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MSP M&A: How To Make Yourself An Attractive Buyout Target

‘The primary thing that you could do to improve your value is to make sure that as much of the revenue that you have is coming from recurring sources,’ says Brad Badgley, director of M&A at Evergreen Services Group.

Mergers, acquisitions and channel consolidation are major trends impacting the channel today, leading partners to believe that increasing the top line and maximizing profitability are what will drive value.

But according to a group of M&A experts and solution providers at The Channel Company’s XChange March 2020 conference, that is simply not true.

If You’re Looking To Exit, How Do You Improve Your Value?

“The primary thing that you could do to improve your value is to make sure that as much of the revenue that you have is coming from recurring sources. So, you’re getting the same amount of money on a monthly basis,” Brad Badgley, director of M&A at Evergreen Services Group, told CRN.

Another point he made is making sure that you have a “respectable level of growth year-over-year.” But keep in mind, if there’s a lack of growth over time “that’s potentially a detriment to you.”

“The other thing is — and a lot of people don’t think about this — you don’t want to be too profitable. So, if we come into a business and we look at it and it’s like, ‘Hey, you’re making 50 percent EBITDA,’ where as the rest of the industry is making 10 or 15 on a good basis that’s probably not something that’s going to be sustainable by the new ownership,” Badgley added.

What Is Financial Fitness?

“As I went through and wrote my book I came up with eight value maximizers and these are things that every business owner needs to work on and focus on in preparation to selling their business,” said Linda Rose, technology M&A advisor and CEO of RoseBiz, Inc.

Rose told CRN that financial fitness is properly representing your financials and compliance with Generally Accepted Accounting Principles, widely known as GAAP.

“So you’re recognizing revenue, or matching revenue with expenses, you’re accurately deferring revenue for let’s say subscriptions that you’re selling for a 12-month period, you’re accurately stating your cost of goods sold… so that you can be benchmarked against peers in your industry, and a lot of partners don’t do that,” said Rose.

How prevalent is M&A in the mainstream channel?

“It is a frothy market, we’re seeing a lot of consolidation, a lot of roll ups and so when you look at the IDC, and the Forrester and the Gartner spending models for the SMB total addressable market is the largest it’s been in the history of the world,” said Jason Wright, director of technology and management consulting at RSM US.

As we continue to see disruptive technologies drive spending, Wright told CRN, it’s impacting every size solution provider, “not only for enterprise but for the SMB and mid-market.”

Watch CRNtv to learn how you can increase the value of your MSP business.

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