This article was written by guest contributor Reed Warren, CEO of iTValuations, which offers business valuation services as well as sell-side and buy-side advisory services.
Every decision an MSP business owner makes either increases or decreases the value of their business. Every. Decision.
Yet MSPs often struggle with accurately tracking and measuring the value they create.
Whether your goal is to acquire a company to grow, or to sell your business in the next few years (or the next decade), it’s essential to have regular, updated insights into the value of your MSP business. But too often, companies don’t conduct valuations until they’re ready to transact. This can lead to missed opportunities for timely adjustments that could enhance value. It’s like trying to lose weight without regularly checking your progress on a scale—by the time you get on the scale, it might be too late to make meaningful changes.
It’s Not Just About EBITDA
Many MSP owners who are thinking about selling their business focus heavily on EBITDA and its multiples, assuming that driving a higher EBITDA automatically equates to higher value. Although this approach isn’t entirely wrong, there’s much more to value than just net cash flow. MSP owners need to look beyond EBITDA to other factors that can significantly influence value. The good news is you have the power to control some of these factors with regular check-ins on your valuation.
Buyers Want Growing Companies
Growth is a critical factor that buyers look for. Companies that grow at twice the industry’s average growth rate tend to command the highest multiples. The market has been strong post-COVID, with a growth rate around 10-12% year over year. However, companies growing at this average rate are simply maintaining their position, not gaining ground. Buyers are more interested in firms that are growing closer to 20-25% on the top line, as this suggests a strong value proposition and the ability to capture market share.
Buyers are primarily focused on return on investment (ROI), rather than just the multiple they’re paying. For them, it’s about what kind of return they can expect from the investment they’re making, typically aiming for an internal rate of return (IRR) between 20-30%. High growth rates, combined with strong value propositions and robust sales organizations, are key indicators of a company’s potential to generate significant returns for buyers.
Buyers also love predictable profitability and growth, so determine what you need from your financial team to drive financial maturity marked by good budgeting and fiscal rigor. Put someone on your leadership team in charge of contracts to ensure they’re transferable upon a sale and include built-in price increases.
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Your Risk Profile Is Also Key
Beyond growth, buyers will study several other metrics, including cash flow, owner dependencies, customer concentration, and recurring revenue. These factors contribute to a business’s “risk profile,” and a buyer will evaluate them to determine the right purchase price. Companies with strong financial tracking and clear, unmanipulated financial data are particularly attractive. Buyers want to see a clear, organic growth story and operational efficiency reflected in the financials, rather than needing explanations for anomalies.
Get Your Team To Pull The Levers
Fortunately, there are numerous “levers” you can pull to enhance value. These include marketing effectiveness, sales performance, service delivery, financial health, and contract management, among others. Get your team involved. For instance, put quarterly goals in place that will drive up sales activity and maturity, such as focusing on revenue streams with the highest gross margins.
Review your progress every quarter to identify areas for improvement and make strategic adjustments that will drive long-term value.
Avoid Surprises – Or Disappointment
Most MSP owners have a “number” in mind for the sale of their business. It may be a personal wealth target, an exit point target, or a retirement age target. Tracking value creation regularly will help you march toward that target because you will be making more informed decisions.
