How Are Managed Service Provider
(Technology) Businesses Valued?
BUSINESS VALUATION IN TECHNOLOGY, SPECIFICALLY MANAGED SERVICE PROVIDERS
Introduction: This article was written by Daniel Welling of Welling MSP Ltd, a consultancy catering for Managed Service Providers (MSPs). MSPs are firms that remotely manage their clients’ IT infrastructures.
The comments, views and advice in the article below are the author’s personal opinions and do not necessarily reflect the views of iTABB or any associated companies.
What is a business worth?
“It’s worth what someone is prepared to pay for it; so what would you pay for it?”
1. This article is based on experience of the MSP market and therefore should only be applied to the MSP, Managed Service Provider, IT Support Business market place in the UK.
2. Articles on this site, and elsewhere, may conflict with this very article.
3. The MSP market place in the UK has a huge ‘tail’ of small businesses, most below £2m in revenue, and that is where this article is aimed, as larger businesses will already be familiar with the topics explored here.
4. My options are informed by my own experience and the experiences of other MSP buyers and sellers that I have been fortunate enough to discuss M&A with. Your perspective may of course be different.
Who am I? I do not identify as a business broker or transfer agent, more a mentor and general advocate of the MSP market place. Most of my income now is derived from mentoring, however having sold an MSP (in the tail), subsequently worked on the buy side for due diligence and integration, and more recently been engaged in buy side off-market deal generation, I have plenty to say about M&A in the MSP space.
Primarily, the mist I wish to cut through is around ‘valuations’ and in doing do I wish to provide MSP market specific guidance. This is not a pricing mechanism though, and I will discuss that later on.
The MSP Tail
First, let’s set the scene of the MSP tail
When it comes to M&A, there are many players involved, including Business Brokers, Finance Brokers, Investors, Staff and Customers and others. However for this article I am focusing on Sellers, Buyers and Valuation.
The Seller's Perspective
The Buyer's Perspective
The Qualification Anchor
My Valuation Methods
Based on my own experience and speaking with M&A active MSP peers; these 4 approaches can triangulate a ‘fair’ number:
All approaches are plus/minus Net Assets (i.e. minus debt or plus retained profits).
Here is a valuation example to demonstrate.
Target business facts:
Valuation examples using the various methods above:
1. £400k (estimated ‘contracted’ revenue on a £1m t/o and not taking account of one time products sales like PCs and ad-hoc services such as installation/projects, again which could be considered one-time).
4. £600k (this is a guestimate as facts’ are limited!)
Price Effects On Valuation
There’s risk & reward for both parties, so they need to think about
In conclusion, let’s go back to the beginning and substitute your numbers in the example valuations. It’s worth what someone is prepared to pay for it; so what would you pay for it?
Questions, comments and observations? You can reach me, Daniel Welling, at Welling MSP.