By M. Eric Furlow of Furlow Consulting LLC
Many years ago the tech world was filled with single product and single service companies, think long distance service, local phone, wireless paging, SMR, cable tv, dial up ISPs and a few others. This made company valuations relatively easy. The valuation metrics were based on dollar per subscriber, revenue multiples, EBITDA multiples, free cash flow multiples … of course with the many adjustments for large fixed assets, growth rates, profit margins etc.
In today’s world there are still many single product/service tech companies, but more and more tech companies offer a bundle of services, yet still have a primary core service offering which accounts for a notable amount of their annual revenue.
Managed Service Providers today offer many combinations of the following services.
And I probably I missed a few.
Sure, there are pure play SaaS operators and old school VARS, but most companies in the tech service sector today are offering a few of these MSP services. So, is every recurring revenue focused tech company now called a Managed Service Provider? It’s starting to look like that. This is not a bad thing or a good thing. It is just the new reality for 1,000’s of companies in the US and Canada.
The main reason for this bundled or “a la carte” approach is, once a MSP has the attention of the client company’s “decision maker” it is very smart to sell them as many recurring revenue services as possible … before one of their competitors does. (and we all know that recurring revenue is the holy grail of company value creation). Once these services are purchased, installed, taught and operational, many of them are hard to replace with a different vendor. In addition, look at this from a customer’s perspective … do they really want to have 10-12 IT service vendors? … or closer to 2 or 3.
So, what in the world do we do about company valuation when each MSP is offering a different combination, mix and weight of these services … hence there might not be a perfect comparable?
Well, the valuation dilemma is not on the sellside. If a MSP’s CEO/owner is selling their company, it’s easy … simply organize the presentation well, proactively market the company to a large pool of target buyers (slightly overpriced of course), then wait for the most interested buyers to grumble about the price and make their best offers. Of course, the process is more detailed than that, but you get it.
Side note: These are 2 articles I wrote on this exact topic
The company valuation dilemma is on the buyside (or investment side). If a CEO/owner or an individual investor is acquiring a company or making an investment in one, the valuation challenge can appear far more difficult because too many times private company merger and acquisition valuation information is incorrect or misleading.
In closing, when CEOs/owners are on the buyside they should stay “old school” with discounted cash flow analysis models, and pay special attention to any downward trends with any of their many services. Just because target companies are more complicated than they used to be, doesn’t mean the simple foundations of value can’t remain the same.
Eric Furlow, is the president of Furlow Consulting and since 1996 has been assisting corporations & individuals acquire, divest and value Internet service companies such as: MSPs, web hosting, cloud services, IaaS, SaaS, eCommerce, VAR’s, VoIP.