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.
When B2B purchasers were seeking potential new suppliers, Twitter and blogs were considered more influential sources of supplier information than any other channel, including word of mouth, seminars and industry press.
Not when it’s delivered primarily via text. The vast majority of B2B marketing messages are delivered online. People have a short attention span online
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