There are numerous performance metrics that buyers are looking for when evaluating an MSP opportunity but based on our experience working with dozens of MSP founders and hundreds of potential buyers, there are 6 valuation metrics that every buyer zeroes in on right away. If you can achieve them, you will be among the top tier MSP firms and can expect to receive a premium valuation.
$10m revenue is a key threshold for many buyers but at a minimum, MSPs should have $7m in revenue before contemplating acquisition.
Buyers are looking for larger acquisitions that are more accretive to the top and bottom line, and also value the internal structure and processes that a larger MSP is more likely to have in place.
With the increasing interest in the MSP market by a host of buyers, we're seeing larger firms looking for larger acquisition opportunities, with many buyers now looking for companies that have achieved $10m+ revenue.
This is one of the most important metrics that buyers look for - most want a minimum of 60% Recurring Revenue under Agreement from Managed Services Customers.
Agreements should be transferable and terms of 1 to 3 years are common. Recurring revenue helps to decrease risk to buyers and smooths out the lumps that are seen in predominantly project-based companies, providing predictable revenue streams.
Gross margins reflect how efficiently a company is utilizing its resources and delivering services. Low gross margins often means poor utilization or a high amount of product resale revenue (or both). Highly automated services, proprietary IP used to increase efficiency of service delivery, and self-service proprietary cloud offerings all contribute to higher gross margins and provide companies with the ability to scale without a comparable increase in resources.
It's critical to track and report gross margins by revenue stream - not only to convey a clear picture to potential buyers but to also have a firm understanding of which services are generating the best margins.
Buyers look for a track record of strong, predictable, profitability YOY. If EBITDA is low, is the company achieving higher than average growth and reinvesting profit? If profitability is lumpy, what are the reasons?
Top MSPs generate 12%-15%+ EBITDA.
Most buyers are looking for a minimum EBITDA of $1m.
MSPs with low churn and strong customer retention are usually also able to generate expansion revenue from their base. Most buyers are looking for churn of 7% or less.
Top line growth of 10%+ YOY is seen as favorable.
We have outlined an additional dozen valuation metrics that are key for MSPs. If you'd like to learn more, or are interested learning what your firm's valuation is in today's market, let's have a brief call: SCHEDULE A CALL HERE