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.
Will 2025 be the year you sell your MSP? Or instead, do you plan to buy an MSP to grow your business? Will it be a buyer’s market or a seller’s market? Whether you’re just “kicking the tires” or ready to sign on the dotted line, here’s a look at what to anticipate for both buyers and sellers in 2025.
A Glance Back at 2024
Before we dig into what’s coming in 2025, let’s review what M&A for MSPs looked like in 2024. After the financial boom that was the post-pandemic age of M&A, 2024 was a tough year for sellers, who outnumbered buyers in the MSP space. This contrasts with the post-Covid era from 2021–2023, where sellers were in short supply. During that timeframe, valuations and transaction multiples were at the highest we’d ever seen. However, those multiples began to erode in 2024, due in part to the influx of sellers entering the marketplace.
However, more sellers didn’t necessarily mean more qualified sellers. This reality was partially due to so many sellers taking advantage of favorable market conditions in 2022 and 2023; many of the top-quartile businesses sold between 2022 and 2024. Top-quartile firms have high operational and financial maturity.
The slower pace in 2024 was also due to the cost of capital. Increases in interest rates meant a higher cost to acquire, which boxed some strategic buyers out of the market.
We did see an increasing separation between the value of high- and low-quality, or top-quartile and bottom-quartile, firms over the last year. Top-quartile firms are still able to command premiums like we saw in 2022 and 2023. However, the median rates dropped—average and bottom-quartile firms were seeing historic lows for their multiples. Additionally, buyers grew more sophisticated in 2024—placing a higher level of scrutiny on the sellers. This made due diligence a much more arduous process than it was in 2023.
2025 Prediction #1: Market Optimism
Looking into 2025, there is a lot of market optimism around potentially decreasing federal interest rates and the new administration, from a business climate perspective. These changes have created some interesting rebounding effects.
The velocity of transactions is already accelerating early in 2025. Buyers are feeling confident of economic business stability and more high-quality sellers are coming to market, thanks to the several years of generally favorable economic conditions they’ve had to grow steadily and improve their businesses.
2025 Prediction #2: Widening Market Disparity
We think we’re going to continue to see a growing disparity between the top-quartile and bottom-quartile firms in 2025. The top quartile is still going to be able to sell at premium multiples to the marketplace. But, unfortunately for bottom-quartile sellers, it’s no longer a seller’s market.
If you’re thinking about selling, get your house in order first. You’ve got to do your homework; put a structure in place and start applying financial rigor to your business. Build out your processes and methodologies, otherwise you’re going to end up selling for pennies on the dollar, once you run out of time and energy to run your business.
Top-quartile firms that are able to put all of that together are going to be able to harvest the buoyancy in the market; we anticipate them getting top multiples, which may actually compete with the numbers we saw back in 2021 and 2022.
2025 Prediction #3: Financing Insights for Buyers
One of the biggest challenges for strategic buyers is coming up with enough cash to be competitive with their offers. If they can leverage other assets, such as personal or corporate real estate, to do the acquisition, they’re going to get better financing terms than they would through a bank. That approach will help them compete with private equity, since their most compelling drivers are their capital and their ability to pay cash.
For owners of MSPs looking to buy, planning ahead and building out a “war chest” of capital to deploy against future acquisitions can make a big difference. Additionally, once buyers get past $2 million in EBITDA, other financing options start opening up. Prior to that level of EBITDA, you’re left with leveraging other assets, SBA financing, or conventional financing, which is typically not enough to complete a full transaction by itself. Once you get to $2 million EBITDA, you’ll gain access to different financing institutions that may provide cashflow lending, which will give you the opportunity to borrow against future cash flows.
A word of advice on the subject: There is a lot of fear, especially among smaller firms, of taking on debt. But to a large extent, debt is your friend. Debt is one way to finance growth—and unlike EBITDA, debt is never multiplied in a transaction. Otherwise, it’s a very slow path, trying to pull yourself up by the bootstraps and build out your own war chest. It takes a lot of time and energy to do that—and isn’t inherently less risky.
Final Words of Advice for Sellers
If you’re thinking about selling your business in the next few years, remember that it’s all about that value creation story. So often, we see sellers who are worn out and just want out of their business. Then, they get reinvigorated during the sales process, because someone else understands the value of their MSP.
So, before you get to that fatigue point, map out your exit process. How do you get from your current value to the numbers you need to match your desired outcome? Preparing your business for sale is a journey. It’s not as simple as throwing a fresh coat of paint on the proverbial walls.
That journey typically takes one to three years, depending on how aggressively you go after it. Make sure you leave enough time, energy, and emotion to get you through, so you can harvest the full value of your 30 years of effort spent building your business.
This look into the trends shaping M&A for MSPs in 2025 will give you the leg up you need to get ahead of the game.
For more changes coming for MSPs this year, check out MSP-industry predictions for 2025.
