Guide
4 min read
By MSP Margin Editorial
When a buyer signs a letter of intent with an MSP, the first data request tends to arrive within days. It is usually a long spreadsheet with dozens of line items, but the first few rows almost always cover the same ground: financial statements, recurring revenue, contracts, customers, vendors and payroll. How quickly and cleanly you answer those rows sets the tone for the rest of the process.
Sellers who scramble to assemble this material after the request lands lose time, and they often lose credibility too. A number that changes between the first and second version of a report invites more questions. The better approach is to treat diligence readiness as part of normal month-end work, well before anyone calls.
Monthly financials, on an accrual basis
Buyers want monthly income statements and balance sheets, typically for the last two or three years plus the current year to date. They want them on an accrual basis. Many small MSPs keep their books on a cash basis or a loose hybrid, which makes monthly results swing with collection timing and prepaid vendor bills.
Accrual books show revenue in the month the service was delivered and expenses in the month they were incurred. That means deferring annual prepayments, accruing unbilled project work, and recording vendor costs like distributor invoices in the right period. If your books are on cash today, converting the historical months is real work. Starting the conversion a year or more ahead of a sale is far easier than doing it under a deadline.
Each month should also be closed and reconciled: bank and credit card accounts tied out, accounts receivable aging matching the balance sheet, and no large balances sitting in suspense or "ask my accountant."
Recurring revenue by customer, and the contracts behind it
The next request is usually a schedule of recurring revenue by customer by month. Buyers use it to see what is truly recurring, which customers drive it, and how it has moved over time. Your PSA and accounting system should agree on this number. If the PSA shows one figure for monthly agreements and the general ledger shows another, expect to spend time explaining the gap.
Alongside that schedule, have the signed agreement for each recurring customer in one folder, named consistently. Buyers read term length, renewal language, termination rights, price increase clauses and any assignment restrictions. An agreement that requires customer consent to transfer on a change of control matters a lot to a buyer, and finding that out late is a bad surprise for both sides. If some customers are on handshake arrangements or expired paper, list them honestly and note it.
Concentration and churn history
From the revenue schedule, buyers will calculate customer concentration themselves, but it helps to have your own view ready. A simple table showing each of your largest customers as a share of total recurring revenue answers the question before it is asked.
Churn history is the companion piece. Keep a log of customers lost, with the date, the monthly recurring amount, and the reason. Also track downgrades and seat reductions, not only full cancellations. A seller who can say which customers left, why, and what changed afterward comes across very differently from one who has to reconstruct it from old invoices.
Vendors, licensing and payroll
MSPs carry obligations that do not always show up clearly on the balance sheet. Buyers ask for a list of significant vendors and the terms behind them: RMM and PSA contracts, security tools, backup, distributor agreements, and Microsoft and other licensing commitments. Annual or multi-year commitments with minimums, auto-renewals or early termination fees should be listed with their dates and amounts.
Payroll is the other core request. Expect to provide a current employee census with roles, start dates, pay rates, bonus and commission arrangements, and benefits, along with payroll registers and tax filings. Contractors should be listed separately, with what they do and how they are paid. Any owner family members on payroll, and any accrued but unpaid bonuses or paid time off, should be clearly identified.
Building the folder now
A practical way to prepare is to build a data room folder structure yourself and keep it current each quarter. One reasonable layout:
- Financials: monthly statements, trial balances, reconciliations, tax returns
- Revenue: recurring revenue by customer, churn log, concentration table
- Contracts: customer agreements, vendor agreements, leases
- People: employee census, payroll reports, contractor list, benefit plans
The goal is not perfection. It is consistency, so that every number you hand over ties to another document in the folder and to your general ledger.
This article is general information, not legal, tax or transaction advice. If you are considering a sale, work with your CPA, an M&A advisor and an attorney who know your business and the terms you are negotiating.