Pax8 Shares 3 Ways MSPs Can Create Higher Valuations, More Profitability
Let’s talk about the MSP space. Through recent M&A activity in the industry, we see the multiple of MSPs businesses continuing to rise. Specifically, data released by Channel Futures, Channele2e and Service Leadership show that MSPs’ multiple of revenue is going up each year by 20 percent.
So, what sets these MSPs with robust evaluations apart? Positioning. If you’re building a technology business you plan to sell someday, here are three things you can start doing today to raise to your valuation:
1. Focus on Vertical Markets
Those who track top MSPs often find that companies with deep vertical expertise have impressive annual recurring revenue (ARR). Some of the most successful MSPs pursue at least two vertical markets, studies have found.
Here’s a breakdown of top verticals targeted by MSPs, courtesy of the 2018 State of the MSP Report from Datto:
- Health care 53%
- Finance 49%
- Manufacturing 48%
- Legal 45%
- Construction 39%
- Education 32%
- Real estate 30%
- Government 24%
Getting into a vertical market often means playing to your strengths. Instead of trying to break into a vertical you don’t have any experience in, go with what you know. Identify areas of expertise that could translate into vertical market focus areas. For example, ask yourself the following:
- What is my company known for?
- Where are we thriving?
- What kinds of expertise do we already have in-house?
- Which service areas get the best customer testimonials?
By asking a few intelligent questions, MSPs often discover they have existing employees with skill sets that translate well into certain verticals.
You’ll also want to deepen your expertise. A LinkedIn report found that 94% of employees would stay longer if their employer invested in their career growth. What’s more, companies with comprehensive training programs enjoy profit margins 24% higher than their counterparts.
Using the line of questioning mentioned above, find vertical experts in-house that are being underutilized as well as up-and-comers interested in leading lucrative new vertical focus areas, and invest in their development. Doing so will improve employee retention and profitability.
Lastly, build the right team.
Group think is the biggest hurdle to driving innovation. Embrace diversity on your team. Look for individuals who bring fresh ideas, skills and perspectives to your business. There is power in diversity. A recent study found that diverse companies generate 19% more revenue.
2. Best Practices for Technology Stacking
Once you choose your niche, it’s time to build your stack. Standardizing your stack empowers you to efficiently scale and automate your operations. Here are three easy ways to start building your stack:
- Partner Up — Find a partner with the business intelligence and technology to enable your success. We saw upsell and cross-sell opportunities rise more than 248% within the first month of launching Pax8 Stax.
- Attend Industry Events — Learn from your peers and discover what’s working.
- Stay Current — Gain a full-stack education through webinars, vendor partnerships, and media publications.
Failing to standardize technology stacks results in employee and customer churn. Techs can only learn so many technologies at once, and customers don’t want to wait around for things to get better. Don’t let your competitors win away your clients. Pick a stack that delivers a seamless customer experience.
3. Adapt and Evolve: Digitize Your Business
According to IDC, by 2022, 60%+ of global GDP will be digitized, with growth in every industry driven by digitally enhanced offerings, operations and relationships, and almost $7 trillion in IT-related spending from 2019-2022. The most effective digitally driven initiatives in business today balance digital business optimization with …