How much is your managed services provider (MSP) business worth? Evergreen Services Group, which acquired roughly a dozen MSPs in 2018, built a worksheet to help frame that conversation with business owners who are exploring potential company sales.
The worksheet, known as the MSP Acquisition Scorecard, lists eight variables that impact company valuations and associated buyout price tags. Evergreen Services Group Head of M&A Ramsey Sahyoun walked ChannelE2E through the worksheet during a briefing call last week.
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MSP Acquisition Scorecard: A Closer Look
The eight variables include:
1. EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization): MSPs need to have at least $2 million of annual EBITDA to be considered a potential platform acquisition, and at least $500,000 in annual EBITDA for potential tuck-in deals. A platform MSP is large enough to serve as a foundation for additional acquisitions. A tuck-in MSP is small enough for a platform MSP to absorb.
2. Recurring Revenue: Evergreen favors MSPs that generate at least 50 percent of their business from recurring revenue models, and 80 percent of revenue from managed customers.
3. Customer and Revenue Retention: MSPs should have at least 85 percent customer retention and 90 percent revenue retention on an annual basis.
4. Growth: Evergreen likes to see double-digit recurring annual revenue growth for platform MSPs, and at least single digit annual revenue growth for tuck-ins.
5. Valuation: The resulting MSP valuation is typically a multiple of the trailing 12-month EBITDA based on factors above.
6. Geography: How relevant is the local market for existing company or a platform MSP.
7. Customer Concentration: Evergreen likes to see MSPs with diverse customer bases. That means no customer represents 25 percent or more of an MSP's revenue; and no five customers represent 50 percent or more of the MSP's revenues.
8. Other Considerations: Evergreen also considers quality of team, seller trustworthiness, pricing, operations metrics, predictability of NRR, ability to do M&A (if a platform), end markets served, and EBITDA to free cash flow conversion.
So, How Much Are MSPs Really Worth?
Admittedly, that's a pretty lengthy list. To boil things down, Evergreen puts it this way: The highest-value MSPs should be growing their EBITDA profits in a strong, predictable, consistent way each year while minimizing customer churn.
Evergreen Services Group doesn't disclose current MSP valuations. But ChannelE2E believes quality platform MSPs are often fetching at least 7 times annual EBITDA, with some MSPs actually earning 10X EBITDA valuations if they have truly proprietary intellectual property (IP) -- especially those that offer self-service, proprietary cloud offerings that seamlessly grab and retain customers.