Mergers and Acquisitions

MSPs Face Massive Valuation Gap Amid Target Exit Dates

ConnectWise VP Arlin Sorensen
Arlin Sorensen

How much is an MSP business worth? Ask a potential buyer and a potential seller and the responses will reveal a massive valuation gap. That gap could become quite serious as a growing number of owners attempt to sell their businesses over the next five years, according to HTG Peer Groups CEO Arlin Sorensen.

HTG surveyed roughly 100 MSPs and IT services providers. The typical owner hopes to sell his or her business for $3 million to $10 million -- but the companies are only worth $1 million to $5 million, according to HTG and data from Service Leadership Inc.

Sorensen revealed the gap during HTG IT Channel Summit 2016 today in Iowa.

Helping MSPs to close that gap -- with more recurring revenue education -- is one of HTG's top priorities, Sorensen said. Simply jumping to cloud services often isn't a quick-fix, since IT service providers lose their frothy up-front revenue bumps if they make a complete shift to cloud services, Sorensen said.

M&A Trends for VARs, MSPs

M&A activity across the IT channel already is hot. And ChannlE2E expects the number of M&A deals to grow through 2022 before leveling off a bit at that point. But valuations won't rise unless (A) buyers are strong and (B) sellers are even stronger.

HTG's views on exits and valuations closely align with ChannelE2E, which launched to assist all IT service providers on their entire business journey -- from Entrepreneur to Exit. Anecdotal evidence suggests that the best-run MSPs have valuations of roughly 5X to 7x or perhaps even 6X to 8X annual EBITDA (earnings before interest, taxes, depreciation and amortization). Some MSPs that have their own intellectual property can even fetch 10X annual EBITDA.

With those figures in mind, MSPs are looking to flow more profits to their bottom lines via automation and/or top-line revenue growth. But overall, profits trump top-line revenue growth.

Exit dates are approaching for many MSP owners. How many will build their valuations to properly fund retirement? HTG's Sorensen is worried about the gap -- but trying to close it.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.