MSP Valuations: Would You Sell Your Company for 10X EBITDA?
Here’s a quick question: Would you sell your managed services provider business for 10 to 12 times EBITDA (earnings before interest, taxes, depreciation and amortization)? In other words, if your earnings were about $200,000 in 2011, would you sell your MSP business for $2 million to $2.4 million? Before you answer consider this update from Mike Jones, CEO of ETG, one of North America’s top MSPs serving the health care vertical. Jones recently reached an intriguing decision.
Back in April 2011, MSPmentor reported ETG had hired Founders Investment Banking to evaluate potential strategic relationships. Translation: ETG was considering a company sale. Jones says he thinks the Founders Investment Banking process “was a huge success” because it produced some suitors that ETG would never have come across.
According to Jones, the process generated the following outcomes:
- Founders Investment Banking contacted over 170 potential suitors, and received 12 indications of interest.
- From there, ETG received three firm LOIs (letters of intent). An LOI basically outlines the rough terms of a proposed agreement — for instance, potential financial terms subject to discovery and ongoing discussions — before the agreement is finalized.
- All three LOIs valued ETG at 10 to 12 times trailing EBITDA for the past 12 months. Each buyout offer involved a mix of cash, earn-outs, notes, etc.
Now The Twist
Jones says ETG’s board ultimately decided to decline each of the offers, “simply because the future looks so bright within our space and things are going so well.” Also, he adds, “I think we would have taken them [an offer, that is] had they been a lot higher on the cash side of things, but we just felt it was best to keep on chugging.”
Generally speaking, I think 10 to 12 times trailing EBITDA is a very high valuation for an MSP. But keep this in mind: Jones and his team focused ETG on the health care vertical and his business has been booming. Plus, I don’t know details of the proposed earn outs that ETG’s potential buyers offered. Perhaps the earn out requirements — typically tied to future revenue and/or earnings growth — were too high or unreasonable, putting too much of the deal at risk. Also, perhaps the note — debt that the buyer uses to pay the seller — seemed too risky to Jones.
Either way, Jones sounds optimistic about 2012. He says:
“For 2012, we are introducing some new services around HITECH compliance and even possibly more back office automation services such as outsourced medical billing. We have closely evaluated opening new verticals as well which many of my MSP brethren think I should do, but I think in the end we will find some ways to sink our fangs even deeper into the medical space with non-MSP type services.”
Food for Thought
Also of note: Jones is practicing a healthy dose of life-work balance. Most emails from Jones offer me updates on his one-year-old granddaughter. He keeps reminding me to close the laptop and hug my kids. And most recently, Jones vacationed in New York City — raving about meals at Il Vagabando on the Upper East Side and Il Mulino in Greenwich Village. I’ve lived in New York my entire life and have yet to visit those destinations. Shame on me.
Blog entries like this are the reason why we started Nine Lives Media back in 2008. Real people. Real business decisions. Real life.
Thanks for sharing, Mike. I bet plenty of MSPs think you’re crazy for declining offers that involved 10X to 12X EBITDA multiples. But only you truly know your company’s worth — and your long-term passion.