Internet M&A: The MSP Company Valuation Dilemma

Internet M&A: The MSP Company Valuation Dilemma

Eric Furlow Eric Furlow

Eric Furlow

Technology Mergers & Acquisitions Advisor since 1996. "Hire someone with as many years experience doing their job as you have doing yours."

发布日期: 2018年1月18日
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By M. Eric Furlow

Article as seen on MSPInsights.com

Many years ago the tech world was filled with single product and single service companies, think long distance service, local phone, wireless paging, SMR, cable tv, dial up ISPs and a few others. This made company valuations relatively easy. The valuation metrics were based on dollar per subscriber, revenue multiples, EBITDA multiples, free cash flow multiples … of course with the many adjustments for large fixed assets, debt ratios, growth rates, profit margins etc.

In todays world there are still many single product/service tech companies, but more and more tech companies offer a bundle of services, yet still have a primary core service offering which accounts for a notable amount of their annual revenue. 

Managed Service Providers today offer many combinations of the following services.

(scroll quickly thru the following to get to my continued thoughts).

A/V (audio and visual services)

BaaS (backup)

BI

Big Data/Analytics

BPO

Cloud services

Connectivity

Content (creation, distribution, storage etc.)

Cyber Security

DaaS (desktops)

Data Center Services (design, construction, maint., monitoring)

Database (mgt., migration, analytics)

Dev Ops (dockers, containers)

Digital Signage

DRaaS (disaster recovery)

eCommerce (many services within ecomm)

eMAR (electronic medication administration record)

Equipment/hardware lifecycle mgt.

Fintech (many services within fintech)

Help desk

IaaS

IAM (identity and access mgt.)

IT Audit 

License mgt. 

Migration (customer and/or data)

Mobile (app dev, payments, advertising, ecomm)

Network (design, maint., monitoring, 

PaaS 

Satellite

Software Dev

Print Mgt. (document mgt.)

SaaS (the 1,001 flavors of a SaaS)

Security (facilities, network, data, cyber penetration testing etc.) 

Systems Integration, monitoring

Unified Communication

VAR

Vendor Relationship Mgt.

VoIP-Hosted PBX

VPN

Web (DNS, Domains, Hosting, Design/Dev, SEO, SEM)

Wireless (system design, maint. etc.)

And I probably I missed a few.

Sure, there are pure play SaaS operators and old school VARS, but most companies in the tech service sector today are offering a few of these MSP services. So, is every recurring revenue focused tech company now called a Managed Service Provider? It’s starting to look like that. This is not a bad thing or a good thing. It is just the new reality for 1,000’s of companies in the US and Canada. 

The main reason for this bundled or “a la carte” approach is, once a MSP has the attention of the client company’s “decision maker” it is very smart to sell them as many recurring revenue services as possible, AKA: get as much of the client's technology spend as possible … before one of their competitors does. (and we all know that recurring revenue is the holy grail of company value creation). Once these services are purchased, installed/implemented, taught and operational, many of them are hard to replace with a different vendor. In addition, look at this from a customer’s perspective … do they really want to have 10-12 IT service vendors? … or closer to 2 or 3.

So, what in the world do we do about company valuation when each MSP is offering a different combination, mix and weight of these services … hence there might not be a perfect company valuation comparable?

Well, the valuation dilemma is not on the sellside. If a MSP’s CEO/owner is selling their company, it’s easy … simply organize the presentation well, proactively market the company to a large pool of target buyers (slightly overpriced of course), then wait for the most interested buyers to grumble about the price and make their best offers. Of course, the process is more detailed than that, but you get it. 

           Side note: These are 2 articles I wrote on this exact topic

·     A perfectly overpriced, initial “business asking price”

·     There are 4 company valuations for every Internet Service Company                                

The company valuation dilemma is on the buyside (or investment side). If a CEO/owner or an individual investor is acquiring a company or making an investment in one, the valuation challenge can be far more difficult because too many times private company merger and acquisition valuation information is incorrect or misleading. 

For example,

·     In news releases the total price might have been revealed but the deal structure was not. In a $20mm deal, 75% of the $20mm could have been spread out over 3-5 years. So, was this really a $20mm deal? … no. 

·     Or, in what appears to be a very high price paid for a company with $50mm in annual revenue, what the public doesn’t know is that a small $20mm data center and associated real estate was included with the deal.

·     Or, if the CEO/owner asked other people for valuation information on their deals or deals they heard about … more times than not, they are not told the compete truth. If you think people exaggerate about their golf scores or how many fish they caught last weekend, you should hear some former owners talk about their past deal information. 

In closing, when CEOs/owners are on the buyside they should stay “old school” with discounted cash flow analysis models, and pay special attention to any downward trends with any of their many services. Just because target companies are more complicated than they used to be, doesn’t mean the simple foundations of company valuation can’t remain the same.

Please feel free to Tweet, Like, Share, or Smirk and Smile.

FYI, I send out a “Weekly Internet M&A Deal List”. This list contains between 30-40 deals. Each week it is sent out to 1,000s of Internet executives and financial buyers around the world. If you would like to see the latest copy, message me. If you would like to be added to the auto weekly version, you can either sign up on my web site or message me and I will add you.

Click here to view my other articles … below is a list:



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