It's Not About the Multiple; It's How you Get There

This could very well be the most useful blog I’ve ever written (just kidding, but it is really important). Based on the volume of feedback I am getting from both sellers and buyers, I’ve touched a nerve regarding the valuation of managed service provider businesses. There are lots of people calling/emailing me (both buyers and sellers) either patting me on the back or asking me how I arrived at my conclusion.

Part of my training is to understand the underlying issues and determine if there are any recurring themes that can be applied. It has occurred to me that there are a lot of people talking about M&A valuations in managed services and very little commonality when it comes to the terminology being used. This is likely the cause of all the hubbub around my valuation blogs. I’ll attempt to explain.

In math class, many of you remember that to simply provide the answer is not enough. My math teachers would always ask to see the work. The work, as they called it, was the supporting documentation for how I arrived at the mathematical answer. What I remember most is that there are frequently several ways to arrive at the same answer; you just need to show your work. The same is true in managed services.

Too many people are running around throwing out multiples and hoping that they stick. “I heard this MSP sold for this multiple; or I heard this MSP bought a company for this multiple” This kind of talk is virtually useless as it does nothing to advance the theory of managed services valuations. How you get to the multiple IS EVERYTHING! If you tell me your company is worth a certain multiple, you’d better be able to support it with documentation (i.e., a theory).

MSPs, both buyers and sellers, are positioning themselves for a very busy year in 2010, and the posturing is already beginning. The smart players would do wisely to forget about coming up with a multiple and instead focus on a valuation model that is repeatable and based in logic. Only then will we see make sense of the valuations being used.