Continuum CEO: 6 Steps MSPs Must Take To Increase Their Valuation

Becoming The Belle Of The M&A Ball

While many IT service providers historically were looking to operate a lifestyle business, it's easier to enlist other people if you're building a business of real value, according to Continuum CEO Michael George.

"If you're going to build a business of real value, it's likely you're going to realize that value, in one way or another, through an acquisition," George said Wednesday to more than 700 attendees at Navigate 2016 by Continuum in Boston.

Focusing on revenue growth and EBITDA, investment around cloud, telephony and application services and becoming a true virtual CIO to end customers are some of the most effective ways MSPs can maximize their value, George said.

Here's are six steps George said MSPs can take to make themselves the belle of the M&A ball.

Who's Looking To Buy An MSP?

The most common acquirer in the MSP space are large MSPs themselves with a national footprint and/or venture capital or private equity backing, George said.

"They've been terrific buyers for the space already," he said.

Office equipment dealers looking to build a big, meaningful footprint in the IT services space have been common buyers as well, George said. Telecom companies, regional VoIP resellers and competitive local exchange carriers (CLECs) have also swooped in and bought many MSPs, George said.

Finally, George said cloud providers looking to provide a complete ecosystem have also purchased MSPs to strengthen their position around on-premise solutions.

6. Respond To Problems With Scale And Immediacy Regardless Of Your Size

Prospective acquirers value MSPs that can respond to issues with breadth, scale and immediacy 24 hours a day, 7 days a week, and 365 days a year, George said.

An around-the-clock help desk and network operations center (NOC) through a provider such as Continuum can enable MSPs to look and act big while remaining small and nimble, George said.

5. Develop Recurring Revenue Services That Address Business Issues

Moving from project-based to subscription or annuity services completely changes the relationship between the solution provider and the customer, George said, providing greater stickiness and boosting client retention.

"They [potential buyers] don't value hardware sales," George said. "It's transactional; it's not repeat business."

Solution providers should focus not only on fixing client's technological issues, George said, but should also aim to proactively help them with business issues and end-user experience.

"Obsess over customer service," he said.

4. Become A Virtual CIO, Not A Trusted Adviser

Many solution providers have begun talking about serving as a client's virtual CIO rather than their trusted adviser, but George said the language has shifted far more quickly that the function and behavior of the IT channel.

If solution providers truly see themselves as part of the client's internal C-suite rather than an external actor outside of the organization, they need to begin truly acting that way, George said.

For instance, George said MSPs should offer to sit in the quarterly business review meetings of their 10 top clients for no additional costs.

"Become an integral part of the business," George said. "Act as an internal function to the business."

3. Develop Cloud, Telephony And Application Services

All MSPs should be able to provide clients with remote monitoring and management (RMM), backup and security services, George said.

"Those are all table stakes to be in this business in any meaningful way," he said.

MSPs can differentiate themselves, though, with knowledge around vertically focused applications, cloud adoption and implementation services and telephony or office equipment services, according to George.

"Your clients can't discern between data, voice and copy," George said. "It needs to all be part of that IT fabric."

2. Hire Salespeople, Not Technicians

In recent acquisitions, George said the value of salespeople has outweighed the value of lower-level technicians 10 to 1 since salespeople give the MSP ability to exponentially build or grow their business.

Buyers like to see account executives, system engineers and client advocates (who separate administrative functions from technical delivery) in potential acquisition targets since they are seen as retention experts, George said.

Some of Continuum's best sales executives don't had a technology or hardware background, George said, but instead are familiar with packaging items together and selling comprehensive solutions in areas such as life insurance.

MSPs can then take their remote technical engineering work and outsource it to organizations like Continuum since it's become commoditized, George said.

1. Get Combination Of EBITDA And Revenue Growth Above 30 Percent

Potential buyers closely examine the profit and loss statement of any acquisition target, George said, and like to see annual growth rates of between 15 percent and 20 percent and EBITDA (earnings before interest, taxation, depreciation and amortization) of between 10 percent and 15 percent.

Taken together, George said the combination of annual revenue growth and EBITDA needs to be at 30 percent or more.

"That's a highly valuable business," he said. "And that's the kind of business we want to help you grow."

Other metrics George said acquirers want to see include: cost of goods sold at less than 30 percent of total revenue; services gross profit margins of 50 percent to 55 percent; SG&A (sales, general and administrative) costs between 25 percent and 30 percent of total revenue; and marketing expenses at no less than 10 percent of total revenue.