Why MSPs Should Undergo Valuation Every Year

MSP TODAY NEWS

Why MSPs Should Undergo Valuation Every Year

By Bill Yates

Before you can sell your MSP, you need a professional valuation. In fact, attendees at MSP Expo 2022 in Fort Lauderdale, FL, heard that MSP owners should value their firms on an annual basis

Why bother valuing your MSP at all? Panelist Don Deloach, managing partner at Rocket Wagon Venture Studios, ticked off a list of reasons you should have your MSP valued regularly:

  • Prepare for merger opportunities
  • Plan for estate transfer or gift giving
  • Guard against marital dissolution
  • Avoid or prepare for litigation
  • Review taxes and charitable donations.

“Your business needs constant attention to make it grow,” Deloach said. “It should be valued every year.”

Doug Green, publisher of Telecom Reseller, moderated the panel discussion, “Building Your MSPs Valuation.”

Public companies can compare their financials to similar competitors. Private companies usually choose between two methods for valuing your MSP:

  1. Discounted cash flow. Used for companies that desire exponential growth to show their projected future value based upon historical revenue.
  2. Net asset value. Reserved for mature or public companies that have most of their value invested in tangible assets, such as real estate.

“There really is no standard, looking at what companies are worth over a period of time” said panelist Pranav Kondala, principal solutions architect at Hughes. “It matters how the multiple is created. Does it include real estate?”

Panelist Mike Geller, cybersecurity architect at RadWare, said it’s important to maximize your security footprint with your available resources.

“Make sure your systems are available and resilient,” he said.

Deloach said MSPs should be aware of the three types of purchasing companies who might be interested in their companies, including:

  1. Strategic. Buyouts by partners or investors who know your company.
  2. Unassociated. Purchases by companies with whom you haven’t worked.
  3. Private equity. Interest from professional investors interested in the space.

Unassociated buyers usually are number crunchers, while private equity is usually looking for vehicle for expansion, he said.

Deloach compared company valuations to an iceberg. At the top of the iceberg, you can find metrics for:

  • Profitability
  • Leverage
  • Liquidity
  • Growth.

But underneath the tip of the iceberg, investors look for:

  • Positive cash flow
  • Proper cash utilization
  • Solid asset and intangible valuations
  • Good debt management

“Not all debt is bad,” Deloach said. Equity investors want a 20% return. Debt only costs you 8%, he pointed out. “You can use debt to build because it’s cheaper than equity,” he said.

Examine your earnings composition for ways to improve, he said. Try to get a handle on:

  • Non-operating assets
  • Owner expenses
  • Renting vs owning location
  • Excess cash
  • Owner compensation.

Deloach urged MSPs to focus on customer composition and retention. Determine whether you prefer growing organically or through acquisition, he said. Figure out which expenses are non-recurring and which are compensation related, he said.




Edited by Erik Linask

Communications Correspondent

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