MSP Valuations And The Desperation Factor
When it comes to MSP valuations, you likely know that well-run managed services providers are worth anywhere from 6 to 8 times EBITDA — though the figure can go even higher if the MSP has intellectual property (example: Sensus).
Still multiple factors can impact the valuation of an MSP, VAR or IT services provider. They range from financial metrics to business focus areas and plenty more.
But here’s one valuation variable I hadn’t considered before: Desperation — which can be real or perceived. Let me give you a few examples:
A desperate seller: You put your MSP up for sale and constantly call/email potential buyers who have shown minimal interest in the business.
- A desperate buyer: You’ve made multiple bids in a specific geography or vertical market but none of them have panned out — and your next acquisition target knows it.
Those scenarios, and plenty more, surfaced during a conversation last Friday with Colin Knox, CEO of PassPortal. He recently sold his MSP business to double down on his password management software company — which has been growing rapidly.
During our call on Friday, Knox and I were debating whether the current M&A environment is more of a buyer’s or a seller’s market. Instead of answering the question directly, he had a slightly different spin on the situation. Without referring to his particular exit, Knox spoke in general terms about the “desperation factor” potentially undermining buyers and/or sellers in certain MSP deals. That, in turn, can greatly impact valuation on either side of the table.
Hiding the Desperation Factor
Actually, I have first-hand experience with the desperation factor. Rewind to 2010. At the time, Amy Katz (my business partner) received an unsolicited inquiry about a company we were building. We were intrigued by the potential suitor and began exploratory discussions.
Among the smartest decisions we made at the time: Amy focused on the M&A discussions while I focused purely on our content. Sure, she and I spoke regularly about the suitor, potential synergies, valuation, etc. But when it came to the nuts and bolts of hammering out a potential deal, Amy was our point person.
That approach ensured that my own feelings — let’s sell, let’s sell, let’s sell — didn’t dominate the negotiations. Amy’s approach gradually rubbed off on me. The discussions, she often said, are a process — not an instantaneous transaction. And that approach ensured that a desperation factor — my knee-jerk emotions — didn’t undermine our potential valuation.
After about three to six months of discussions, the deal seemingly approached the finish line — but then it ultimately fell apart over their proposed financing terms. We parted ways with the suitor on good terms.
Eliminating the Desperation Factor
Fast forward about a year (late 2010/early 2011), and Amy and I had made some changes to the business. We killed one of our low-revenue websites, and launched another that was far more successful. That pivot further lifted our EBITDA and top-line revenue growth rate — and therefore our valuation. Plus, it prepared us for another round of potential M&A talks.
It was early 2011. If we continued to run the business on our own, we would have needed to hire a range of marketing, sales, IT and content folks. Instead, we decided the best path forward would be to plug into a larger media company. I wouldn’t quite say that we put the company up for sale. But we did hire a broker — another great move on Amy’s part, by the way — to help test the valuation waters.
Here again we could have suffered from a perceived desperation factor. As our broker spoke with potential suitors, the suitors could have assumed that we were simply desperate to sell. We weren’t. Our finances were in order, and our profitability growth was solid. Plus, having a broker in place ensured that we there was a gradual back-and-forth between Amy, the broker and suitors. And I remained looped in each time we reached another decision/discussion point in the process.
We ultimately sold that company in August 2011, stuck around and worked with the new owners a couple of years, then exited in May 2014. The “exit” certainly didn’t make us rich. But it did help us to recharge, regroup — and re-enter the IT media market with a new company and ChannelE2E’s launch in Sept. 2015.
As we continue building ChannelE2E, we continue to document the latest M&A deals involving VARs, MSPs and IT service providers. And we heed advice from our readers — including Knox. Whether you’re on the buy- or sell-side of potential deals: Don’t let the desperation factor harm your side of the valuation discussion.