Valuation Models for MSPs

The subject of valuation models for MSPs is coming up in discussion more frequently and I see a lot of people with hugely different valuation multiples; so many that I though I'd clear the air. The first thing everyone must understand is there are valuation models that favor buyers and there are models that favor sellers. Because these models almost never yield the same number, we are forced to create a third model that more closely approximates the true value of a managed services practice (for those of you who want to skip to the end and see what that model is...come to the M&A Workshop on February 4). 

One of the inconsistencies of a "buyer's" model is that it relies heavily on EBITDA. I say this is a buyer's model because it assumes a MSP has net income. When most small MSPs run their practice as close to breakeven as possible (to minimize tax exposure) this EBITDA number tends to be very small. Therefore, a buyer will generally have a lower price with a EBITDA multiple.

On the flip side, a seller tends to favor a top line revenue approach as this number will exclude profitability and focus on their ability to generate revenue. Naturally, this excludes some very important operational factors and will never produce a very accurate valuation number. 

Therefore, I have created a blended approach that takes into account both top line revenue and EBITDA, as well as many other operational factors to produce a very accurate valuation for the MSP practice. In the end, no matter what people are saying the going multiple rate is in managed services, if a bank won't finance it or an accountant can't wrap their head around the valuation number, it probably isn't a very good valuation model being used.

Yeah, buyers want to buy MSPs cheaply and sellers want a lot more than they are worth. Somewhere in the middle the truth can be found. Oh, and come to Dallas, TX on Feb 4., we'll be going into a lot more detail about this model during the workshop.