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The Elusive MSP Everyone Wants to Buy

Service Leadership Inc. CEO Paul Dippell has received the calls. HTG Peer Groups CEO Arlin Sorensen has received the calls. I’ve received the calls. And I bet TruMethods CEO Gary Pica has received the calls.

The voice on the other end of the line represents a private equity firm, a large MSP — or both. He typically asks: “Where can I find a $10 million MSP with 20 percent EBITDA profit margins? Because I’d like to buy that MSP.”

The disappointing industry answer: For the most part, that type of MSP doesn’t exist. Instead, the vast majority of IT service providers within HTG Peer Groups are closer to $3 million to $5 million companies, Sorensen noted last week during the organization’s IT Channel Summit out “on the farm” in Iowa.

Revisiting the MSP Valuation Gap

The conversation leads back to a bigger MSP industry problem — which Sorensen calls The Valuation Gap. While the typical owner hopes to sell his or her MSP business for $3 million to $10 million — but the companies are only worth $1 million to $5 million, HTG and Service Leadership estimate.

Still, there are some signs of hope. Best-in-class MSPs typically generally EBITDA profit margins of perhaps 20 percent or more. And overall profitability among MSPs within HTG Peer Groups has steadily grown over the past few years,

But where are all the $10 million MSPs with those frothy 20 percent margins? If your company actually fits that description and you’re looking to sell, now’s the time to check in with an M&A advisor…

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5 Comments

Comments

    Rick Murphy:

    Yes, it’s true! EVERYBODY wants to buy “that” MSP (…and please call me!) The first problem is, generally speaking, many of the companies that fit that mold, or better, are perfectly happy owning a well-run MSP that is creating such a significant amount of free cash. Plus, in order to make a deal workable, the owners of “that” business need to be certain that it is a good business decision for them, meaning; a really big check at closing with little risk, if any, after closing. Accelerating their ability to earn the same or better free cash, but all at once, instead of waiting three, four, or five years.

    The second problem then becomes the pool of the potential suitors. Those who might have the cash are typically I’ll equipped to own a company this size, but the “seller” discovers this in the transaction process and the deal never happens. For those suitors who do have the operating acumen, they likely don’t have the ready capital to structure a workable deal with enough cash at closing to make it appealing, so that deal also never happens. For the buyers with both the ready capital, and the right attitude/operating acumen, they don’t want to wait forever to breakeven on the deal – read: aren’t going to pay a ridiculous multiple – so those deals also don’t often happen.

    Bottom line? “Sellers” don’t often appreciate the “buyer’s perspective” of return on their investment, as virtually all of the press and chatter among peers revolves around sell-side multiples from the seller’s perspective. Consider this: when have you seen a buyer publicly discuss their “internal” multiple? I assure you that it is not the multiple that sellers discuss. I can also assure you that if a company received a really high multiple on their deal (however one chooses to calculate it) that the price includes a “reality delta” equal to the total of synergies, consolidation and integration opportunity, with a smidgen of conservative sales growth added, that allows the buyer to strongly believe that they will get their investment back in 60 months or less. Anything more is simply risky business.

    Joe Panettieri:

    Hey Rick,

    Thanks for the detailed views. Great to have you weighing in. Just one point of clarification from ChannelE2E’s perspective. We’re doing a ton of coverage that represents both the seller-side and buyer-side perspectives. Everything gets compiled in our milestones section.

    Best,
    -jp

    Mohit Kansal:

    Hey Joe, long time reader, first time poster – great article, as usual.

    I agree that the list gets very small once you get up in size and are looking for near best in class EBITDA margins.

    From the buyer perspective (or I prefer to say partner!), creativity to get upto both I think is critical. As examples, for size, come in with a smaller, emerging firm and acquire to get scale and for margins, invest in capabilities (people, software, hardware) to grow margins.

    Thanks,
    Mohit

      Amy Katz:

      Mohit thanks for your comment. And please keep ChannelE2E informed as Clairvest continues to monitor the MSP market. ABK

      Joe Panettieri:

      Hey Mohit: Great to hear from you. From a seller perspective, Service Leadership Inc. CEO Paul Dippell made a rather interesting point on our Sept. 22 webcast yesterday. Instead of growing/scaling top-line revenues, MSPs should first focus on fine-tuning their financial models, compensation models, etc. Scaling a bad model, he noted, doesn’t make sense. Solid advice.
      -jp

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