As ChannelE2E navigated several technology conferences -- DattoCon19, ConnectWise IT Nation Explore 2019 and Kaseya IT Connect Global 2019 -- attendees asked our team a key question over and over again: "How much is my MSP worth?"
In some rare instances, we've seen some MSP valuations reach 8X to 10X annual EBITDA. But ChannelE2E cautions managed IT service provider (MSP) buyers, sellers and financiers: Those lofty valuations are extremely rare deals, typically involving larger MSPs with strong annual recurring revenue growth and healthy profit margins. Or in some cases, a desperate buyer willing to overpay.
The more reasonable valuation ChannelE2E has heard is 6.5X annual EBITDA -- with many deals ranging from 4X (yes, that low) to 8X annual EBITDA, based on a range of factors (cash up front vs. earnout, percentage of revenues from monthly recurring services, etc.), according to ChannelE2e interviews with key M&A sources at this week's DattoCon19 conference in San Diego, California.
And don't forget: In some M&A deals absolutely no money exchanges hands. Instead, some MSPs are rolling up with one another to gain scale before pursuing financing, additional tuck-in acquisitions and perhaps a strategic exit.
MSP Valuations: Worksheet
Admittedly, valuation models and perceptions can vary significantly company to company, but I think Evergreen's point of view at least provides a few starting points to help frame the conversation on MSP valuations.
Also of note: Not all M&A negotiations involve valuations and conversations based on EBITDA. And as Investopia notes:
"EBITDA does not fall under generally accepted accounting principles (GAAP) as a measure of financial performance. Because EBITDA is a "non-GAAP" measure, its calculation can vary from one company to the next. ... However, unlike free cash flow,EBITDA ignores the cost of assets."
MSP Valuations: Market Correction Coming?
ChannelE2E expects MSP M&A activity to rise and remain strong through at least 2022. But it's important for us to clarify:
- The number of deals will rise annually, we expect
- The value of deals, however, may not necessarily rise.
In reality, we may see an MSP valuation correction soon, ChannelE2E believes, based on a range of factors. In particular:
- Many would-be "buyers" are now instead becoming "sellers" because they don't want to climb steep business and technology hills -- managed cybersecurity, cloud, compliance, IoT, etc.
- Many PE firms are finally realizing that MSPs are not SaaS companies. As services businesses, MSPs should be priced at a significant discount to SaaS firms.
- Some recent deals involve debt financing, but it's difficult to pinpoint how much risky debt is now in the market, and how a recession could potentially impact those debt payments.
Still, private equity firms currently remain well-funded and strongly interested in MSPs. We're not quite sure if or when that interest and funding levels will taper.
MSP Valuations: Advisors and Market Influencers
Readers should also check in with MSP peer group, benchmarking and business performance organizations along with M&A experts. Organizations that come to mind (sorted alphabetically) include:
- Austin Dale Group -- an M&A firm focused on software, cloud, and IT service companies, including MSPs
- Cogent Growth Partners -- a buy-side MSP advisor
- ConnectWise IT Nation Share -- peer groups
- Harbor Ridge Capital -- M&A advisory firm focused on MSPs and cloud services
- MartinWolf and the ITExchangeNet (ITX) -- An M&A advisory firm for middle-market IT services, solution provider and software companies; plus a facilitator for smaller mid-market IT M&A deals
- MSP Ignite -- peer groups
- Taylor Business Group -- peer groups
- TruMethods -- coaching and strategic MSP guidance
- Service Leadership Inc. -- the only company benchmarking IT service provider valuations, ChannelE2E believes
- Zygoquest - a key advisor on dozens of deals that we've tracked
- Whom did we miss? Email me your thoughts: [email protected]
Special thanks to the many sources that reached out to ChannelE2E and shared background information during our recent IT conference travels.