IT Service Provider M&A Guidance
So you run a VAR or managed services provider (MSP). What’s the secret to a successful merger, acquisition or company sale — at least in terms of MSP and VAR valuations and financial metrics? Those topics surfaced during an M&A Panel at Continuum Navigate today in Las Vegas. Here’s a recap.
- Mitch Morgan, Growth Achievement Partners
- Chris Ryne, Growth Achievement Partners
- Mike Dudek, Esq., Zygoquest Group
Among the key panel themes:
- We are in the middle or the end of the middle of the transition to managed services.
- Successful MSPs should be driving more than 50 percent of revenues from recurring models.
- Make sure you’ve got systems and processes in place (i.e., automation software) in place to scale the business.
- CXOs within MSP businesses need to shift from “hands on keyboard” to “markers on whiteboard” when dealing with customers.
Metrics for MSPs
The MSPs best positioned for strong valuations have the following business metrics…
- Growth rate: Successful MSPs can grow 20 percent or more per year.
- Operating income and returns: They should be double digit if you’ve achieved scale, proper pricing and service structure, systems and processes and appropriate staffing.
- Services revenue: 60 percent to 70 percent of topline.
- Contractual recurring: 70-80 percent of services revenue.
- Auto-renew contracts: One to three year terms.
- Services revenue per employee: $150,000 to 250,000 per year.
- Services revenue per tech employee: $200,000 to $300,000 per year.
- Operating Income: 10 percent to 15 percent.
Note: Roughly half of the room here either plans to buy or sell an MSP in the next three to five years. Quite a few, to my surprise, are in acquisition mode rather than exit mode.
Market Consolidation: The panel predicted that one-third of the MSP market will disappear through M&A consolidation and competition over the next three years. More than 50 percent of deals involve MSPs with 1-4 employees; 30 percent with 5-9 employees; 15 percent with 10-19 employees; and fewer than 5 percent have 20-49 employees.
Types of Acquisitions:
- Strategic Buyer: In the industry or wants to be in the industry.
- Core: Often higher valuation because the buyer sees you as a key piece to the business going forward.
- Financial: Deals done purely for the money, with complex underlying deals.
- Contiguous: An extension to their existing offerings.
Valuations: They’re based on revenue, profit, cash flow, balance sheet, recurring revenue and growth, business model, critical success factors and metrics.
Zygoquest has a “value scorecard” for MSPs to help on what adds and detracts value. But overall, MSPs should not sell for less than 5 times EBITDA, the panel said.