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MSPs And Private Equity: What Makes An MSP Stand Out From The Pack?
Joseph F. Kovar
‘I think cultural fit is something that is extremely important. And in terms of the technical stuff, we look from a customer perspective at what customers want. We want to see really good retention rates. We want to see a diverse customer base,’ says Briton Burge, principal at Rosewood Private Investments.
Multiples Of Revenue A Poor Indicator Of Value
Garver said he tries to discourage people from thinking about the valuation of an MSP based on revenue.
“I think you need to bring it further down the line to have positive cash flow,” he said. “And the lenders on the sell side will go to companies like Deerpath Capital Management or Plexus Capital and get what’s called a leverage read and know, OK, when somebody goes to make a bid, we know the lender will give 4X leverage, as an example.”
When looking at the valuations of MSPs, one should think more in terms of how SaaS companies are valued, which is often around the “Rule of 40,” in which the total of a company’s growth rate plus its EBITDA percentage should be greater than or equal to 40.
“And you have to have at least one year experience on customer retention because to get the SaaS kind of valuation, you have to be able to prove that your retention rate is at 80 [percent], 90-plus percent,” he said. “And that’s really what got me into MSPs. At its purest form, the way someone like Briton thinks about the valuation of an MSP is just a derivative of how everybody values SaaS companies.”
