Guest Column | November 24, 2022

Sell Or Hold? The Big Choice For MSP Founders

By Parag Sheth, Progress Partners

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The pace of mergers and acquisitions in the managed service provider (MSP) space is stunning. In 2021, US-based private equity (PE) firms alone closed a record 4,121 middle-market deals for a total of $602.6 billion according to PitchBook. MSP deals hit $52 billion, says 451 Research—three times greater than in any previous year. 2022 is tracking to be almost as strong.

If you own an MSP in this environment, it’s hard not to consider selling your business or acquiring other firms. Having scaled and exited six businesses, most recently a tech-enabled services firm, I’ve been there. I’ve also participated in these transactions as a board member, venture investor, and today, a banker – all this to say, I understand your situation.

After pouring your life into a company, exiting isn’t an easy decision. You want the business and its employees to continue thriving. You also want a good return on what is likely the biggest transaction you’ll ever make.

The better you understand this M&A market, the better you can advocate for yourself and your team. So, let’s explore why the demand for MSPs is so strong, what the PE industry sees in MSPs, and the factors that determine your company’s valuation.

Demand Is Rising For MSPs

The global managed services market is expected to grow at a 13.4% CAGR, from $276 billion in 2022 to $731 billion in 2030. The key driver is cloud adoption.

According to a study commissioned by Cisco, 82% of IT decision makers have adopted the hybrid cloud. The rise of remote work during COVID-19 made cloud-based work environments essential but more complex from a security standpoint. Uncoincidentally, a survey by cybersecurity firm Acronis found that MSP leaders overwhelmingly expect revenue growth from managed security and cloud-based managed services, but not software and hardware resale, network services, or traditional support.

Meanwhile, shortages of technical talent have encouraged organizations to automate processes in the cloud. But of course, moving workloads to the cloud requires technical talent that organizations can’t hire. In a fall 2021 survey of IT executives, Gartner found that the talent shortage was the most significant adoption barrier for 64% of emerging technologies, up from 4% in 2020.

For most firms, outsourcing to MSPs is more expedient than bringing these capabilities in house. PE firms are counting on it.

How PE Firms See MSPs

PE firms see a massive opportunity to acquire, bundle, scale, and resell MSPs. But growth alone didn’t lead PE firms to pile into the industry. The other key reason is recurring revenue.

Most MSPs are evolving from project-based business models to SaaS and subscriptions. PE firms view the cloud SaaS model as highly scalable and capital efficient. Indeed, Bessemer Venture Partners estimates that leading cloud companies turn $1.2 of investment into $18 of enterprise value in 12 months, on average—a multiple of 15x.

It doesn’t hurt that as of June 2022, US-based PE had $948.9 billion in “dry powder” according to PwC. Their investors (aka, limited partners) expect that capital to be deployed.

Thus, MSP owners are in favorable M&A conditions with multiple bidders likely. But what valuation could your business fetch?

What Makes A Strong MSP Valuation

Different from publicly traded SaaS, which started sliding late in 2021, MSPs have largely held their value. Firms can live without their umpteenth SaaS collaboration platform, but most cannot dispense with the firms that manage their cloud infrastructure, security, network, and more. Thus, MSPs are seeing a broad valuation range, anywhere from 5-15x EBITDA multiples – depending on a variety of factors.

Valuations are science and art, quantitative and qualitative. On the quantitative side, the highest multiples go to MSPs with over $50M in revenue, three to five years of high recurring revenue (50% or more of the total), broad revenue distribution across their client base, 15% or greater year-over-year growth, and EBIDTA margins in the 20% to 25% range.

On the qualitative side, acquirers want to see that you’re focused on critical services—security and cloud versus, say, videoconference and printing. They also put a premium on stable, long-term management teams and a base of high-growth and enterprise clients.

Asking a banker for a valuation has no downsides. At worst, the feedback will help you optimize your valuation.

Many Ways To Exit

There’s no single way to exit an MSP. It doesn’t mean retirement unless you’re ready. It doesn’t mean leaving your team out to dry. You can stay involved in your business, advocate for your team, and even carve out a role doing what you enjoy most.

Still, the question, “Am I doing the right thing?” can keep you up at night. I’ve been there. Just remember that selling your MSP doesn’t have to be the end. Rather, it could be exactly what you and your team need to reenergize and push forward. An exit is just an entrance to something else.

About The Author

Parag Sheth is managing director at Progress Partners.