Managed Services Providers: 2022 M&A Trend for Sellers – Part 3

Read the original article here.

 

Thesis: The managed service provider market continues to be a hot M&A trend for sellers in 2022, and is expected to remain so for the balance of this decade. The MSP sector is moving at light speed, with consolidation becoming a consistent theme. In this article, we share what you should know and how you can prepare for the sale of your consultancy.

 

Sellers still dictate the tempo

The shortage of technical talent, the pressure for continued growth, and a reduction of costs are simultaneously putting pressure on smaller MSPs to build, buy, partner, or sell.

 

The market is currently characterized by the logic of “acquire or be acquired, “which in many cases still favors the seller.

 

Key requirements for selling your business

What should you pay attention to if you want to market your MSP business?

 

  • Recurring revenue: Investors are looking for 1-3 year contracts generating strong recurring revenue in excess of 50-60%.
  • Automated processes: Investors are seeking companies with advanced automation, typically looking for consultancies where processes are centralized and automated so daily operations run without high overhead.
  • Diverse service portfolio: This is especially beneficial for platform-oriented companies, as most buyers prefer companies whose service portfolio includes cybersecurity, project-based tasks, cloud infrastructure, and other managed services elements (preferably in a balanced ratio).
  • Customer Concentration: To mitigate risk, buyers prefer no one customer makes up more than 10-15 percent of total revenue. This provides assurances that the seller’s business has a better chance to remain stable 24-36 months post sale.

 

Valuation factors

Current deals are characterized by a high cash ratio even with low sales and EBITDA, but the earn-out structure appears in nearly all transactions. In this scenario, the buyer establishes a target EBITDA value or revenue target that the business must achieve during the following 2-3 years to award the remaining transaction value.

 

However, there are no established industry standards for what multiplier to use to add management performance and expertise to the enterprise value. The leadership of a spectacularly poorly managed company represents an additional risk that will certainly have a negative impact on the transaction value. At the same time, senior management comprised of seasoned experts may be a significant value-enhancing component. This is a 2022 M&A trend for sellers we are seeing now.

 

If you are contemplating the sale of your MSP/IT consultancy, let’s talk. ITX has completed 200+ IT-enabled transactions in more than 20 countries during the last 25 years.

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