

How much is your managed services provider (MSP) or technology solutions provider (TSP) business worth -- and how can you structure a potential deal to buy or sell in the MSP and TSP market? ConnectWise CEO Arnie Bellini and Service Leadership CEO Paul Dippell tackled those questions during a Path to Success webcast today.
The webcast was the first in a multi-part series, which covers:
Even if you don't plan to buy or sell a company, MSPs and TSPs should follow the shared tips from the webcast to ensure you run the company with maximum cash flow and quality, Dippell notes. Building on that point, Bellini noted that many MSP and TSP owners want to pass their companies on to kids or the next generation of management. To make sure you do that as beautifully and effectively as you can, MSPs should really zero in on the valuation and deal tips, Bellini added.
Bellini reinforced that point by describing how ConnectWise explored a potential IPO, which helped the company to really zero in on key variables that influence valuation. (ConnectWise does not, by the way, have plans to IPO at the current time.)
Overall, only about 30 percent of MSPs really understand the buying and/or selling process, according to Service Leadership figures. (I'm paraphrasing the figures and they certainly vary a bit from the 30 percent mark. But for the sake of brevity I'm publishing 30 percent.)
Valuations: The 50,000 Foot View
"The market is hot... crazy hot," said Dippell. "Private equity groups are moving to consolidate this industry. And that's a good thing." Still, he conceded: There's a catch: PE firms want to buy MSPs and TSPs that each have $5 million to $10 million in profit. Yes, that's profit -- not revenue, Bellini pointed out.
There are at least 8 to 10 variables for valuations. But Dippell boils it down to these multiples from January 2017 research, based on 2016 multiples and actual deals:
By the way, Service Leadership expects to share new multiples for 2017 sometime in January 2018.
MSP Valuations Based on EBITDA
The valuation above is based on revenue. But valuations can also involve EBITDA dollars and EBITDA profit margins. Service Leadership says the typical profit multiples (assuming the seller CEO is paying him/herself a fair market wage) is:
Of course, there are additional variables to manage on valuation -- including business model, geographically, cash and debt, and more, Dippell noted.
Deal Structures
This section of the webcast, in particular, is a must-attend. Dippell and Bellini shared plenty of banter about how to piece together a deal. I'll share a few thoughts below but they don't capture all the nuances from the webcast discussion. Among the key points:
Whether you buy, sell or hold -- never overlook the number one thing that typically holds back an MSP from growing from $3 million or above: Hiring and training a solid management team -- particularly a second layer of management below the C-suite. HTG CEO Arlin Sorensen made that very point during IT Nation in November, Dippell noted. Bellini, meanwhile, told partners to zero in on all types of recurring revenues -- not just traditional managed services revenue -- to drive valuations higher.