Mergers and Acquisitions: Do MSPs Agree On Valuation?

Mergers and Acquisitions: Do MSPs Agree On Valuation?

Sure, there's a lot of merger and acquisition activity within the managed services market. And new consulting firms are starting up to assist MSPs with M&A efforts. But sometimes the most basic challenge for small business buyers and sellers involves agreeing on a company's valuation. Here are the stats to prove it.

For this blog, I'll leverage some broader small business stats involving the New York Metropolitan Area. During the first quarter of 2010, the typical small business that was up for sale had an average asking price of US$265,000 vs. an average selling price of US$180,000, according to BizBuySell.com, an online M&A marketplace. In some ways, the stats suggest would-be sellers were seeking a 47% price premium above what the typical buyer was willing to pay. That's a huge gap.

I suspect that example holds true in the managed services market, where potential sellers have an emotional connection to their corporate brands, but would-be buyers tend to think purely in dollars, cents and cash flow.

Let me use my own dad as an example: He's been in the residential real estate market for 55 years. He's a true pro at selling somebody else's real estate. But when it came time for him to potentially sell his own residential holdings, my dad looked at everything through rose-colored glasses -- triggering a price premium that many buyers weren't willing to pay.

Back in the MSP market, a healthy list of consulting firms -- such as Cogent Growth Partners, Martin Wolf Securities, Service Leadership and Weaver & Associates Ltd. -- are striving to help MSPs with their M&A activity.

It can't hurt to check in with an MSP M&A veteran. But one MSP that recently completed a deal says it's wise to find a good M&A lawyer to help assist with such steps as valuation, preliminary discussions, developing a letter of intent, deeper discovery and the ultimate transaction.

Get some legal advice, and you might be better prepared to set an appropriate MSP valuation. Even if you're not looking to sell, you never know when a potential buyer will come knocking on your door. Just ask The I.T. Pros, which was planning a national managed services push until a surprise suitor emerged.

And be careful when an outside consultant tells you what your business is worth. Take it or leave it, the market (i.e., true bidders for your company) decide your company's valuation.

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