A client called me this past week and asked if I could help him ready his Managed Services Provider (MSP) business for sale. His time horizon is two years and, between now and then, he wants to make the business as attractive and as valuable as possible. This request was a bit far afield from the ones I normally get, so I asked him to give me a few days to research before I gave him an answer.
My research opened my eyes. There are several different forces at work that make the valuation of
an MSP business a dynamic process. How MSPs are valued is changing, and I was able to say, “Yes,” to my client.
Here’s what I found. The preeminent expert in this space is Charles Weaver. He’s the President of the MSP Alliance, and of a consulting group that specializes in MSP mergers and acquisitions. I exchanged a few emails with Charles. His position is that MSP valuations used to focus on annual profits. The purchaser would ask to see the books. They valued the business more if it could show a year over year improvement in net profits, and they would pay a multiple of last year’s net.
This profit metric led to MSPs choking off investment in the business for a couple of years prior to sale to pump up the size of their profits and, therefore, the selling price. Purchasers were paying top dollar for a business in decline, and they had to invest heavily to get it back into growth mode.
So the metrics changed. Instead of looking just at profits, potential acquirers also looked at the book of business. They reviewed the number of current contracts and their future value in order to get a better idea of future profits. So MSPs who were contemplating cashing out focused on signing clients to multi-year contracts. Charles feels that this is also a less than optimal valuation method. He thinks it’s actually unfair to the seller because there are many sources of non-recurring revenue that should be included. His preferred calculation method is to blend top line revenue and EBITDA.
According to Joe Panettieri, the ‘VAR Guy’ and President of MSPmentor, “effective Marketing, Sales and Consulting are the three basic criteria for long-term MSP success and maximum company valuation… the most successful MSPs have processes in place to work on social media, marketing and PR on an ongoing basis.”
What Joe is saying is that having processes in place to handle Marketing and PR functions delivers three positive influences on valuation:
- they indicate a willingness on the part of the business’ management to build and deploy infrastructure devoted to demand generation and lead nurturing (critical sales enablement ingredients when selling complex B2B services),
- they accrue sales assets, which are tools that accelerate and amplify the sales process, and
- they result in company and brand visibility in the geographies served and across the online world.
Marketing is not a one and done kind of thing. Like Sales and Consulting, it’s an ongoing process that needs to be worked on all the time. Especially today when everyone is dealing with ‘short attention span prospects’. Fresh, relevant and useful content is needed on websites and for social media platforms. You have to give prospects a reason to keep coming back (i.e. new information that educates and gently persuades), until they’re ready and willing to sit down with a salesperson.
So how do I help my client pump up the valuation of his business? By doing the same things I do with all my clients… get them to:
- focus on Marketing as a strategic part of their business;
- stop doing ‘promotional activities’ on an ad hoc, opportunistic, haphazard basis;
- plan, budget and execute Marketing functions just as they do with Consulting and Sales functions.
Tags: charles weaver, Joe Panettieri, mergers and acquisitions, MSP Alliance, MSPmentor, valuation method
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Hi -
Great article — thanks. Some points:
* You mentioned Book of Business, which I think is better — but what about proprietary assets like databases, custom programming, mailing lists, etc.
* You mentioned social media, and I have seen websites for sale fetch a higher price by including a sizable follower list from Twitter along with the website (several thousand).
The “value” of proprietary assets and “lists” (marketing reach), should be included as a negotiating point, I think, and as long as the potential buyer understands and agrees… that could drive up the valuation.
- Scott
Scott,
As far as I could tell, they don’t get down to that level of granularity. I have to believe, though, that as people understand how important websites have become in B2B (as marketing and pre-sales tools); it won’t be long before they take into account website traffic and conversions. As you know, with Analytics it’s easy enough to record those online statistics. Thanks for the comment.
Bob
Hi Bob,
If I was buying an MSP, I’d look at Balance Sheet and Cash Flow in addition to Income Statement. On the latter, I certainly would look at current and booked revenue for a particular time horizon, and of course pre-tax profit. But ‘Net Profits’ and EBITDA aren’t the same. I probably would look at EBIT vs. EBITDA. Why would anyone pay full value on an asset that has undergone some level of amortization and depreciation? You wouldn’t pay new sticker price for a 3 year old car. Also, the interest a business is paying draws down available cash. Finally , if the business has tax losses, those could be an ‘asset’ with some economic value to the acquirer (maybe not so much in this economy…).
Of course, the MSP’s business environment is another factor. If the business is in a growing area/technology, it is worth more than the opposite. Simple example: ISDN videoconferencing (from an ongoing business perspective worth little these days apart from possibly being able to migrate the customer base to something new) vs. types of IP videoconferencing (some are worth alot more than others). This is true regardless of what the ‘books’ say.
Hope this helps,
Lisa
Lisa,
Thanks for the comment. Your knowledge of business finance is much deeper than mine. The one point you make that I can elucidate on is the product related one (one of the four Ps).
Product mix is another piece of the pie that I didn’t see anyone reference when I did my research, but certainly would affect profitability.
Very insightful article! The perceived brand value in the online world is also a really important factor now as compared to previous times. An MSP with a strong online brand who are looked upon as thought leaders in their space are likely to have a stronger flow of inbound leads and good potential sales pipeline.
- Neil
Neil,
You’re absolutely right. Blogs, articles, answering questions on LinkedIn, distributing tidbits on Twitter, etc. can quickly turn an expert in a specific area (e.g. networked storage, document management, regulatory compliance) into a world renowned thought leader and trusted advisor. The niche of expertise is fairly tight, but the reach is global. The difficult part is finding the time to do the above activities. We help our clients plan and execute social media, so there’s a minimal drain on their time.
Bob