If you read one blog this week that prompts you to actually do something meaningful in your MSP practice, please make it this one. I have seen a lot of MSPs brag over the years about how well they are doing, how much money they bring in, and how cool their NOC is. This behavior stands in stark contrast to how they act when it comes time to either sell or value their company.
It’s almost a night and day comparison to how companies behave under normal times and then go into panic mode when they find out their business isn’t worth as much as they thought. “If only I could go back a few years and make some changes, my business would be worth more!”, they say. Well, pay attention and grab a pen because I’m going to give you some very simple pointers for making your MSP practice more valuable.
- Contracts are King: if it doesn’t appear in a service contract, it doesn’t exist. No, seriously. Revenues not tied to a SLA are simply not worth as much during a valuation so make sure you get as much as you can in those SLAs.
- Assignable SLAs. If you don’t know whether your service contracts are assignable, go get a lawyer and have those SLAs changed immediately.
- Keep good books. Tidying up your financial records the night before a M&A or valuation transaction is like studying for an exam without ever having read the course material. It’s too late! Don’t get caught unprepared; start keeping your financial books now. Hire an accountant if you don’t have one but get it done. It will save you lot of trouble later on.
- Profit, Profits, Profits. Running a lifestyle business and minimizing taxes are all well and good but if you want to have a highly valued MSP practice, start paying attention to your bottom line. MSPs with little to no profits at the end of the year will simply not command attention. A healthy bottom line will do wonders for your MSP’s valuation.
These are only a few of the ways you can start to add value to your MSP business. Even if you don’t plan to sell your company anytime soon, doing these simple things will have a positive impact on your business.
The ClearPointe acquisition of TecWatch earlier this year was a textbook example of how a M&A transaction should be done. The terms of the deal, although not disclosed, were such that both parties are happy nearly half a year post transaction.
From the very beginning, the process went smoothly and both parties were able to come together towards a meeting of the minds. From start to finish, the entire transaction took roughly 4-5 months. The ability to create happy M&A transactions is something I am very proud of and look forward to doing the same for my other clients.
I’ll be writing more about how well structured M&A deals should occur but for now, I’m happy to report that the deal is still going strong.
The subject of valuation models for MSPs is coming up in discussion more frequently and I see a lot of people with hugely different valuation multiples; so many that I though I’d clear the air. The first thing everyone must understand is there are valuation models that favor buyers and there are models that favor sellers. Because these models almost never yield the same number, we are forced to create a third model that more closely approximates the true value of a managed services practice (for those of you who want to skip to the end and see what that model is…come to the M&A Workshop on February 4).
One of the inconsistencies of a “buyer’s” model is that it relies heavily on EBITDA. I say this is a buyer’s model because it assumes a MSP has net income. When most small MSPs run their practice as close to breakeven as possible (to minimize tax exposure) this EBITDA number tends to be very small. Therefore, a buyer will generally have a lower price with a EBITDA multiple.
On the flip side, a seller tends to favor a top line revenue approach as this number will exclude profitability and focus on their ability to generate revenue. Naturally, this excludes some very important operational factors and will never produce a very accurate valuation number.
Therefore, I have created a blended approach that takes into account both top line revenue and EBITDA, as well as many other operational factors to produce a very accurate valuation for the MSP practice. In the end, no matter what people are saying the going multiple rate is in managed services, if a bank won’t finance it or an accountant can’t wrap their head around the valuation number, it probably isn’t a very good valuation model being used.
Yeah, buyers want to buy MSPs cheaply and sellers want a lot more than they are worth. Somewhere in the middle the truth can be found. Oh, and come to Dallas, TX on Feb 4., we’ll be going into a lot more detail about this model during the workshop.
While this deal is a little outside the sweet spot of most MSPs today, it still shows the increasing trend and opportunity for deals in the managed services industry.
A lot of data has come out recently about the jobs market. ADP reported that businesses shed 23,000 jobs in March. Consumer confidence also took a hit last month. So with all of this seemingly negative thinking going on about hiring, why should MSPs be happy?
