Small Business Values Plummet; Will MSPs Reverse the Trend?

Small Business Values Plummet; Will MSPs Reverse the Trend?

"Business purgatory." The Wall Street Journal used that term today; it describes aging entrepreneurs who are unable to retire and forced to "hang on for a recovery that economists say could still be a long way off." Many entrepreneurs in the WSJ article have been trying to sell their businesses, but refuse to do so because they believe early offers were "low balls." There are certainly some parallels with the MSP market, where some CEOs suffer from "entrepreneurial fatigue" from time to time. But...

...I still believe the best-run MSPs -- and their CEO leaders -- are in far better shape than the typical U.S. small business. According to the WSJ article:

  • Cash Poor?: 56% percent of small business owners said most of their retirement nest egg is tied to their business.
  • My MSP Hunch: I bet things are similar for MSPs.
  • Sale Price vs. Valuation: The median selling price for U.S. small businesses during the first half of 2012 was $150,000, down 25 percent from $200,000 in the first half of 2008 (source: BizBuySell.com).
  • My MSP Hunch: I suspect MSP valuations (typically a multiple of EBITDA, with some growth rate rewards mixed in) are down a bit from 2008. But that doesn't mean MSP prices are down. You can still get a higher price today than you did in 2008, assuming you've grown your EBITDA. But that doesn't mean the multiple has kept pace.
  • M&A Deals: In the first half of 2012, 3,332 small businesses changed ownership, down 40 percent from the first half of 2008.
  • My MSP Hunch: I believe MSP M&A has accelerated since 2008. But don't get caught up in the hype. Even as All Covered, The Utility Company (TUC), mindSHIFT and other big MSPs search for acquisition targets, tens of thousands of MSPs will remain independent.
The biggest problem of all: I think some entrepreneurs are too close to their business to see and understand it's true value. The WSJ article quotes a few entrepreneurs who say they've received "insulting" low-ball offers for their companies. But ultimately, the market -- not the selling CEO -- decides a company's valuation. Your best hope for increasing the market's perceived value of your company is to:
  1. Increase your EBITDA
  2. Show three-years of solid top-line and bottom-line growth, and have a business plan that outlines how you'll fuel more growth for at least the next two years
  3. Make sure you can make a convincing case that the business can still grow without you. Or at the very minimum, communicate to suitors that you are committed to staying on
The Wall Street Journal article certainly paints a difficult picture for small business owners. The article indicated that small business total revenues have increased just 3 percent since 2007, and some markets (construction, -12%; real estate services, -3%; retail, -2%) have declined since 2008.

Most MSPmentor 100 companies, in stark contrast, have double-digit growth rates -- each year. Oh, and about that "entrepreneurial fatigue" that I mentioned in the first paragraph. That trend involved MSPs who became a bit disillusioned around 2010 and 2011, as they began to realize building a high-value business may take more work and more time than originally anticipated.

During the recent TruMethods Schnizzfest conference, J. Michael Drake, CEO of masterIT, said the MSP industry's entrepreneurial fatigue had largely gone away in the past year, as the best MSPs continued to introduce new services.
TAGS: Financing
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