Small Business M&A Activity Slows

Small Business M&A Activity Slows

Managed Services Mergers AheadI keep hearing from managed service providers who are scouring the market for potential acquisitions. But that MSP trend appears to be the exception to the rule. The number of small businesses that were purchased/sold in Q1 fell by 36 percent compared to Q1 2008, and small business valuations are falling. Can MSPs really buck those macroeconomic trends?

First, a little background. I got the M&A data from Entrepreneur magazine. And the original information was culled from, an online marketplace where businesses are sold to one another.

Our own MSPmentor M&A Tracker suggests that MSP deals are still occurring. And during the 2009 HTG Summit in Dallas, attendees openly discussed how they were maximizing their company valuations.

Still, my M&A data points are anecdotal. BizBuySell's data is far richer -- and (I suspect) statistically valid. Among all small businesses that were sold on BizBuySell in Q1:

Revenue multiples for closed transactions dropped 5.5 percent to .69 in the first quarter of 2009, while cash flow multiples fell 3.8 percent to 2.69. Finally, the median business sale price for closed transactions decreased 17.3 percent to $165,500.
What does that mean for MSPs? I still hear that MSPs generating recurring revenue are being valued at 1.5 X to 2X their annual recurring revenue. So if you have $1 million in recurring revenue, you can likely fetch $1.5 million to $2 million for your business. But I do wonder: Are the numbers I'm hearing too optimistic? Are the multiples simply from wishful sellers who need to find buyers?

Silent Discussions

No doubt, phone lines have been buzzing across North America, as some small VARs and MSPs struggle with cash flow and call up neighbors to discuss exit strategies. And some larger deals -- involving fast-growing MSPs -- have been consumated. Azaleos acquiring M3 Technology Group certainly comes to mind.

But I do wonder: Are MSP valuation multiples falling? In other words, are MSPs fetching 1X recurring revenue today compared to 1.5X and 2X recurring revenue a year ago? If so, the market is likely filled with bargains, and the strongest MSPs should think like Warren Buffet: It might be time to buy high-quality companies at value prices.

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