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Oct. 6, 2022

4 Financial Value Drivers For Managed Service Providers (MSPs)

4 Financial  Value Drivers For Managed Service Providers (MSPs)
  • Revenue Growth: While demonstrated revenue growth and a solid pipeline will lend itself to higher valuations, the quality of that revenue growth is also important. Growth in the rearview mirror is the price of admission to enter discussions, but buyers care most about what happens after the acquisition of your MSP. Monthly recurring revenue (MRR) growth is the most important factor with non-recurring revenue tied to MRR clients acting as a bonus for buyers. The ability to grow quality revenue streams demonstrates ownership of customer, defensible position and meaningful wallet share. And unlike standard IT services businesses, buyers of MSPs expect annual growth to exceed 15%. 
  • Gross Margin: Gross Margin is one of the most important lines on your P&L and is the way buyers measure how efficiently your MSP makes money. An ideal gross margin target is 50%+ with the ability to maintain or increase that number while growing revenues. Buyers of MSPs will evaluate the consistency of month-to-month gross margins in order to understand how much of every revenue dollar flows to the bottom line. A consistent gross margin above 50% demonstrates good quality of revenue and bill rates versus cost. It’s the best starting point toward achieving an optimal net profit. And with cash flow being critical to growth and sustainability, higher gross margins directly affect cash flow.

  • Predictable Cash Flow: All buyers want to mitigate as much risk as possible before pulling the trigger on an acquisition. High recurring revenue models solidify predictable cash flows, and demonstrate a sustainable business. For MSPs, MRR and ARR is the income that will be received every 30 days or annually based on collecting subscription fees for services rendered. Buyers love steady cash flow vs. the traditional IT services model that is lumpy due to fluctuating project-based assignments. MRR also demonstrates a scalable model for continued growth, simplifies expense management (easier to increase or reduce expenses to match revenues), and provide excellent visibility based on a durable forecast. NOTE: The longer the annual contract, the better the valuation.

  • Scalability for Growth: All buyers project various growth scenarios before making an acquisition. To mitigate risk, buyers of MSPs need to feel confident that the target acquisition can scale. Can you take on increased workloads in a cost-effective way, without burning your employees out or fail in execution? A solid operating system, use of automation tools, proven business procedures and a balanced bench of delivery personnel create an environment capable of handling growth. In many cases, a scalable business model creates a platform for additional acquisitions. These platform MSPs subsequently trade at higher values.

 

Looking for more information? Curious how this applies to your MSP? Visit www.itexchangenet.com/marketplace-how2exit