Thesis: Global firms including IBM (24/7 system management, hosting, administration, operations, and application support), Vodafone (cell phone security as a managed service), Amazon (cloud-as-a-service and cybersecurity), and Amazon are all present in the managed service provider industry. At the same time, there are a ton of new businesses in the pre-seed or seed stage clogging up the tech MSP space, and billions of dollars are sitting idle waiting to be invested in expansion. In the next part of our article series, we will look at the key M&A trends for sellers that will shape the MSP market in the coming period.
MSPs of all sizes
Prior to the COVID pandemic, Strategic Buyers and Private Equity investors typically focused on larger opportunities with transaction values in excess of $30-40M (USD). The MSP market also offered an abundance of these opportunities, however, the trend has since decreased, and by 2022 the focus has shifted to smaller mid-market MSPs valued at less than $30M.
The reasons:
- Due to a growing remote workforce, a high number of experienced professionals have exited consultancies to start their own businesses. In recent years, this affect alone has multiplied the number of viable MSP startups globally with high revenue potential.
- At the same time, mid-sized and large companies have made significant profits during the pandemic and have accumulated substantial cash in these organizations that are used for traditional investments, talent acquisition M&A, or even high growth mergers.
Managed Service Provider Groups
As the number of SME market participants grows, grouping or platforming solutions are increasingly used. In such cases, either strategic or financial partners accelerate their efforts to consolidate managed service providers into one platform. This is one of many M&A trends for sellers to keep an eye on.
Significant centralized synergies may already be obtained with 5–10 enterprises since they can exchange knowledge and skills, as well as adopt a shared service center strategy. In such cases, finance, HR, infrastructure, backup processes, or even telecom procurement can be handled much more cost-effectively by a group of up to several dozen companies.
Adjusted EBITDA in the MSP M&A market
While MSSPs will often trade at multiples of revenue, MSPs continue to be valued based on multiples of adjusted EBITDA. Channel E2E’s recent transaction list of more than 750 deals, along with ITX’s market intelligence, show 2022’s MSP transactions can be characterized by 6.5 to 9.7 times annual adjusted EBITDA valuations.
However, there were deals in the 2 to 3 times revenue multiple categories, such as the sale of the now veteran Budapest-based Starschema, founded in 2006. Published data shows that the valuation peak was reached at 15-20 times the EBITDA multiple. An outstanding example is Australia’s ARQ Group, whose EBTIDA earnings multiple is 15.6%, which is close to the top quartile of MSPs.In part three in our series, we look at the big picture of the MSP M&A market, and prepare you for a sale. In the meantime, let us know if you are contemplating the sale of your MSP/IT consultancy. ITX has completed 200+ IT-enabled transactions in more than 20 countries during the last 25 years.
