MSP Execs: KPIs, Metrics Key To MSP Growth, Eventual Sale

‘KPIs reduce risk. It's going to give you higher figures supported by those better opportunities, and it's going to indicate potential issues. If you're driving less than 15 percent EBITDA, you're at risk of losing a big client. If you're driving more than 25 percent, they might think you're overpriced, that it would be hard to sustain if someone buys you. A lot of your metrics will tell other organizations how you are running as a business,’ says Brett Jaffe, president and COO of MSP+.

The typical MSP someday will eventually be looking for an exit strategy, and if that strategy includes selling the business, it is important to be prepared to show prospective buyers the kind of data they need to value the company.

That’s the word from Brett Jaffe, president and COO of MSP+, who told fellow MSP executives attending the recent XChange NexGen 2024 conference in Houston that every service an MSP does is wrapped around business valuation.

“It’s really important, when you look at the different aspects of your business, at what are the pieces that drive value,” Jaffe said.

[Related: Panelists Offer Tips For MSPs Eyeing A Sale Of Their Business]

Las Vegas-based MSP+ is a result of a merger of five different entities that came together about one year ago. The company works with other MSPs on everything from tool stack implementation and consulting to strategic coaching. The company also works with MSPs on leadership development strategy and on post-M&A framework.

A company looking to buy an MSP is looking for some benefit such as a certain demographic or geographic market, the ability to leverage their sales team to help the acquired team grow, or to make their company larger, Jaffe said. At the same time, he said, there's also some talk that M&A is slowing.

“What’s really important right now is, there's a lot of people looking out there,” he said. “And if you look around, there aren't really a lot of young people in this room. Sorry, no offense. A lot of us are getting older, and some people are looking to make an exit. … So as this population starts changing, people are looking to make an exit. And when that happens, there’s an exodus, and you’re going to see not that M&A is slowing. You’re gonna see a lot more competition for people selling and values starting to change.”

Several variables impact the valuation of an MSP, said Brian Hoppe, strategic coach at MSP+.

The first important variable is an MSP’s EBITDA, particularly as private equity companies continue to acquire MSPs, Hoppe said.

“They want to see a large EBITDA,” he said. “The more dollars, the more safe that investment is for them. And it's a company that presumably has better processes and so on. And for a tuck-in acquisition, they're looking for that half-million-dollar base level of EBITDA. I can tell you that for many PEs (private equity firms), just the expenses for acquiring one MSP are more than a half-million dollars in legal fees and so on.”

The second factor is, the more recurring revenue there is, presumably the better it is, Hoppe said. “[Buyers are] looking for 50-plus percent recurring revenue, and having 80 percent of the revenue from managed customers,” he said. “They're not looking for lot of break-fix or one-off projects and that kind of thing.”

The third factor is customer and revenue retention, Hoppe said. “How much of your customer base are you retaining?” he said. “As far as customers go, 85 percent is a good number to look at. And you want to retain 90 percent of revenue over time as well.”

Other positive factors for MSP valuation are high top-line and bottom-line growth, a diverse customer base rather than a high concentration of business on a single customer, geographical location, 12-month trailing EBITDA, and a high level of operational maturity, he said.

It is also important for MSPs to set and follow KPIs, or key performance indicators, Jaffe said. He said, for instance, that with operational maturity, assuming an MSP could sell itself for five times to seven times EBITDA, an increase in the bottom line by $1 million could mean an increase of $1 million to $2 million in the asking price.

“You have to pay attention to those metrics,” he said. “You have to pay attention to the KPIs, because they are going to be the indicators of whether or not you're going to fail down the road. … You're looking at the things that are predicting the outcomes that you want, that you want to expect.”

KPIs are important to an MSP’s value for five reasons, Jaffe said.

MSP+ built a model for how it looks at KPIs it calls PCP, or perception, comprehension, and prediction.

Perception, Hoppe said, is the easiest part, and involves being aware of something. “What are the actual relevant things that we need to measure,” he said. “Who is responsible for it. And then we look at what the KPIs are and why these things are important. What should you focus on. … Metrics bring clarity.”

Comprehension, Jaffe said, is why we are measuring this. “When you're trying to measure these KPIs, you don't need to measure 100 things in your company,” he said. “You need to measure like 15 or 20. They're really going to give you the pulse of what's going on. When we talk about understanding why we're measuring these things, we have to understand why it's important to understand that.”

Prediction, Hoppe said, is thinking about what those KPIs are saying will happen, not what has already happened. “There's a sales pipeline and all of that,” he said. “Those are dollars that you might have with opportunities. But what's going to actually determine whether those things come in the first place? That might be marketing metrics, or some sales metrics.”

Jaffe said that when a metric is off, which shows that something is not on track, the important question is not always why it’s not on track.

“The question you need to be asking is, how do we get that contract? What is the action plan we have around that?” he said. “And every metric you have needs an action plan.”

There is a wide variety of potential KPIs an MSP could use to measure its business, Jaffe said. These include:

“Sales KPIs are extremely important,” he said. “They're very predictive. You can probably tell, based on the number of meetings, what your sales are going to be next quarter. And you know that if they’re not getting a lot of meetings today, we're gonna have a tough quarter coming up.”

KPIs can have a major impact when it comes time to value an MSP for a potential sale, potentially adding millions of dollars in enterprise value, Jaffe said.

“KPIs reduce risk,” he said. “It's going to give you higher figures supported by those better opportunities, and it's going to indicate potential issues. If you're driving less than 15 percent EBITDA, you're at risk of losing a big client. If you're driving more than 25 percent, they might think you're overpriced, that it would be hard to sustain if someone buys you. A lot of your metrics will tell other organizations how you are running as a business.”

Hoppe and Jaffe made a strong case for using KPIs, said Joe Vieira, senior vice president of Entre Computer Services, a Rochester, N.Y.-based MSP.

“Entre has been in business for 40 years, so we're a pretty mature organization for an IT service provider,” Vieira told CRN. “I think it's always important to take a step back, especially with KPIs, to make sure that you're measuring the right things, as these gentlemen talked about. Measure the right things, take action on the right things. The presentation was also a good refresher because sometimes when you start to measure KPIs, you could easily be a little lackadaisical on the follow-up.”

The MSP+ presentation, in a way, was a reset for Entre, Vieira said.

Sitting here and seeing these guys evangelize the importance of metrics was almost like a restart,” he said. “It gives me a chance to go back to the office and say, ‘Hey, this is why we put these things in place. This is why it's important. And maybe here's some other things that we should introduce.’