Pax8 Shares 3 Ways MSPs Can Create Higher Valuations, More Profitability

By Ryan Walsh

Let’s talk about the MSP space. Through recent M&A activity in the industry, we see the multiple of MSPs businesses continuing to rise. Specifically, data released by Channel Futures, Channele2e and Service Leadership show that MSPs’ multiple of revenue is going up each year by 20 percent.

So, what sets these MSPs with robust evaluations apart? Positioning. If you’re building a technology business you plan to sell someday, here are three things you can start doing today to raise to your valuation:

1. Focus on Vertical Markets

Those who track top MSPs often find that companies with deep vertical expertise have impressive annual recurring revenue (ARR). Some of the most successful MSPs pursue at least two vertical markets, studies have found.

Here’s a breakdown of top verticals targeted by MSPs, courtesy of the 2018 State of the MSP Report from Datto:

Getting into a vertical market often means playing to your strengths. Instead of trying to break into a vertical you don’t have any experience in, go with what you know. Identify areas of expertise that could translate into vertical market focus areas. For example, ask yourself the following:

By asking a few intelligent questions, MSPs often discover they have existing employees with skill sets that translate well into certain verticals.

You’ll also want to deepen your expertise. A LinkedIn report found that 94% of employees would stay longer if their employer invested in their career growth. What’s more, companies with comprehensive training programs enjoy profit margins 24% higher than their counterparts.

Using the line of questioning mentioned above, find vertical experts in-house that are being underutilized as well as up-and-comers interested in leading lucrative new vertical focus areas, and invest in their development. Doing so will improve employee retention and profitability.

Lastly, build the right team.

Group think is the biggest hurdle to driving innovation. Embrace diversity on your team. Look for individuals who bring fresh ideas, skills and perspectives to your business. There is power in diversity. A recent study found that diverse companies generate 19% more revenue.

2. Best Practices for Technology Stacking

Once you choose your niche, it’s time to build your stack. Standardizing your stack empowers you to efficiently scale and automate your operations. Here are three easy ways to start building your stack:

Failing to standardize technology stacks results in employee and customer churn. Techs can only learn so many technologies at once, and customers don’t want to wait around for things to get better. Don’t let your competitors win away your clients. Pick a stack that delivers a seamless customer experience.

3. Adapt and Evolve: Digitize Your Business

According to IDC, by 2022, 60%+ of global GDP will be digitized, with growth in every industry driven by digitally enhanced offerings, operations and relationships, and almost $7 trillion in IT-related spending from 2019-2022. The most effective digitally driven initiatives in business today balance digital business optimization with …

… the creation of new business models through digital business transformation. IDC says every business must take on this challenge or risk two-thirds of their addressable market vanishing by 2022.

To support IDC’s claim, CompTIA’s 2019 Trends to Watch Report predicts that stackable technologies will supercharge digitization efforts. Identify and find a partner who can help you strategically build the right technology stack for your clients. Together, you can achieve your desired business outcomes.

Start Improving Your Valuation Today

The difference between a million versus billion-dollar valuation for technology companies is threefold: focus, technology, and the ability to adapt and evolve. To improve your valuation, focus on vertical markets, standardize your technology stack and digitize your business.

Ryan Walsh is the chief channel officer at Pax8. Previously, he served as vice president of product management for MX Logic, a cloud-based email and web security company that was acquired by McAfee in 2009. Ryan has dedicated his career to enabling business improvements with Internet or IT-based solutions and startups. He started his career building a reengineering practice at Deloitte & Touche in the consulting division. Ryan holds a B.A. in business economics from Colorado College and an MBA from the Harvard Business School. He is also a member of the Channel Futures Think Tank.