Acquisitions are a huge factor in the MSP space. Whether it’s the vendors the MSP works with, or the MSP themselves, mergers and acquisitions seem to be on a steady rise in recent years. Multiples are healthy and the economic uneasiness in the area has led many business owners to exit.
If you’re growing an MSP, selling or buying has undoubtedly been on your mind. In this segment, we’ll be discussing 4 key components to consider when growing to sell:
- Revenue Ratio
- Client Ratio
- Client Upsells
- Marketing Strategy
Revenue Ratio
Recurring revenue will receive a higher valuation than project/hardware revenue. An MSP looking to maximize their valuation should focus on growing their recurring revenue. Project and hardware sales are inventible and an important part of the business. However, you will not receive as high of an offer if your business is predominantly based on chasing the next project.
We have partners on both ends of the Spectrum. One partner stated that their project/hardware is 10X the agreement revenue for many of their customers.
We also have partners that focus most of their attention on recurring revenue. They no longer sell firewalls, switches, or access points, and have created agreements for each. They also sell a lot of cloud services, instead of replacing servers.
If revenue was the same between the two, the latter would undoubtedly receive a higher valuation.
Client Ratio
We’ve seen many MSPs where a single client makes up more than 20% of their total revenue. This is a dangerous scenario to be in. Not only does it impact the valuation, but it also puts your business at risk. With a good mix of clients, your valuation will go up, if you are charging appropriately.
Client Upsells
Our most successful partners have laid out all their clients into a service grid. This grid lays out every potential upsell and whether the client falls into each bucket. This service grid identifies which campaign they will run to their customers. For instance, if there are many clients that do not have your VoIP service, you can target and sell your customers on the move.
Marketing Strategy
As Henry Ford once said, “A man who stops advertising to save money is like a man who stops a clock to save time.” If you are not investing in effective marketing tactics, it will take significantly longer to meet your goals no matter how good your business is. Word of mouth works, but on its own time.
Have any questions on how a cloud offering can boost your recurring revenue and maximize business valuations? I’m here to help.
