Company's Real Worth
Has every MSP founder really sold their company for 10-12X EBITDA?
Crestview Group
What is Your Company Really Worth?
M&A is certainly a hot topic in the industry today! Valuations and EBITDA multiples seems to be a focus of discussion everywhere, including industry conferences. Has every MSP founder really sold their company for 10-12X EBITDA?
Well, probably not!
Valuation ranges are often by MSP
The good news is that there are well known industry valuation benchmarks, based on the size of a company and key financial metrics and business profile. The following types of valuation ranges are often referenced by seasoned MSP buyers:
- Small MSP: $2.5 M revenue; $0.5 M EBITDA. Valuation: 4.0 to 5.5 x EBITDA
- Mid-sized MSP: $6 M revenue; $1.5 M EBITDA. Valuation range: 7-9x EBITDA
- Large MSP: $13 M and $3 M EBITDA. Valuation range: 10-12x+ EBITDA.
It is important to note that two companies can look very similar, but have dramatically different valuations, based on financial and business criteria, industry specialization and technical capabilities as noted below.
| MSP 1 | MSP 2 | |
|---|---|---|
| Revenue | $5 Million | $5 Million |
| Profit | $0.5 Million | $1.5 Million |
| Recurring Revenue | 50% | 85% |
| Cybersecurity Capabilities | At or Below Industry Average | Top Tier |
| Industry Specialization | No | Deep expertise in 1 or 2 end markets |
| Regulatory / Compliance Capabilities | No | Top Tier |
| Customer and Employee Retention | Low | High |
| Estimated Valuation | ||
| EBITDA Range | 4.0 to 5.5 X | 8 to 10 X |
| Valuation Range | $2 to 3 Million | $12 to 15 Million |
| Cash Portion of Valuation | 50% | 80% |
| Deferred / Future Consideration | 50% | 20% |
Note, EBITDA is a measure of profitability that takes into consideration the operating profit of a business if it was operated by a new owner. Interest, tax and depreciation expenses, which are discretionary to the current owner are removed, so EBITDA is generally higher than ordinary net income.
How do Buyers Value MSPs and IT Services Companies?
Valuation of technology services companies, particularly Managed Service Providers (MSPs) and cybersecurity firms, is a complex process influenced by a myriad of factors. These businesses operate in a highly dynamic environment where technological advancements and cybersecurity threats evolve rapidly. Understanding the key factors that affect their valuation can help stakeholders make informed decisions. Here’s a detailed exploration of these factors.
1. Revenue Consistency and Growth Potential
Revenue is a critical metric for valuation. For MSPs and cybersecurity companies, recurring revenue models, such as subscriptions or long-term service contracts, provide a predictable income stream and are highly valued. Investors look for steady growth in these revenue streams and the potential for expansion in new markets or through new services.
2. Customer Diversity and Relationships
A diverse customer base reduces the risk of revenue concentration in a few clients, which is a positive factor in valuation. Long-standing customer relationships and high customer retention rates indicate a reliable revenue stream and effective service delivery, enhancing company value.
3. Profit Margins and Cost Structure
Profitability, particularly EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), is crucial. High profit margins in MSPs and cybersecurity firms are often driven by scalable solutions that do not require proportional increases in costs with revenue growth. Companies that demonstrate efficient cost management while scaling operations tend to attract higher valuations.
4. Technological Expertise and Intellectual Property
The technical expertise of the workforce and the ownership of proprietary technologies or intellectual property can significantly enhance a company’s valuation. Innovations that offer competitive advantages or entry barriers in areas like cloud infrastructure, artificial intelligence in cybersecurity, and automated IT services are particularly valuable.
5. Regulatory Compliance and Industry Certifications
Compliance with industry standards and regulations, such as ISO certifications or compliance with frameworks like GDPR for data protection, reassures potential investors of the company’s commitment to best practices and risk management. This compliance can elevate a firm’s reputation and reliability, thereby increasing its market value.
6. Market Position and Competitive Landscape
A leading position in a specific market or niche can greatly enhance valuation. This includes having a strong brand, unique service offerings, or a dominant market share. Conversely, a highly competitive landscape with many players can pressure prices and margins, potentially lowering valuation.
7. Scalability of Services
The ability to scale services efficiently without a significant increase in costs is crucial. Technology service companies that have automated processes, robust IT infrastructures, and effective training systems in place to quickly adapt to increased demand are often valued higher.
8. Strategic Partnerships
Strategic partnerships with software vendors, technology companies, and other service providers can enhance a company’s service offerings and market reach. Such collaborations can also provide competitive advantages and access to new customer bases, impacting the firm’s overall valuation.
9. Cybersecurity Risks and Incident History
For cybersecurity firms and MSPs, the ability to manage cybersecurity risks is intrinsic to their business value. A history of successfully repelling attacks and managing data breaches enhances reputation and reliability. Conversely, firms that have experienced significant breaches may face valuation discounts due to perceived risks.
10. Exit Strategy and Market Conditions
The exit strategy for investors and the current market conditions also play a role in valuation. A buoyant market with strong demand for technology services can lead to higher valuations, influenced by general investor optimism and availability of capital.
Conclusion
Valuation of MSPs and cybersecurity companies is influenced by numerous factors that interplay to define their market worth. Stakeholders need to carefully assess these factors to align their business strategies with market expectations and enhance their company’s valuation. Whether planning a sale, seeking investment, or aiming to improve market position, understanding these valuation drivers is crucial for business owners.