Hardware and Device as a Service: Hurting MSP Valuations?

Amid the “everything as a service” hype, thousands of MSPs and VARs are exploring ways to shift their hardware sales from CapEx to OpEx business models. You know the conventional wisdom: Monthly recurring revenue — rather than one-time product sales — provides a more predictable business model and typically lifts business valuations along the way.

With that thesis in mind, many MSPs are exploring hardware as a service (HaaS), device as a service (DaaS) and other pay-as-you-go hardware models for end-customers. After several false starts a decade ago, HaaS and DaaS now have traction in some market segments.

DaaS and HaaS: Helping or Hurting MSP Valuations?

But not everybody believes HaaS and DaaS are good trends for MSPs that want to lift their valuations and eventually sell their businesses. Among the skeptics: Evergreen Services Group, which has acquired more than a dozen MSPs over the past year or so.

Why I Care: I take Evergreen’s M&A and valuation viewpoints seriously because the team has skin in the game. They’ve spent thousands of hours speaking with more than 700 MSPs about potential M&A deals, and the company has actually opened its wallet multiple times to consummate MSP buyouts across the country.

Twitter: Evergreensvcs

HaaS – Read the Fine Print: Before you read on, it’s important to keep the Q&A interview below in context. HaaS and DaaS come in many forms. In some cases, the MSP takes ownership of the hardware. In other cases, the MSP never actually owns the HaaS equipment. MSP valuations can vary greatly based on which model and partner engagements you pursue. Also, MSP buyers (private equity firms, peer MSPs, strategic investors, etc.) use various models to estimate and set valuations. Evergreen’s own Valuation Worksheet may vary significantly from other buyer models and considerations.

The Background: The seeds for this interview were planted during two separate conferences. I caught up with the Evergreen Services Group team during a trip to RSA Conference 2019 in March. We stumbled onto the HaaS-MSP valuation topic during that meeting. I was intrigued. Then I got distracted. Then Evergreen Services Group and I regrouped at this week’s Kaseya Connect IT Global 2019 conference in Las Vegas.

Ramsey Sahyoun, head of M&A at Evergreen Services Group, and I quickly dove into the valuation discussion during an impromptu “How the heck are you?” conversation in the hallway on May 7. Ramsey is a details guy. I’m a sound bite guy. Something was bound to get lost in translation (by me) in that hallway. After a brief face-to-face catchup, email became the perfect method to capture Ramsey’s deeper thoughts in detail on May 8. Here’s the interview.

ChannelE2E: What impact does HaaS have on MSP valuations? Is there a downside?

Sahyoun: In our view, HaaS has a VERY negative impact on MSP valuations because of the capital expenditures (typically called Capex) required to use that business model. Capex is a real cash expense that we factor into our valuation on every acquisition we’ve made. MSPs that don’t do HaaS or private cloud typically have very little in the way of Capex (that’s one of the reasons we like MSPs!), so EBITDA generally approximates cash flow. With HaaS or private cloud businesses, there is so much Capex that cash flow is significantly lower than EBITDA. And that impacts valuation very negatively because we apply our multiple to cash flow.

LinkedIn: Evergreen Service Group Head of M&A Ramsey Sahyoun

We’ve now had conversations with over 700 MSP business owners and one of the unfortunate things I see is that they adopt HaaS because it makes their EBITDA look better. They compare their EBITDA margins to their peers and it makes them feel like they’re doing great, but they actually end up generating less cash flow. It’s unfortunate because it has a negative impact on both the cash that an owner gets from his/her business every year and also on the ultimate valuation.

The only saving grace about HaaS is that it turns hardware into a recurring revenue stream, so it will improve a company’s revenue mix. For example, our threshold for recurring revenue is 50%, so sometimes HaaS can help an MSP get into a recurring revenue % that will appeal to buyers. But overall, we’d much rather see managed services revenue itself be 50%+ of the total and we won’t value HaaS revenue as highly as managed services.

ChannelE2E: Should MSPs instead focus on leasing and other types of financing to keep hardware off their books?

Sahyoun: If I was an MSP business owner I wouldn’t worry about using tricks to get the hardware revenue off the books. I would instead focus time and energy on growing managed services to be a greater and greater portion of total revenue to where hardware doesn’t impact bottom line profitability as much.

I would encourage folks to try to get favorable arrangements with vendors/distributors. It can be challenging for MSPs from a cash flow perspective to pay for hardware upfront and resell it, and we’ve seen some companies have favorable arrangements where they just get a commission from the distributor instead of carrying inventory.

ChannelE2E: What impact does private cloud/building-owning data centers have on MSP valuations?

Sahyoun: Similar to HaaS, the capex associated with private cloud and data centers have a negative impact on valuations. Most MSPs I’ve talked to that invested in building their own data center try to use it as a differentiator to the end customer, but they almost always tell me they wouldn’t make the investment knowing what they know today.

Competition from public cloud is intense. AWS and Azure cut prices regularly and have better functionality in most cases, so it’s a very tough business.

While the margins on private cloud are higher, the difference isn’t has great as most people think when you factor in the capex associated with private cloud whereas public cloud requires literally zero capex.

Overall, I would say private cloud is a negative on valuations, but different people have different perspectives. The one major takeaway from all of this is that people need to consider capex as the real expense that it is when they’re considering what paths to take in building their business.

What’s Your View?

Got a differing opinion for me? My email inbox awaits your view. And yes, comments below are welcome. -Joe Panettieri, Content Czar, ChannelE2E

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    Ted Warner:

    Fantastic topic Joe. Yes, I have a bit of a differing opinion. At Connecting Point we utilize HaaS to beef up our gross margin that we realize from products. In our HaaS calculator we calculate our hardware margin at 30%. That is a good 10%-12% higher than we can achieve with direct sales of product. Additionally, we finance our HaaS agreements either through my leasing company, Point Capital, or through bank financing (a bit lower rate). The net result is that it does not negatively affect the capital position of our company. Yes, we pay some interest on the loan or the lease, but it minimizes the large capital outlay that aggressive HaaS business can demand. We also create a payback stream on the financing that matches the income stream from the HaaS agreements. The other beauty of HaaS is the end of life options for the client. We provide them a couple of options. They can purchase the equipment after 36 months for two additional payments (100% profit to the MSP). The equipment ownership moves to them at that point. They can also return the equipment to us and start the process all over again. This also is a good option for both parties as it keeps their equipment current and under warranty. The MSP benefits as they don’t have to fight the extended refresh cycles and again the margins are robust.

    A final thought on HaaS equipment is the fact that it helps us lower client anxiety about starting a new recurring revenue agreement with us. Having fairly large onboarding fees that include purchasing appliances like firewalls, BDRs and wireless devices can scare many small businesses away. At Connecting Point we roll these appliances into the agreement so the client isn’t burdened with a large capital outlay at the outset of a new managed service agreement. This tactic has worked very well for us. Their is a HaaS agreement between the leasing company and the MSP (in this case, Connecting Point) that funds those appliances inside the managed service agreement. Connecting Point (through the leasing company) owns the appliances and then can refresh them at the appropriate time and take the decision making burden off the client.

    Again Joe, great topic. Love this stuff 🙂

    Ted Warner
    Connecting Point – Greeley
    Point Capital Leasing

    Joe Panettieri:


    Thanks for such detailed info about your strategy, model and the reasoning behind it all. Also, Ramsey from Evergreen deserves the credit for the conversation above. He mentioned the HaaS stuff to me in passing during that March meeting in San Francisco. My ears perked up immediately, since I knew his team (like yours) has skin in the game — rather than a stadium seat behind the sideline (like me).

    All the best and thanks again.

    Greg VanDeWalker:

    You and I have talked about your program before and if an MSP wanted to learn how to do HaaS the right way, I would send them to you! With that said, you have a bit of an unfair advantage over most MSPs in that you have a leasing background that helps you both understand and manage the risk you are taking. The point I do agree with Ramsey on is that the coinciding debt on your books is a subtract item when it comes to your valuation. Keep up the great work Ted!!

    Ramsey Sahyoun:

    Super interesting points Ted and Greg, this is indeed a fascinating topic. I definitely hear you on some of the benefits of HaaS – great to get that perspective from talking to customers on the front lines. When I say that it hurts valuations, what I’m really saying is that it hurts your EBITDA multiple because of the capex requirements. I think the punch line of this whole thing from an M&A person’s perspective is that there is nothing intrinsically wrong with companies doing HaaS, but those companies need to view the value of their business on an EBITDA less capex, whereas those not doing HaaS can just value their business as a multiple of EBITDA because they don’t have the capex. So the EBITDA multiple of a business doing HaaS will tend to be quite a bit lower even if the cash flow multiple is the same. Great conversation on here as always!

    Don Bentz:

    To add to this topic, what about those companies that spin off a separate “holding” entity which in essence is a self-made leasing company?

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