Five Factors (Other Than Profitability) That Drive MSP Valuation
As we work to help owners and leaders of Managed Service Providers unlock the value of their companies through a sale or recapitalization, we often are asked “What besides EBITDA are the biggest drivers of my company’s enterprise value?” It is a great question, and while profitability unavoidably is the biggest factor, there are other key metrics that both strategic buyers and private equity investors look at.
1) Growth
An MSP/MSSP that demonstrates a historical track record of growth will be of more interest and value. We aren’t in the late 90’s and early 2000’s, and often times growth comes from either upselling existing customers or displacing an incumbent and winning a new client, both of which are driven by providing more value than what is currently being received. Demonstrating that the growth isn’t luck, but rather being driven by thoughtful sales and marketing efforts, will convince a deep pocketed investors to pour fuel on the fire.
2) Retention
We encourage you to think broadly here, as it isn’t just customer retention driving interest and valuation, but also team retention. Both speak to your culture of service – how well do you support your two primary constituencies: your clients and the team serving them. Taking care of both will result in sticky customers and happy teammates. Continuity in both makes service delivery easier and enables buyers to pay up knowing there is certainty around a baseline of operations.
3) Specialization
As customers look to their MSPs to be true partners and extensions of their own team, they expect their MSP to be able to serve the specific needs of their industry. We don’t want to come across as lobbying to focus only on serving customers in the financial services, healthcare, manufacturing, or other sectors, but rather ensure that your team has the functional knowledge and expertise to solve problems efficiently and be well versed in the solutions and software available for key end markets. Demonstrating expertise in a vertical also helps drive marketing focus, as you can lean on experience to win future clients and deliver excellent outcomes.
4) Clarity
Whether you use QuickBooks, ConnectWise, or some other billing and invoicing platform, it is key to know who is being charged and for what. The native language of all private equity groups is data and their appetite for it is limitless. The ability to provide, with clarity, information on each customer is key. From revenue to direct and indirect costs, the more closely you can track and provide your financials, the more confident groups are to submit aggressive offers.
5) Leadership
Oftentimes the impetus for pursuing a transaction is the owner’s desire to take a step back. Challenges present themselves when they are the individuals who maintain the primary relationship with customers, vendors and other centers of influence. Buyers and investors have rational concerns for the ability to transition those away from the owner/CEO, especially an owner who is receiving a large liquidity check that is proverbial “go to the beach” money. Enabling your team to take the lead in those relationships and not having a single point of failure for key customers and vendors instills confidence that the business is on stable footing and a change of control won’t be disruptive.
Undoubtedly, profitability as measured by EBITDA or free cash flow is still the primary variable, but focusing on these other components will enable any MSP owner to maximize their company’s valuation ahead of any transaction or liquidity event.
Our team would love to chat with you about any of these points and discuss planning on the front end for a successful exit. If you have any questions, please don’t hesitate to reach out to Chris Weingartner (cweingartner@foundersib.com or 205-503-4020), who helps direct our transactions in the IT Services sector.