IT Services/MSP

• • A lack of skilled technology professionals and a persistently tight labor market is proving a real constraint to growth, requiring creative talent recruitment and retention strategies.
  • The pace of technology change, the evolution of cybersecurity threats, and the demand for digital-first interactions make it difficult yet critical to keep up with the latest customer needs and the most relevant solutions. In this dynamic environment, IT services and MSP businesses are challenged to continually adapt and innovate to meet evolving requirements and expectations.
  • The remote/hybrid work trend requires MSPs to adapt their services to keep up with customers’ changing needs for remote management and IT support for distributed teams.
  • The regulatory environment creates additional burdens, requiring IT services and MSP businesses to comply with changing regulations around data protection and data privacy.
  • Perceived growth opportunities continue to attract new entrants to this sector, creating a more competitive field that requires businesses to differentiate their services and diversify their offerings to attract new customers.
  • A volatile macroeconomic environment and the impact of global geopolitical events can make it more difficult for these businesses to access affordable capital and plan with confidence.

Despite these very real challenges, investors find the IT services and MSP sector very attractive, even at times of economic uncertainty. And that makes it a good time to consider selling an IT services or MSP business.

Investors are particularly drawn to this sector’s focus on building recurring revenue streams that improve revenue predictability and reduce financial risk, along with the digital and cloud technology trends that are driving strong, sustained demand for IT and MSP services. Both strategic acquirers and financial buyers see opportunities to consolidate a highly fragmented market, overcome talent acquisition constraints, leverage synergies among complementary IT businesses, and set a strong foundation for expansion into new geographic markets and new customer segments.

Though economic uncertainty, high interest rates, and market volatility can all weigh on M&A activity, the IT Services and MSP M&A market remains extremely active. If you’re considering selling your company in this environment, you will likely have questions about what kind of deal outcome you can expect.

The deal outcome is primarily a function of your company’s valuation (known as your enterprise value) and the deal multiple. Though every business and every deal is unique, the following provides a window into our observations regarding the most recent multiple trends for IT services and MSP businesses.

As a general guideline for IT Services companies and MSPs, for companies with less than $2 million of EBITDA, we generally see multiples in the range of 5 to 6X, while for companies with $2 to $5 million of EBITDA, we typically see multiples of 6 to 8X. For companies above $5 million, we see a range of 7 to 10X from active buyers. Specific sub-sectors within these broad sectors may attract higher valuation ranges. For example, cybersecurity companies may see much higher multiples compared to the general IT Services sector.

For Value Added Resellers (VARs), we usually see lower multiples as these businesses tend to have lower margins and revenue can often appear “lumpy.” This perspective often leads buyers to offer a multiple for VARs as low as 4X, although usually more in the 5-6X range, with an A+ VAR commanding 7X or more.

Custom programming business that exhibit strong financial characteristics can expect to see multiples in the range of 7 to 10X, with the higher end of the range usually reserved for companies of larger size with strong forecasts, historical consistency and a robust backlog of contracted work.

The previous examples are provided as a general guideline. However, average multiples and multiple ranges can be misleading because every company is different. For buyers, there are many factors that are evaluated to determine an assessment of value.

No matter the state of the economy or how attractive a given sector is overall, investors will always seek top-tier businesses that provide a strong opportunity to generate high returns. With that goal in mind, buyers tend to consider the following characteristics when evaluating an IT services or MSP business.

• • Financial performance. Buyers seek out IT services and MSP businesses that can demonstrate consistent profitability, increasing revenue, and steady cash flow.
  • Market position. The better the business’s market leadership position, the more attention it will garner from strategic and financial buyers.
  • Growth opportunities. Buyers are drawn to IT services and MSP businesses with the potential to grow, whether by expanding into new geographic regions or tapping new customer segments. Companies with a proven ability to scale efficiently also prove more attractive to investors.
  • Technology strength. Technology is at the core of any IT services or MSP businesses, so investors will seek those that bring technological advantages. That could include highly attractive intellectual property, innovative software, or a strong IT infrastructure.
  • Management team. If investors expect to keep the management team on for a period of time—which is nearly always the case for a PE group, and often for a strategic acquirer—then the experience and expertise of the executive team will be a key consideration.
  • Synergy opportunities. Strategic buyers will seek an IT services or MSP business that allow them to leverage synergies. For instance, they tend to value companies whose products and services complement their own and can help them grow, expand, diversify, and drive greater value.
  • High ROI. For financial buyers, the target company must provide significant growth opportunity within a relatively short window of time, allowing the buyer to sell the business at a much higher value. That, in turn, ensures the buyer of a clear path to exiting the investment on the desired timeline.

There are two primary forms of capital: debt and equity. Deciding which is best for you starts with understanding how each option works, along with the associated pros and cons.

Which form of capital is right for your IT services or MSP business will depend on a number of factors. If your company is in the early stages, you might not have sufficient revenue to service debt and might need to opt for an equity investment. A more mature company with consistent cash flow likely has more flexibility to use debt capital as a means to retain greater control and avoid ownership dilution. A company that is growing consistently and can demonstrate strong recurring revenue also might find it easier to attract equity investors than a business whose revenues are flat.

With various options to choose from and many factors to consider, raising capital can be a complex undertaking. Owners of IT services or MSP businesses would do well to hire an investment banker to serve as a trusted guide to navigate the complexities and choose the optimal capital structure. Your investment banking partner will ask about your objectives and how you plan to use the funds, then recommend the best capital structure to achieve your goals, market your business to the right capital sources, and negotiate and finalize the best terms.

The Forbes Guide to Middle Market Capital Formation is an informative and comprehensive resource for IT services and MSP business owners that are looking to raise capital.

How Forbes Partners Can Help

Despite the volatility of the past several years, it’s still a good time for exceptional companies in the IT services and MSP sector to consider taking the business to market. Buyers remain interested in this sector and seek top-tier companies to deploy their capital and earn a strong return on their investment.

The Forbes Partners investment banking team is adept at navigating dynamic M&A markets, well-versed in the trends driving adoption of IT services and managed services, and deeply knowledgeable about this sector and its unique opportunities and challenges. We maintain strong relationships with many of the industry’s most active buyers, so we know what they’re looking for in a target company and we have ready access to them as potential buyers for your IT services or MSP business.

The Forbes team has leveraged its experience in the IT services and MSP sector to guide the successful completion of deals like these:

• Served as exclusive advisor to PayReel, LLC, a leading tech-enabled provider of human resource compliance, worker classification, and payrolling solutions, in its partnership with Seaside Equity Partners
• Served as exclusive advisor to Enquiron, Boston-based provider of risk management and consultative business solutions has been acquired by Zywave, a leader in the insurance tech industry and portfolio company of Clearlake Capital
• Served as the exclusive advisor to Integro on its sale to Innovative Discovery
• Served as the exclusive advisor to Lighting Analysts, Inc., the author of industry standard tools used in architectural lighting applications, on its sale to TA Associates

Complementing our IT services and MSP sector experience, the Forbes team has extensive M&A and Capital Formation experience in the broader technology sector, working with businesses whose operating models rely on recurring revenue streams. We also understand what it takes to run and grow an IT services or MSP business, because we’ve done it ourselves. Dan Roth, a member of our IT advisory team, has started, built, and sold multiple IT businesses, including a value-added reseller. He’s also served in leadership positions for premier IT companies, including an international computer and networking manufacturer and as President & COO of a $140 million, 900 employee IT outsourcing / Data Center company. His deep operational experience in software, hardware, networking, security, data analytics, data centers, and managed services affords him keen insights into how these businesses operate and how buyers approach acquisitions in this sector.

Regardless of your company type or sector, our investment bankers are highly skilled at crafting a compelling story about your business and creating a unique and defendable position that can help you achieve an optimal outcome. Owners that aren’t ready to sell also find our advisory services invaluable in positioning them for an optimal deal outcome when the time is right.