple schedule with the client name, monthly recurring amount, term, renewal date, termination notice period and any assignment clause.

Look for these issues:

• Clients with no written agreement, or agreements that expired and were never renewed.
• Assignment clauses that require the client's consent before the agreement can move to a new owner.
• Price locks, unlimited-support promises or included hardware refreshes that will cost you money.
• Billing that does not match the agreement, in either direction.

Here is an illustrative example with round numbers. A seller reports $40,000 in monthly recurring revenue across 30 clients. After reviewing the agreements, you find that $8,000 of that MRR comes from clients on month-to-month arrangements with no written term, and another $6,000 comes from agreements that require client consent to assign. That leaves $26,000 of MRR, or 65 percent of the reported figure, under agreements that transfer cleanly. The other $14,000 is not worthless, but it carries more risk and should be priced and structured that way.

Rebuild the margin on your own cost base

The seller's gross margin reflects the seller's tools, labor rates and habits. What matters is the margin you will earn after the clients move onto your stack and your service standards.

For each client, or at least for the largest ones, estimate:

• Your tool and licensing cost per user or device, including any tools you will add to meet your security baseline.
• The monthly support hours the client actually consumes, using the seller's ticket and time history if it exists.
• Onboarding effort: documentation, agent deployment, credential handover and any remediation needed to meet your standards.
• Pass-through items such as licensing and how they are billed and marked up.

Clients who were profitable for a solo owner working long hours may not be profitable once your team, your rates and your tools are applied. Transition costs are one-time, but they come out of cash in the first months, when retention is least certain.

Receivables, prepayments and cutoff

Ask for a receivables aging as of a recent date and the history of how quickly each client pays. Slow payers rarely improve after a change of ownership.

Decide early how receivables are handled. A common approach is that the seller keeps receivables for work performed before closing and the buyer bills from closing forward. Whatever you choose, write it down, including what happens when a client pays the wrong party.

Watch for clients who prepaid for annual or multi-month service. If the seller collected the cash and you will deliver the service after closing, that is a liability you are taking on, and it is usually addressed as an adjustment to the price. The same cutoff logic applies to vendor bills for tools and licenses that span the closing date.

Common deal structures at a conceptual level

Small tuck-ins usually combine a few building blocks:

• Asset purchase versus equity purchase. Buying assets (agreements, client relationships, sometimes equipment) generally leaves the seller's historical liabilities behind. Buying the company itself brings everything along, known and unknown.
• Cash at closing for part of the price.
• A seller note, where the buyer pays part of the price over time. This keeps the seller interested in a smooth transition.
• A retention-based adjustment or holdback, where part of the price depends on clients staying for a defined period after closing.
• An earnout tied to revenue or profit after closing, which needs careful definitions.
• A transition or consulting agreement that keeps the seller involved for introductions and handover.

The right mix depends on how much transfer risk you found in the agreements, how dependent clients are on the seller personally, and how much cash you have available. Retention-based pricing is often the most direct answer to the question every buyer of a client book is really asking: will these clients stay with me?

This guide is general information, not financial, legal or tax advice for your situation. The structure, tax treatment and documents for any acquisition should be worked out with your CPA, attorney and other advisors.