Private Equity Investor To MSPs: Know Your Options To Get The Best Valuation

MSPs can get a lot of benefit from studying what private equity firms are looking for, even if a sale of their company is years away, says Hannah Paige, director at Worklyn Partners.

Even if a sale is five, 10 or 15 years away, it’s worthwhile for an MSP to start learning how potential private equity acquirers are likely to value their company, according to investor Hannah Paige.

As busy as MSP owners are, it pays off to carve out a half hour every week—or even every month—to “better understand what we’re looking for and how to grow your business accordingly,” she told an audience of MSPs Monday during the XChange March 2024 conference.

“Make sure you’re aware of all the options out there so you’re maximizing that end value,” said Paige, director at New York-based investment firm Worklyn Partners.

As part of her aim of demystifying the M&A process, Paige provided “really key points for any organization that is new to looking at how a private equity firm can come in and help them,” said Raymond Ribble, founder and CEO of Gardena, Calif.-based SPHER.

Without a doubt, it’s crucial for MSPs to go through the exercise of “introspectively looking at their business” prior to pursuing a sale, Ribble said. That way, an MSP can determine, “What do I need to do before I’m ready to have that conversation?”

The session at XChange, which is hosted by CRN parent The Channel Company and held this week in Orlando, Fla., also included a number of useful qualitative criteria that private equity investors will assess, Ribble said. This included information around the often-discussed issue of the “long tail” of legacy SMB customers that are not profitable for the MSPs, he said.

Ribble also said he appreciated the focus on “buyer archetypes”—including the difference between scenarios where that MSP would be considered the “platform” or the “add-on” by the private equity investor.

In cases where a private equity buyer has never made an investment in the space, it likely will want to use the MSP as a “platform” and will retain the company’s brand and staff, Paige said. For “add-on” acquisitions, the acquired companies are less likely to keep their employees and brand, she said.

In terms of quantitative criteria, the biggest factors include annual recurring revenue (ARR) and monthly recurring revenue (MRR); revenue mix (specifically the split between managed services and resale revenue); customer retention and churn; and gross margin, according to Paige.

Revenue growth is also “incredibly important” in terms of how a private equity firm will value an MSP, she said. MSPs that can surpass the industry average of 10 percent to 15 percent in annual revenue growth will fetch a much higher valuation, Paige said.

“We want to know that the business is going to keep growing once we acquire it,” she said.

Industry specializations for the MSP are another major influence on valuation, with service providers that focus on health care, manufacturing, financial services and SLED (state, local and education) being among the most valuable in the eyes of private equity investors, according to Paige.

Ultimately though, before considering any other aspects of a potential sale of their business, MSP owners will want to get clear on what their true priorities are, she said.

“What do you really want to get out of a sale? What do you care about? Do you want to keep running your business? Do you want your business to exist with the same brand, the same identity, the same culture, the same people?” Paige said. “Or do you want to maximize cash at close? Are you just trying to retire, live on a beach somewhere? That sounds pretty good, too.”