The managed services space is hot. With increasing demand for IT solutions and expertise, and rising support requirements as more companies continue to shift to remote and hybrid work environments, the value of a well-run MSP business has never been higher. Investors and acquirers understand the potential of the managed services market, and many are jumping at the opportunity to buy and ride that wave of growth, rapidly scaling revenue and profits.
Now is the perfect time for desiring MSPs to cash in—under the right conditions. As any savvy business owner would expect, investors are not looking to buy just any technology business. One of the more proven approaches is to start with one or more highly successful firms with solid key performance indicators (KPIs) and optimal backend processes. Once those businesses are under control of the new owners, those investors may expand into new geographies or specializations by acquiring underperforming yet high potential MSPs. Implementing best practices across the combined organizations improves efficiencies and raises profits.
Sales opportunities and healthy KPIs are key. A highly scalable MSP not only offers tremendous revenue growth options, but it optimizes its people, processes, tools, and other resources. Those firms provide the best-case scenarios to those looking to acquire or invest in the managed services space. MSPs need to create solid ROI opportunities for potential owners and investors to get the most value from their businesses. There is no real secret to M&A success—it’s about dollars and using common sense.
That’s why 2023 has the potential to be a big year for managed services mergers and acquisitions. Recurring revenue and long-term contracts reduce risks for investors. While other industries reduce their workforces in uncertain times, successful IT services firms typically experience sales growth. Businesses can significantly trim their payroll expenses by outsourcing IT support, infrastructure, cybersecurity and other technology services, especially as costs rise to hire and retain those professionals.
Gartner predicted worldwide IT spending will hit $4.6 trillion in 2023, a 5.1% increase over previous years’ gains, and someone has to make it all work. More organizations may be open to outsourcing at least a portion of their technology support dollars. That spells opportunity for MSPs.
Raise Your Firm’s M&A Profile
Demand and growth potential are just a few reasons why MSPs are gaining more investor attention today. Managed services valuations are rising based on several factors, including:
- Strong recurring revenue streams.
MSPs typically focus a lot of time and attention on boosting cash flow. Whether shifting attention away from one-time projects and infrequent hardware sales to more predictable income, or developing new “as-a-service” opportunities, IT presents a number of possibilities for driving new income streams. The math is quite simple: increasing cloud and monthly support contracts raises monthly recurring revenue (MRR). Those steady income streams are what many investors need to fuel expansion plans and generate a long-term ROI.
- Robust contracts.
Prospective investors scrutinize managed services agreements to determine the MSP’s true financial outlook. The longer and stronger the contract, the less risk. Effectively crafted managed services agreements detail the deliverables for each side and the penalties for potential failures, effectively defining the relationship, rules, and payment timelines and processes. Providers need to periodically review all these documents and templates with their accounting and legal teams to ensure everything is up to date. Liability, length of contracts, and collections methods and tools should be a major focus during those meetings.
- Service offerings.
Closing larger deals with existing and prospective customers is the most effective way to boost revenue. Suggesting complementary incremental solution options to sales proposals boosts client awareness—MSPs get an opportunity to educate decision-makers on the benefits of each selection. For example, including cloud backup solutions to all new and renewing contracts helps spur conversations on the cybersecurity and business continuity needs of their business. The incremental revenue also boosts the value of the MSP for potential M&A activity.
- Cash flow.
Effective billing and collections processes can further strengthen an MSP’s valuation. Without constant attention, even the most successful providers can run into cash flow issues, especially when rapidly scaling operations and onboarding new clients. Strengthening collections policies and procedures, and capitalizing on automation and integrations, helps providers quickly convert more of their monthly recurring revenue into cash, which also increases the company’s valuation.
- Skilled employees.
Potential stakeholders look for companies with strong skills sets, high growth potential and staff stability. MSPs with positive HR plans and active training and retention programs typically draw more attention than unstructured firms with haphazard personnel policies. A strong staff reduces investor risk. Many buyers want some type of assurance that the MSP’s most skilled team members will remain after the sale.
- High customer satisfaction and client retention.
Happy, long-term customers are a high-value asset for MSPs. Many prospective buyers will closely scrutinize account turnover and satisfaction scores to minimize the risk of losing clients following a merger or acquisition. Implementing customer satisfaction scoring applications helps MSPs identify and manage potential problems before seeking potential investors.
Get the Best Possible Return
Achieving maximum valuation should always be a top priority—the greater the price tag, the more financial security for the principals. Of course, there can be other considerations, such as continued employment for the seller and current team members or a stake in the acquiring company. Raising an MSP business’ value provides owners with many financial opportunities.
Equity is power. MSPs should work hard to ensure their business commands top dollar if and when the time comes to sell. Enhancing the revenue and profit potential of the firm also creates interest from potential M&A partners, including investors and buyers. The stronger the company’s cash flow, staff, contracts and customer satisfaction, the higher the valuation. Even if you have no plans to sell, MSPs that are built to sell are usually also great to keep and run. They’re efficient, yield high margins and a return on assets.
Will 2023 be the year you sell or bring in new investors for your MSP? With demand for IT services growing and M&A partners ready to pull the trigger, it might be the right time to consider your options.
As you review your MSPs value and measure KPIs, don’t confuse outstanding accounts receivable with revenue. Money is only considered revenue after it’s exchanged hands and resides in your bank account. ConnectBooster has helped thousands of MSPs automate getting paid for predictable cash flow.
Request a demo to learn how ConnectBooster can help your MSP drive down A/R, and save time and money so you can focus on growing your firm and its value.