MSP Valuations: Up-Front Conversations With Potential Buyers Key To Success

‘Building real relationships with a potential buyer gets you a level of trust where, ultimately, if and when you do decide you want to sell, you’re going to have a quicker outcome, a better outcome,’ says Zack Miller, co-founder and president of Worklyn Partners and MSP Harbor IT.

Trying to get the best deal when selling an MSP business depends on a wider range of factors that impact a company’s value rather than merely looking at the numbers.

Zack Miller (pictured), co-founder and president of Worklyn Partners, a New York-based holding company focused exclusively on cybersecurity and IT services as well as co-founder and president of New York-based platform cybersecurity MSP Harbor IT, Sunday told an audience of MSPs at the XChange 2024 conference in Orlando, Fla., that his company, which has acquired six MSPs in the last three years, takes the time to consider what is best for both the buyer and seller.

XChange is hosted by CRN parent The Channel Company.

“We’re not doing 10 M&A transactions a year like private equity-backed MSP rollups,” he said. “We’re really trying to go slow and steady and get each integration right and build something really special, and that is a national one-stop-shop provider of cybersecurity and IT services focused on the SMB and middle-market end customers.”

The MSP business is where many American small businesses get their cybersecurity, Miller said. “This is a really interesting space, and there’s a great opportunity for a buy and build strategy,” he said.

Every MSP owner has in the back of his or her mind the question of how to ensure they get the maximum valuation for their companies when they decide to sell their business, Miller said.

“If I were to impress one thing upon this group it’s to have conversations with buyers,” he said. “There’s a lot of buyers out there. A lot of private equity is probably calling you guys up every day, every week. Don’t take all those calls, but take half, or one a quarter, something like that. Because I think building real relationships with a potential buyer gets you a level of trust where, ultimately, if and when you do decide you want to sell, you’re going to have a quicker outcome, a better outcome,” Miller said.

“You have to think ahead,” he said. “Start with the exit in mind, like I said. Listen to the suitors. Take a call every quarter to find your buyer and exit universe. Try to figure out before you are actually selling the business what’s the right type of buyer for me?”

Miller identified a number of different types of companies that purchase MSPs.

Classic private equity firms, which are professional investors that may invest across all different industries but that invest directly in MSPs because of the chance to turn them into platforms that can then purchase other MSPs.
Private equity-backed strategic MSPs like New Charter that are looking to roll up other MSPs while keeping the acquired companies’ management team and may or may not have a long-term plan to keep the owners.
Independent sponsors that are MSPs focused on their own business and are looking to grow but may or may not have the capital to make the right kinds of acquisitions.
Growth equity, which are would-be investors that might acquire a 40 percent or 40 percent equity stake in an MSP and allow the current owners retain control.

“Why does private equity like MSPs?” he said. “I think the simplest, biggest reason is recurring revenue. MSPs are also asset-light and are connected to positive technology trends like cloud transformation and AI without being the technology itself because private equity is a little wary about the software companies. Private equity thinks, ‘Are these guys going to get disrupted by AI? Maybe the whole software model is in trouble with services?’ I think there’s a lot more certainty with recurring revenue contracts. That’s where private equity gets really excited.”

Selling an MSP takes time, Miller said.

“Once the LOI [letter of intention] has been signed and you kind of agree to the high-level terms of the deal, which should take a couple of weeks, it should take 60 days, give or take 30, to close,” he said. “Ninety days is not unheard of, especially if there’s a little more uniqueness to your business or your books are not really in order. But you should expect the buyer to kind of drive that process and tell you, ‘Hey, here’s the information I need. Here’s where you need to put it.’ And if you’re not getting that from the buyer, and you’re like, ‘Hey, I’m confused. What are you then looking for here?’ that’s a bad sign. The buyer should be the one pushing this process, telling you exactly the data that you need to provide, exactly where to put it, how to cut it. And if they’re not, maybe they’re not engaged enough. Maybe they’re running around talking to someone else. It’s not a good sign.”

When asked by an MSP in the audience about what multiple of EBITDA an MSP can expect, Miller said it depends on size and on recurring revenue.

“If you’re less than $1 million in EBITDA range, then certainly your multiple is going to be less than 10 on that EBITDA,” he said. “And for it to be closer to 10 than five, the reason would have to be because your revenue is highly recurring and you don’t have a lot of customer concentration. The truth is, multiples are all over the place. And you have to take what you hear with a grain of salt because structure also really matters. For instance, you may get four times EBITDA in cash and another four times in an earn-out. Well, is that an eight times multiple? Or is that a four times multiple? We don’t even know until two years after the deal closes.”

It’s important to negotiate as much as possible before signing the LOI, Miller said.

“Negotiate more up front in the LOI because then you’re shrinking the surface area of stuff you can be fighting about on the last day when you know tempers are maybe higher, or tensions are higher,” he said. “Hammer out all the data, as many details as you can, in the LOI.”

The strategies Miller presented will likely come in handy for Brian Prinkki, owner of Tech N Toner, an Upland, Calif.-based MSP that he is considering selling after it has supported his family and the families of his employees since he started running it in 1999.

“A lot of the strategies and pre-work, if you will, of setting up your business to be ready to sell and trying to identify what you think might be good for a buyer or prospective buyer, those tips are going to be good,” Prinkki told CRN. “A lot of times when you’re doing things like this, you want to seek outside validation that the process you’re going through is the right thing to do and the right sequence. It’s hard to see all the little items, but I think we’re doing the right things.”

Prinkki said he hopes to find time to discuss with Miller a unique part of Tech N Toner’s business.

“Many years ago, we established our business as a service-connected, disabled veteran-owned business,” he said. “And as such, we have the ability to sell into government contracts, federal, state and local at an extreme advantage. Some of the contracts we’ve utilized and done have been great. Others, not so much. But it's a unique position to be in and to be able to leverage that into a sale.”