I keep hearing from managed service providers who are scouring the market for potential acquisitions. But that MSP trend appears to be the exception to the rule. The number of small businesses that were purchased/sold in Q1 fell by 36 percent compared to Q1 2008, and small business valuations are falling. Can MSPs really buck those macroeconomic trends?
First, a little background. I got the M&A data from Entrepreneur magazine. And the original information was culled from BizBuySell.com, an online marketplace where businesses are sold to one another.
Our own MSPmentor M&A Tracker suggests that MSP deals are still occurring. And during the 2009 HTG Summit in Dallas, attendees openly discussed how they were maximizing their company valuations.
Still, my M&A data points are anecdotal. BizBuySell’s data is far richer — and (I suspect) statistically valid. Among all small businesses that were sold on BizBuySell in Q1:
Revenue multiples for closed transactions dropped 5.5 percent to .69 in the first quarter of 2009, while cash flow multiples fell 3.8 percent to 2.69. Finally, the median business sale price for closed transactions decreased 17.3 percent to $165,500.
What does that mean for MSPs? I still hear that MSPs generating recurring revenue are being valued at 1.5 X to 2X their annual recurring revenue. So if you have $1 million in recurring revenue, you can likely fetch $1.5 million to $2 million for your business. But I do wonder: Are the numbers I’m hearing too optimistic? Are the multiples simply from wishful sellers who need to find buyers?
Silent Discussions
No doubt, phone lines have been buzzing across North America, as some small VARs and MSPs struggle with cash flow and call up neighbors to discuss exit strategies. And some larger deals — involving fast-growing MSPs — have been consumated. Azaleos acquiring M3 Technology Group certainly comes to mind.
But I do wonder: Are MSP valuation multiples falling? In other words, are MSPs fetching 1X recurring revenue today compared to 1.5X and 2X recurring revenue a year ago? If so, the market is likely filled with bargains, and the strongest MSPs should think like Warren Buffet: It might be time to buy high-quality companies at value prices.
MSPmentor is updated multiple times daily. Don’t miss a single post. Subscribe to our Enewsletter, RSS, Webcast and Twitter feeds.
Read More About This Topic
Share This Post
Posted In: Acquisitions
Tags: Azaleos | BizBuySell | Company Valuations | HTG Peer Groups | HTG Summit | M3 Technology Group | managed services acquisitions | Managed Services Mergers | MSP acquisitions | MSP Mergers | MSP Valuations | MSPmentor M&A Tracker
Interact: Add a Comment | Trackback Link | Permalink
Subscribe: RSS Feed
Take a look at our 
Joe, this is great info. Since I do some acquisition financing (but not much), my question would be are they all getting 1.5-2x Revenues as thats a nice multiple. I’m sure how good and tight the service contracts are is a factor too as well as the diversity of clientele.
Do you think cloud computing and all these great platforms will allow for national or at least regional MSPs instead of the dependence on the local mkt or just being local for the fixes that can’t be done remotely?
Stu
http://www.southernlendingsolutions.com
Generalizing about multiples can be a little dangerous. What are the MSP’s profit margins? What is the MSP’s growth rate? How long has the talent been with the company? How has customer churn been during the past one year and the past five years? There are so many additional questions beyond “what’s your annual recurring revenue”?
L.D.N.
MSPs in general, when compared against small businesses overall, benefit from good fundamentals that fuel M&A. Those include a tailwind from IT outsourcing, visibility into future cash flow from the recurring revenue model, and operating scale.
My perspective is that valuation multiples are down because many buyers still have higher sensitivity to risk, but deals can get done. Contrast that with other B2B markets where M&A activity has vanished because the recession hurts business directly and they have no visibility into the future.
John. Well said. Whether you’re trying to buy, sell or manage a business — long-term financial visibility is a huge advantage. And well-run MSPs are gaining that advantage vs. traditional resellers.
As someone who does the occasional acquisition financing, I find those multiples interesting. What I’m curious about is, aside from what is offered and accepted by the 2 parties, what makes for the low end and high end of the range?
Is it the length and strength of the service contracts? I’m not sure I’d want to pay 2x revenue if the contract terms didn’t extend at least another 2 yrs……
Just a thought.
Stu
http://www.southernlendingsolutions.com