How is the value of my managed service provider business calculated?

Introduction

Back in 2014 I joined a small MSP business as General Manager. For the first three years we focused on growing recurring revenue, although we always made a profit, growth was the focus. Despite achieving great growth, we were disappointed when an external party pitched a low value of the business.

There were many points of value that made the business interesting, however, without profitability, we were never going to reap rewards for the blood, sweat and tears that the founders had put into the business over many years.

After this experience, we refocused on profitability. It is easier to drive short term profitability, but this can come at the cost of over-stressing people (under resourcing), or not making the right investments for long term success.

I’ve been through the business sale process several times, the pre-sale due diligence is not for the faint hearted, but welcome it as a great opportunity for learning.

The Measures described in this article are indicators of a healthy MSP business – if you can get it right, the business will deliver value to shareholders and will also make it attractive and more valuable when sold.

If you’re working in an MSP (in any role) and you understand these business drivers – it will set you up for a better career; if you can help increase business value through your actions, then it should get noticed!

A Measure of Business Success

When you come to sell a business, the prospective will calculate a value, usually measured as a multiple of operating profit. As such you may hear the term “multiple”.

Not all revenue or profit is seen as equal, there are things you can do to increase the multiple, making your business more valuable.

The core factors that change the multiple may vary, and each buyer will have their own way of estimating the value of a business, but in most cases the buyer is looking to ensure that they get a return on their investment, as an MSP owner, we need to hence make sure that there are few question marks over the ability of the business to generate income into the future.

These are some of the core performance indicators I have come across.

1. Operating Profit – usually measured as EBIT Earnings before interest and taxes – Wikipedia or EBITDA Earnings before interest, taxes, depreciation and amortization – Wikipedia – This shows the ability of your MSP business to generate income for the prospective buyer, unless you have some amazing IP or astronomical growth, I believe this is the primary measure of your MSP business. The buyer will want to see how this profit is generated, being able to understand the costs associated with your revenue streams will be really helpful.

2. Recurring revenue can be worth 10x more than non-recurring revenue. – Recurring revenue is always more attractive, Successful recurring revenue businesses need to build strong and long relationships with customers, each month starts with booked revenue in place.

3. Customer lifetime (proof of how long recurring revenue can be valued) – A demonstration of a long recurring customer relationship shows the true value of your business. If your customers have a long tenure then this is a great sign – it usually means customers are satisfied with your service.

4. Growth rate – how fast your business has grown over time – Sustainable growth over three years is a sign of maturity. If you have a proven sales model to find, attract and add new customers, while retaining your existing customers – then this is Gold. Knowing how much it costs for you to acquire a new customer will also be asked.

5. Business Size – more substantial businesses (measured by profit generated) will be more valuable, they carry less risk and are likely to have more mature processes, management and governance, as well as less dependency on few key individuals.

6. Diversity of Customer Base – Winning a large customer for a small business is one of the best feelings, but if one or two customers account for a large proportion of your income, then this may be seen as risky – if something happens to this one large customer, then it could be hard for your business to survive. Having longer term contracts can help de-risk.

Your People and Culture

In todays market, acquisitions could be made to acquire a set of skills, or to expand the capability/skills of another organization.  Regardless of the future path of your business, your people are always going to be valuable.

The buyer will want to know

• Who your key people are – this will be your management/leaders and your key technical people
• The skills of your team
• Your organizational structure and management team
• What your staff churn rate is – i.e. how long to people stay on average – people move on, but excessive churn is never a good sign.
• How much you pay your staff – they will want to know you are paying market rates, while still achieving profitability.

Systems and Processes are your IP

Systems are your IP, they are the definition of how your business operates, from sales and customer support through to communications and billing.  It’s what sets you apart from your competitors.

Good systems mean that you can scale up without dependency on individual people, and you can scale in a non-linear manner.   Successful businesses have efficient systems, this should mean that as the business scales up, profit margins will get larger.  This can have a dramatic impact on how the business is valued.

In many cases companies acquiring an MSP may need to merge your systems into a larger organization – your unique systems could become the new standard.  Fundamentally – well implemented and operating systems will be easier to integrate.

Traditionally IT service organizations are based on selling time, this is an example of a business that doesn’t scale easily.  Revenue/Margin hence has dependencies on

• Number of staff employed – to make more money you need more people to charge more hours.
• Utilization rate (how much of their time is charged out) – underutilisation could take you into loss making territory.
• Management overhead – people need to be managed, recruited, trained

How much is an MSP worth?

These are estimates and assume at least 50% of all revenue is recurring.

What will increase the value of my MSP?

1. Good revenue growth – 10-20% per annum is good
2. You have self-service systems which reduce labor and offer competitive advantage
3. Strong automation across your business
4. Predictability around sales
5. The willingness of the founder/owner to commit to the future results of the business – this is usually handled through an earn-out, where the owner gets some of the sale price in the future, when they have delivered the promised results that the purchase price was based on.

What will decrease the value of my MSP?

1. Recurring revenue is less than 50% of your revenue streams
2. Revenue growth is low or flatlining
3. Customers are churning
4. Low EBITDA as a percentage of revenue
5. Poor quality internal systems
6. If the Business does not look to be able to scale easily without adding people

MSP Automation for improved margins

MSPs that have a focus on process and automation work strategically to cut manual labour from their operations and charging model. 

This increases business value by

• Improved customer satisfaction and retention
• Better employee engagement – empower junior staff, while removing boring tasks
• Support more customers to a higher standard, with less staff

How Atria helps…

MSPs have a wide array of tools to pick from for device management, billing automation or human workflow automation (Ticketing systems).

Atria helps MSPs to deliver service to end-users, enabling service desk and end-customers perform tasks without needing access to any administrative tools.  Out of the box, Atria supports Active Directory, Azure Active Directory, Microsoft 365, Citrix Cloud or on-premises and an SDK which allows virtually any service to be modeled for delivery via Atria.

Benefits

• Decrease load on key engineering staff
• Empower Support staff to do more, without requiring administrative access
• Cut the need to maintain process documentation
• Reduce inbound tickets by enabling customer self-service
• Onboard new customers, ready to be supported in under 30 minutes
• Automatically capture changes for billing and push into your PSA

Get in touch and book a demo.

Would you like to be one of these?

• A channel focused MSP that supports more than 5000 end-users cross 500+ customers with less than 5 engineers and only handles escalation support for partners.
• A security focused MSP that supports 15 hosted enterprise customers with 2 senior engineers and a shared helpdesk.
• A large European MSP that delivers a range of fully hosted IT services to over 15,000 end-users with a team of 20 support and engineering staff.

They have all used Atria as the centre of their automation strategy, if you want to discuss how Atria can help with some of the concepts discussed in this article, please get in touch for a no obligation chat.