Looking at an MSP deal and seeking feedback

May 09, 2024

by a searcher from Washington University in St. Louis in St. Louis, MO, USA

I am looking at a Managed Service Provider (MSP) for a potential acquisition and I am seeking some feedback and any reaction froom those who have transacted or heavily looked at businesses in this space. Some contours around the deal itself is below:

- ~$1m in SDE at about 30% sde margins.
- Clients are smb's primarily focused in professional services and construction
- Service offerings are managed services, SaaS, managed security, Backup, consulting, and hardware/software sales
- 70% of revenue is recurring

I am continuously looking to educate myself about this space and what a good acquisition target looks like. I will be using an SBA 7(a) loan as well, and believe a valuation should be around 4-5x, but would like some context on this as well.

I would love to get feedback and or a reaction to the above. Any and all feedback is extremely helpful. Thank you in advance!

If anyone would like to chat further about this space, my email is redacted

Reply by an intermediary
from The Johns Hopkins University in Gainesville, FL, USA

Max - I started an IT business in 1986, ran it for 27 years, and sold it as an MSP in###-###-#### Now I work with MSPs as an intermediary. As ^redacted‌ has suggested, an MSP operating at a high operational maturity level with 70% MRR will go for a higher multiple, sometimes much higher if their culture aligns with one of the PE-backed MSPs who are on the prowl.

The first thing you should do to educate yourself on the sector is head over to Service Leadership's web site: read everything in their Library at no charge, and then consider purchasing their 2023 Annual IT Solution Provider Industry Profitability Report. At $1599 it is not cheap, but the metrics and intel in it put other industry guides to shame. MSPs are not all alike, so it is critical that you understand the what SL calls the Predominant Business Model of the firm you are considering. There are different and sometimes competing strategies for creating value among the different business models.

Feel free to reach out if you'd like more guidance. I've recorded six podcasts with heavy hitters in the space and would be happy to share one or two episodes with you before the first one drops on May 22. If anyone else would like to be on the email list for "From Startup to Sale: A Podcast By MSPs for MSPs" please head to my website at https://www.financialmodelingservice.com and click on Podcast.

Reply by a searcher
from Rutgers, The State University of New Jersey in Tampa, FL, USA

Hi Max, There's a lot to consider before we can determine if this is a favorable deal. I agree with the advice you've received, and I'm happy to discuss our experiences (30 years MSP's/ASP's/Etc's.) in more detail over a call. Here are some key areas to review to ensure your comfort: 1. Small to Medium Business considerations, assuming no customer concentration issues. 2. An impressive 30% adjusted SDE, but it’s crucial to delve deeper into these figures. Peel the onion! 3. A clear understanding of the service mix and its contribution to revenue is vital. 4. Analyze historical growth trends by service to understand shifts in the business. 5. Recommend a minimum seller transition of 18 months, ideally longer. 6. Evaluate the seller's day-to-day responsibilities to understand their impact on operations. 7. Assess sales forecasts and marketing initiatives, integrating them into a three-year plan to verify their logic. 8. Thoroughly examine the recurring revenue—its nature, contract duration, customer opt-out clauses, and support mechanisms. 9. Check if there are any prepaid blocks of service or maintenance that have yet to be delivered. 10. Consider your staff’s tenure, identify any immediate staffing needs, and evaluate individual utilization rates. 11. Finally, 4-5x on EBITDA, SDE, or Revenue? What number are you using for the multiple?

As mentioned, there’s much to unpack here.

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