What is the Value of Your MSP Business?What is the Value of Your MSP Business?
These simple steps can help you calculate your business’ worth.
November 16, 2016
Even wonder what your business is worth and how to calculate the value? This is a question I would get asked frequently when I practiced as a corporate valuation officer.
Traditionally, the response is usually something standard like the “5-8 EBITDA multiple.” However, no one really knows what that means and if it actually accounts for the important fundamentals like cash flow, annual earnings, capital, or any other implied multiples.
Think about it. Would you buy a house without knowing why you’re paying $153 per square foot?
Let’s hope not.
Eran Ben Horin
So before we jump right into how to calculate how much your business is worth, let’s first discuss what an EBITDA multiple is and how we should use it to find out the value of your business.
How can a multiple help you?
A multiple is basically any number you multiply by a numerical trait of that asset, in order to get to the value of that asset. For example, if I have a business that generates an annual profit of $500,000, and a friend told me similar assets are usually traded at an earning multiplied by 8, a fair price for that business should be $4 million.
It is important to understand that the trait doesn’t have to be some kind of earning. Often you’ll hear someone saying that a house was bought based on a valuation of $200 per square foot. The trait used in this example is the house’s size, in square feet, and we multiply that size by 200 to get the price of the house.
How does multiple valuation usually work?
Decide on a numerical trait of the asset you’re looking to buy or sell, like square feet for houses or earnings for businesses.
Find the proper multiple to use for this valuation.
Multiply (1) with (2) to get the fair value of that asset. If you’re selling, you’d like to get a higher value than the fair value, if you’re buying, well…you know.
The tricky part is to find the right multiple, and the reason I say it’s tricky is due to the following:
If I told you my house was sold for $100 per square feet. To determine if that information is useful, you have to look at other variables regarding area of town, type of property, etc. Still, that example highlights two things:
A multiple is based on similar deals for similar assets. This sample of transactions is our peer-group for determining the right multiple. Because we use data from other transactions in our own valuation, using a multiple is often referred to as relative valuation.
When you use that multiple for valuing an asset, you implicitly assume that the asset is identical to the peer group. Even if it’s not the case, it should be as similar as possible.
To sum it up, here are the three steps we recommend to estimate the value of your MSP business:
Take your EBITDA in the last 12 months, excluding any one-time items that are not recurring.
Decide on an EBITDA multiple. The standard is 7, but if you’re experiencing high growth in revenue (30 percent and more) or have an EBITDA margin of 20 percent and higher, you can use 8-10. If your business is a bit risky, use 3-5. What do we mean by risky? If your business is dependent on one to three large customers, a low-margin products portfolio (Office 365 anyone?), or negative growth rate in revenue, then your business is considered risky.
Multiply (1) with (2).
Add Cash to (3)
Deduct Debt from (4)
And just like that, these simple steps can help you calculate your business’ worth.
Eran Ben Horin is currently the chief financial officer at Atera, developer of a cloud-based IT automation platform that combines RMM, PSA, and remote access into one powerful solution. Ben Horin is well known for his corporate valuation book, “The Handbook of Corporate Valuation,” which is used at universities throughout Israel.
He has a B.A. in accounting and economics, an MSc. in corporate finance from the Tel-Aviv University and is a CPA. He can be reached at [email protected].
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