Considerations When Prepping Your MSP or IT Service Business for a Liquidity Event or Capital Raise

Considerations When Prepping Your MSP or IT Service Business for a Liquidity Event or Capital Raise: Part 4

By Andrew Gaffney and Dominick Robusto

Part IV: Pulling it All Together, A Summary of Key MSP Valuation Drivers

In the final part of this series, we will look at some of the key drivers of valuation for managed service providers. Before embarking on our deep dive, we must mention the principal caveat that every MSP is unique, and while there are some attributes that tend to drive value across all MSPs, valuation is certainly more complex than what is summarized in this article. While none of the following should be taken as gospel, it is based on our deep experience in representing MSPs in transactions as well as thousands of collective hours spent with some of the smartest investors and consolidators in the space.

Technology / Solution Offering & Expertise. While it can often be challenging to isolate the value of specific solutions as MSPs generally become more diverse in their offerings, we do see some consistency in solutions and expertise that drive higher value over others. See below for a broader comparison of the values of these solutions, and the following section for an expansion upon the numerical factors that constitute what makes certain solutions more desirable than others. (See Business Model & Financial Attributes matrix)

Business Model & Financial Attributes.  Key financial metrics and business model attributes often influence one another. For example, an MSP with primarily recurring revenue will likely have more contracted revenue, higher gross margins and ultimately higher EBITDA and free cash flow conversion compared to a VAR that is very early in building its transition to a recurring MSP revenue model.

Target Market & Customer Base. Of all the MSP valuation drivers, this category has the most exceptions and some of the finest lines separating value enhancers vs detractors. However, based on our experience, the following categorization of target market and customer attributes holds true for most MSPs:

Sales Channels & Capabilities. We see successful MSPs with diverse go-to-market strategies, which typically depends on the core solution(s) the MSP leads with. For example, a nationally focused network and IaaS MSP will often find more success with a channel-focused strategy, as opposed to a local or regionally focused IT help desk MSP that may find more success with a combination of direct sales and targeted advertising. Here are some common attributes we tend to see across successful MSPs.

• Strong sales leadership and productivity generated primarily by the sales team or channels vs. owner executives.
• Productive sales channel / partner relationships that generate consistent results.
• Deep sales engineering and technology expertise aligned with target customer needs.
• Consultative sales approach that results in a catered solution as opposed to pushing specific products / services.
• Targeted marketing and advertising strategies that creates consistent inbound lead generation activity.

Quality of Service & Support. Having a great solution offering is meaningless if you do not have the service and support platform in place to keep customers happy and functional. Here are some of the key service and support-related attributes we see driving value:

• Attractive SLAs with the network, systems, and processes to meet them.
• High-quality, redundant network deployments engineered for high-availability and QoS.
• 24/7/365 support with knowledgeable technicians and rapid response times.
• Strong data protection and privacy policies with relevant certifications.

IT / Back Office Systems. While not usually a leading driver of valuation multiples, having a robust back office is a must-have for any MSP expecting a premium valuation. Automation, operational visibility, and scalability are a few of the important attributes investors and buyers evaluate (often via third-party IT diligence professionals):

• ERP systems that provide comprehensive, real-time views of KPIs and key historical data requested by buyers and investors.
• Easy-to-use, automated portals for partners and customers, frequently built on proprietary software platforms.
• Efficient/automated processes and systems for managing customer sale through billing and support.
• Scalable systems that can support aggressive growth strategies and rapid customer onboarding.

And there you have it! While not intended to be comprehensive, our hope is MSP owners and executives can gather some level of value from this and the rest of our four-part series.

About the Authors

Andrew Gaffney / Managing Director/ [email protected]

Andrew Gaffney has over 25 years of investment banking and corporate finance experience, leading numerous strategic transactions including mergers and acquisitions, recapitalizations and debt and equity financings. He has worked with clients in a range of telecom, media, and technology (TMT) sectors including cloud communications, managed IT services, network services and software. Andrew’s clients include Broadcore, Broadsmart, Clearspan, DeCurtis, IFX Networks, Meriplex Communications, NexVortex, OnSIP, Simple Signal and Telovations. Prior to joining Q Advisors, he worked at SunTrust Robinson Humphrey, a leading middle market investment bank based in Atlanta. Andrew received a B.A. degree in History from Washington and Lee University and an M.B.A. with honors from The Wharton School, where he was a Palmer Scholar. In addition, Andrew holds the Chartered Financial Analyst designation.

Dominick Robusto/ Vice President / [email protected]

Dominick Robusto joined Q Advisors in 2019. Previously, he executed numerous mergers and acquisitions, equity and debt financings, and strategic advisory engagements for clients across the telecom, media, and technology (TMT) industries with an emphasis on software and hardware technologies within the Internet of Things (IoT) sector at KPMG. Specific clients on whose transactions he has been engaged include 3M Company, Absolute Performance, Inc., Atlantic Metro, Cognizant, Control-Tec, Kiosk Information Systems, Smiths Group, Telco Experts, Ubisense Group plc, and WCS. Dominick received his MBA in Finance with Distinction from Texas Christian University and his B.S. from Trinity University. Dominick holds the Chartered Financial Analyst designation.