I recently had a conversation with someone and the subject of M&A came up, specifically what the current valuation trends were. Having been in M&A for so long I have seen this particular area of business philosophy mature in many respects. Many MSP's, during the negotiation process, would complain to me about why their businesses were being devalued by potential buyers. Obviously, that's what a buyer is supposed to do; every buyer is looking for the best deal possible. However, in the last few years I've started to see a trend in valuation schemes that is showing signs of maturity and common sense.
Because M&A is the most likely liquidation (or cash out) event a business owner/investor is to experience these days (IPO's, venture capital, and other deal transactions are less common) the valuation of a company is one of the best external indicators of how the managed services profession is faring. Here is a great example of how our profession has advanced in the last decade.
It used to be common practice to discount or assign a zero value to a MSP's non-recurring revenue...zero! This means, any product, project, or any revenue of any kind that was not specifically tied to a contract would have been essentially tossed out of the negotiations. What ended up happening was recurring revenue (tied to a contract for all of you "we do business on a handshake" folks) was valued at a premium, with its own multiple, while the non-recurring revenue was assigned a zero or minimal valuation multiple. I actually got very upset and decided to quit the M&A industry because it was unfair to the MSP's who worked hard on growing their business only to see important components of the business thrown away at the bargaining table.
Today, things are beginning to change. By going to a flat multiple scheme, MSP's can achieve a more realistic and accurate model of their business valuation than under the previous model. For example, instead of taking all the different revenue sources and assigning each its own multiple, you would take the overall (top line) revenue and assigning it one multiple. Assuming that the revenue streams are all related to a managed services practice (i.e., you wouldn't want to pay for a tanning salon along with the MSP business assets) this valuation model will yield a number more accurately reflecting all the various components that make up a successful and efficient managed services practice.
Our profession is maturing and for that I am thankful! What are your thoughts?
