The rollercoaster ride of the pandemic and its subsequent economic challenges has undoubtedly impacted MSP owners — and likely your own business and employees as well. Intrepid spirit, ironclad nerves, and a problem-solver ethos helped you achieve success in building your MSP. But after the past few years, you may be asking yourself if it’s the right time to sell your MSP. The answer to that question is surprisingly complex but manageable for enterprising MSP owners.

Amy Luby, Founder of Modern MSP

AUTHOR: Amy Luby, Founder of Modern MSP

Market uncertainty and hiring challenges have likely driven a greater workload for you and your team. While MSPs are growing rapidly in nearly all 50 states, cybersecurity threats are keeping in lockstep with that rate of expansion. Some 57% of tech executives surveyed by CNBC reported that finding qualified employees is the biggest concern for their company right now. And as if that weren’t enough, nearly 72% of U.S. tech workers polled in a recent survey said they were considering leaving their jobs in the next 12 months. Suffice to say, running a growing MSP is full of uncertainty right now.

While working in a rapidly expanding market is always preferable to working in a dying industry, you just might be ready for a different pace in your career or life. If you find yourself considering retirement or a lifestyle change, the urge to sell your MSP may be overwhelming. Here are some elements of the sale process that may provide more clarity.

If you’re thinking of selling your MSP, the time to prepare is now — even if a potential sale is years in the future.

Putting a price on your MSP

Business owners examining the prospect of selling their MSP must first arm themselves with its true market value. Nailing down a realistic number can be nerve-wracking and a little overwhelming. Like real estate and many other things, your MSP is worth what someone is willing to pay — so that may not always match your expectations. The formula for setting your MSP’s value can be a complex and dynamic process; however, you can help set realistic expectations for what your MSP is worth with a few key indicators of value.

Merger and acquisition (M&A) experts typically value a company using a formula of earnings before interest, taxes, depreciation, and amortization (EBITDA). A quick formula for EBITDA is to add your net income to the interest, taxes, depreciation, and amortization. MSP valuations can run the gamut from three to 10 times the EBITDA, depending upon several environmental factors.

Subtle changes in the EBITDA calculus and other variables can stymie overall valuation. Examples of these include:

>>  A small average contract size compared to the industry average

>>  A low percentage of Monthly Recurring Revenue (MRR)

>>  Less than normal customer retention rates

>>  Small growth year over year

>>  Physical operations centered in economically disadvantaged geographic regions (signals lower growth opportunities)

As you examine key factors determining your MSP’s value, you may not be thrilled with the current outlook. The next ideal step will be to start adding value to your MSP. The good news is that’s probably a smart move even if you never sell it!

Adding value to your MSP

To boost your MSP’s value, you’ll want to start by addressing your EBITDA. This loaded acronym tells investors a lot about your company and can quickly draw in or repel potential buyers. Higher EBITDA is tied to higher multiples for valuations.

Net profit margin is another key factor in showing your profitability to potential investors. After all, just 30 percent of MSPs believe they’re doing a good job of maximizing net profit margins, per CompTIA.

Small differences in net profit margin can have big benefits for MSPs looking to sell. For example, let’s assume you have a $1.2 million hypothetical EBITDA. If nothing changes about your net profit margin, your valuation may end up around four times the EBITDA — or $4.8 million. But if you boost your net profit margin just six points from 17% to 23%, for example, your MSP’s valuation could rise to $6 million. So how can you increase the net profit margin? The name of the game is efficiency. You may need to automate additional processes, offload unnecessary expenses, or reassess resource utilization across the company.

Another solid tactic is boosting your MSP’s recurring revenue. Start with client retention — an obvious way to increase cash flow and attract potential investors. Assess performance over the last three to five years and note any high rates of attrition or customer complaints. Whatever the reason for losing clients — and there are several possibilities for this — you must identify and address those issues within your organization as soon as possible. If the business is fueled by MRR, and not bluebird projects, it sends a clear signal to investors that the future forecasts are based on reliable repeat business, which means your MSP deserves a higher valuation.

Related Content – Year-End Financial Planning for MSPs

Looking toward a sale

If you’re thinking of selling your MSP, the time to prepare is now — even if a potential sale is years in the future. Planning and patience are essential for effectively implementing industry best practices that can drive the business forward long after you’ve retired to a beach house or island paradise.

Start by knowing what you’ve built. Your MSP has a unique story, specialized capabilities, and exclusive relationships that deserve a prospective buyer’s attention. To secure the highest valuation, spend a few years optimizing your MSP’s operations into an efficient, well-oiled machine with cash flow and an in-demand portfolio that grabs investors’ attention. You may consider moving to a specialized billing platform, streamlining operational workflows, or eliminating waste and inefficiency by implementing stronger financial practices.

Finally, remember that you spent all this time and effort building something extraordinary. Exercise your power. Decide what type of investor would be the best fit for your company and do the necessary things to catch their attention.

If you have more questions about buying or selling your managed services business, ask your peers in the Modern MSP Facebook Group.