Why All MSPs Need to Understand the M&A Landscape

true EBIDTA. Firms with less than $500,000 EBIDTA tend to receive offers three to five times that amount, and those in the $500,000 to $1 million range are getting valuations of five to seven times true EBIDTA. Larger MSPs in the $1 million to $3 million ballpark are seeing seven to 10 times EBIDTA offers, while those at the top-end receive valuations 10 to 15 times their EBIDTA.

It’s also important to realize that many of these offers aren’t just big piles of cash and a handshake. Many include a combination of cash, stock and/or notes, often requiring key staff to remain with the new company for a period of time. The increased barrier to entry for the MSP market due to the greater complexity of cybersecurity, cloud offerings and more means they want the expertise, not just the customer base and assets.

 Valuation Factors

While EBIDTA is an excellent way to estimate what your firm might be worth, there are other factors at play. Since buyers generally have a strategic focus and aren’t just executing a pure land grab, they place additional emphasis on how an acquisition fits into that strategy and with the rest of their portfolio.

The nature of the customer base is also a key element, be it their size or which verticals they’re in. Most buyers aren’t looking to swoop up a ton of really small customers; they want bigger customers in growing industries.

An MSP’s operational maturity is also a factor. Wary of risky investments, most buyers want companies with solid processes, cybersecurity chops and a full staff. An owner more involved in the sales and marketing than the operations side of the house is also more attractive, since they know owners may not stick around after the deal closes.

From a revenue perspective, the split between recurring and non-recurring revenue is a big deal. Targets will ideally have 70% or more revenue be recurring, and 70% to 80% of that should be services revenue versus product based. They’re also shooting for a positive trajectory indicating that MRR is on a steady growth curve.

 How to Prepare … and Stay Prepared

No matter your plans today, the future is uncertain. It’s therefore a good idea to assess your business on a regular basis to stay ready for whatever comes your way. By calculating and tracking some important KPIs, you can see how you’re measuring up, identify areas to improve on, and be able to quickly respond if an opportunity to buy or sell comes along.

• Calculate your current value.
• Identify potential acquisition targets based on your own strategic goals.
• Identify potential acquiring firms based on their previous and current activity.
• Conduct a SWOT analysis based on valuation metrics.
• Calculate your average seat price to determine if you have a healthy revenue-per-seat.
• Calculate your average MRR to ensure you aren’t so reliant on too many small customers.
• Calculate your tickets per month per seat, which is a great indicator of operational efficiency.
• Determine your leverage and shoot for a target of more than $150,000 in services revenue per employee or more than $250,000 in services revenue for each technical employee.
• Calculate the percentage of non-recurring revenue generating from MRR activities.

Having command over these numbers helps your MSP be seen as mature enough to warrant a decent valuation. And you can improve upon all of them by getting more efficient by using tools and automation. This includes creating smooth and consistent workflows across products, which is why a seamless suite makes sense versus a patchwork, hodge-podge solution.

However, the best thing any MSP can do to improve their valuation is what they should be doing anyway–focus on growth and profitability.

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