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In late September WTA Partners ran a webinar on Cloud Services
M&A. In one of the five sessions given by four speakers, Jeffrey Jenner,
who leads our Cloud Services practice, presented on “What makes an MSP
attractive to an acquirer”. This market view is very much based on that.
We first need to establish a common understanding of what an MSP
is. There are many businesses claiming to be MSPs but many of these are VARs
with only a small part of their business qualifying. What does it take to be
accepted as a Cloud Services MSP and be valued as such rather than a VAR-plus? This
primarily comes down to the level of Annual Recurring Revenue (“ARR”) which
itself will be a main driver of value. And to be classed as a proper MSP that
should be 50% and preferably 60%. The higher the percentage the better. There is,
however, a view that the very high weighting put on ARR has lessened because of
the move to digital transformation increasing the importance of consultancy and
professional services. Also important is the length of the contract with the
customer: the longer the period the better too. Three year contract length is
the standard and good but longer is even better.
So the possible first, and certainly one of the two most
important attributes, is good ARR preferably from multiple revenue
Sitting alongside ARR in importance and also a major driver of
value is financial performance and with EBITDA performance having the
highest weighting for that is a proxy for cash and cash generation which perhaps
the key item of interest for acquirers. Well-run MSPs are achieving EBITDA
margins of 15% so that is what to aim for. The best are achieving close to or
at 25%. Those MSPs performing below 10% have work to do but some buyers will
see that as an opportunity and an encouragement to acquire but will, of course,
base valuation on the lower metric.
Consistency is important too as that shows sustainability. It is better to have
a number of years of say 10% EBITDA performance than erratic performance over a
similar period of time. Consistent, steady growth is best.
Revenue growth comes next. Top line growth is rated highly.
Again the same consistently and sustainability points stated for EBITDA apply
here too. Outstanding growth can be a definite wow factor as probably shown by
the recent sale of Helecloud. From a beginning in 2016 it reached £13 million
in 2021. Megabuyte estimates a valuation at five times revenue which would be an
exceptional outlier achievement. Of course growth is not the only factor here
but seems to have been important.
Revenue considerations leads us naturally to Customers.
High revenue concentration is not attractive but a good spread of revenue
across the customer base is as it de-risks the business. Worse still is a high level of customer churn
as it indicates either poor delivery or out of date services. So to maximise
attractiveness: deliver well and keep services relevant.
MSPs can add to their attraction by having customers with at
least 50 seats for the larger number of seats the more complexity and
complexity provides potential acquirers with greater opportunity to sell
Size does matter. The larger the turnover the more
likely a higher EBITDA multiple is achieved. The bands tend to be revenue under
£5 million, £5-10 million, £10-20 million and then larger.
Having a strong management team in place is good as it
means the business is more likely to be sustainable and have good procedures.
It is also attractive to a buyer as they may see opportunities for synergy
If the business has both strong revenue growth
and a strong management that may make it appealing for direct investment by
Private Equity too which opens up additional possibilities for the existing
Competition for staff is acute so culture is important. Happy
and well qualified employees with good skillsets is a big positive. That
means a high level of accreditations and a decent rating on Glassdoor.
There are many other items which can improve attractiveness such
as having tax losses, good people to revenue ratios, specialisms, the
private/public cloud mix, fixed asset spend, etc but those above are the
most important to attract more the best suitors and, hence command a higher
So not every business will be able to tick all the boxes and
ultimately each buyer will judge the business as a whole against their own reasons
for acquiring but working on and improving the key drivers of value will
certainly result in a better outcome for the shareholders and management.
you wish to discuss any aspect of this or you are considering your own exit or
planning an acquisition please make contact with Jeffrey Jenner via email@example.com or 020 37869001 or Alan Butterworth via firstname.lastname@example.org or 020 37869002.
are specialists in technology merger and acquisition (M&A) services
operating from London and Canada. We represent and advise Sellers and Buyers in
M&A projects in the UK, USA, Canada and Europe with specific focus in
software and services businesses. Currently we are particularly active in the
cloud services space, smart city and transportation, health tech and public