Mergers & Acquisitions: The Truth About MSP Valuations

valuation

First, who was on the panel:

Now, here are six highlights gathered from the panel and the broader N-able Partner Summit.

1. Valuations:

During the mid-2000s, MSPs could be valued at a high of roughly six times recurring revenues. But more recently, some conference attendees mentioned, most of the valuations are much lower. A few sources indicate that typical valuations are 50 cents per dollar of recurring revenue (or a $500,000 sale price for an MSP with $1 million in recurring revenue). Time and materials (T&M) businesses are valued at a lower price of roughly 20 to 30 cents on the dollar, according to some attendees who spoke on background.

Meanwhile, at least one MSP involved in a recent company sale insists that it’s still possible to fetch 1.5 times recurring revenues for a managed services company sale.

Separately, some MSPs are focusing more on EBITDA (earnings before interest, taxes, depreciation and amortization). In that case, sale price multiples can range from 6 times EBITDA to more than 10 times EBITDA, depending on overall revenues. The higher the revenues, the higher the EBITDA multiple, noted Simpler.

2. Who to Sell To:

Instead of selling to a peer MSP, Lippie of Thrive Networks recommends selling to someone outside of the traditional MSP market. The reason: A buyer who’s hungry to enter the managed services market for strategic reasons will likely be willing to pay you a higher valuation.

3. The Sale Process:

Lippie says Thrive Networks worked with an investment banker to prepare a “book” for potential bidders to review. The book included financial information and business information about Thrive Networks. The investment banker sent the book of information to roughly 60 companies that were interested in Thrive’s business. Next, Thrive met with about 12 companies face to face, to answer their inquiries about the business. Then, four companies ultimately bid on Thrive’s business and Staples had the winning offer, Lippie says.

4. When to Walk Away:

Walls of Corsica Technologies says he has walked away from potential acquisition targets because the potential sellers had businesses that were beyond repair. If the business is going to sink don’t try to save it, Walls says.

5. Who to Target:

As a potential buyer, Drake of Master IT is looking for MSPs that have customers that are willing to pay Master IT-level rates. Moreover, Master IT wants to acquire talent — specifically, MSPs that employ managers who can become virtual CIOs to end-customers. In stark contrast, Walls of Corsica Technologies says he’s mostly focused on buying customer bases. In some cases, Corsica retains the talent of an acquired company. In other cases, acquisitions are simply about buying up customer relations, then converting customers to managed services.

6. Mergers of Equals:

They’re rare. But a prime example involves Simpler-Webb and HEIT merging to form a national MSP serving community banks, credit unions and the financial services vertical. More than 70 customers and partners recently attended a HEIT summit focused on the financial services vertical.

Your Valuation Will Vary

Some readers have beaten me up pretty good for trying to pinpoint MSP valuations; they complain that by blogging about lower valuations I’m creating a sell-fulfilling prophecy that drives down valuations.

My reaction: Your company is worth whatever a buyer is willing to pay for it. To drive up that worth, drive up your recurring revenues and your EBITDA. But please don’t blame me for potentially driving down valuations. No doubt, valuations vary from region to region, deal to deal; no two deals are alive.

As one MSP said to me here at the conference, “It’s the dirty little secret of the industry; MSP valuations are not as high as they used to be. But that’s true of all high-tech. That’s why we’re seeing so much M&A activity.”

I agree.

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