Managed Services

3 Value Creation Strategies for Your MSP

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Many business owners will at some point look to realize the value they’ve built via a sale of their company, whether to retire, explore a new challenge, or just take some chips off the table. However, many founders feel like they are not yet at the point where their business is worth what they need to achieve their financial goals, even if they are ready for what’s next.

With that said, it’s no surprise that one of the most common questions that comes up during conversations I have with MSP owners is “how do I increase the value of my business to get where I need to be?”

Well, unfortunately, there is no silver bullet and the only reliable way to grow the value of your business is to grow revenue and EBITDA. Be that as it may, there are a few key areas that we have identified as the most impactful growth levers for an MSP along with some tips to execute on them.

Whether you are looking to sell your business in the near future or planning on building your company for decades to come, the three below buckets can serve as a roadmap to distill the most impactful ways to add value to your business amidst the hectic day-to-day responsibilities of being a business owner. 

New Business

This is probably the most intuitive on this list. Adding new business, particularly new monthly recurring revenue, will undoubtedly increase the value of your company. There are two ways to add new business: increasing the services provided to your existing base and winning net new clients, which can be broken into Account Management and Sales functions. Both are important to the growth of a business and should complement each other. If you aren’t bringing on new customers you are limiting your growth potential, but if you aren’t regularly increasing the spending of your existing base then you are leaving low-cost revenue growth on the table.

Best Practices

Account Management

  • Set regularly scheduled touchpoints with customers to discuss their roadmap and create and opportunity to upsell MRR
  • Broaden your upsell catalog (add security, phones, internet, etc.)
  • Reconcile user or device counts on a monthly basis to capture any increase in users in your customer base

Sales  

  • Hire a sales resource that can close deals on their own and acquire new logos
  • Expand into new regions, verticals, and client sizes to increase your addressable market and thus possible leads

Price Increases

Doing price increases can be stressful as many business owners see it as a catalyst that could cause your customers to look for another provider. These are also not always the most fun conversations to have with clients you may consider friends. However, especially in an inflationary environment, it can actually be riskier not to do price increases. Your vendors are pushing through price increases and the labor shortage has led to wage inflation across the MSP industry.

Through our ownership of over 60 MSPs, we have found that when you are providing high quality services to your clients there is very little pushback on reasonable annual price increases. This can be an especially powerful to increase value in your business as there are no costs associated with the increase in revenue, meaning it will all drop to the bottom line.

To illustrate the power of this concept, if an MSP with $5m of revenue, $3m in managed services revenue and $750k of EBITDA increases its managed services price by 5%, they will increase EBITDA by $150k if they do nothing else to grow the business. That’s 20% EBITDA growth through pricing alone! Would your customers leave you over a 5% price increase? My guess is they wouldn’t.

Best Practices:

  • Implement price increases every year in Q1 that is twice your salary raise rate
  • Push raises to Q4 to capture the full delta of the price increase for the whole year
  • If you have legacy clients that are far below newer clients’ rates, do a one-time increase to bring them closer to your average pricing
  • When onboarding new customers bring them on at your new price point

Cost Control

Alright, we’ve talked about a couple of ways to increase your top-line which should naturally result in higher earnings, but how do we make an even higher percentage of that newly added revenue drop to the bottom. By focusing on cost control. The goal of cost control is to scale your revenue at a faster rate than your expenses.

Best Practices:

  • Incentivize and align employees to the goal of growing EBITDA to increase productivity (profit-sharing agreements, etc.)
  • Track and regularly review customer effective rates and gross profit margin of different services
  • Negotiate contracts with vendors and work with vendors that offer higher profit sharing
  • Regularly review your solutions to ensure you are fully utilizing what you’re paying for
  • Find a cost-effective way to serve clients (“grow your own” techs and leveraging master MSPs for offshore labor)

Conclusion

There isn’t a shortcut to immediately add value to your business, but by putting your energy into the things that make the biggest difference to your revenue and EBITDA you may see faster growth than you thought. Establishing processes to add new business, performing regular price increases, and actively working to be more efficient by controlling your costs are all ways to facilitate growth.

It is also important to note that none of these things are possible or will be successful unless you maintain accountability for providing quality services for your clients and create a rewarding work environment for your employees.

Wherever you may be on the journey of your business, I hope these strategies can help you achieve your goals.

This Evergreen Services Group post is written by Alex van Lent, M&A Expert at Evergreen.

Alex van Lent, M&A Professional, Evergreen Services Group