Selling Your MSP: What Buyers Are Really Valuing

▶️ Watch: Selling Your MSP: What Is Your Business Really Worth?

https://youtu.be/SoPgEKhT2_I

Prefer to read? The key ideas from the video are expanded below.

When MSP owners start thinking about selling, one of the first things they usually focus on is revenue. They hear that MSPs are selling for some multiple, and naturally they start trying to apply that multiple to their own business. But buyers are not really just buying revenue. They are buying the earnings they believe the business can continue to produce after you leave.

Buyers Are Valuing More Than Revenue

That is where you start hearing terms like EBITDA, adjusted EBITDA, and seller’s discretionary earnings. They are calculated differently, and the measure a buyer uses may depend on the size of the business and the type of buyer. But they are all trying to get at the same basic question: what does this business really earn?

Not Every Add-Back Is Really an Add-Back

One reason that matters is that your financial statements may include expenses that a new owner would not have to continue paying. Maybe the business pays for some personal expenses. Maybe you had unusually high consulting costs, a one-time recruiting expense, duplicate software costs during a migration, or legal and accounting costs related to something that is not going to happen again. Some of those may be legitimate add-backs.

If an expense is truly owner-specific, discretionary, or nonrecurring, a buyer may be willing to add it back when they are looking at the earnings of the business. And that can make a meaningful difference in the value. But you cannot just go through the P&L, circle every expense you do not like, and call it an add-back. The buyer is going to look at each one and ask a pretty simple question: does this cost actually go away after you leave?

For example, maybe you pay yourself more than a market-rate salary. Part of your compensation may be a reasonable adjustment. But if you are performing an essential role in the company, the buyer is still going to have to pay somebody to do that work. So the real question is not whether the expense disappears from your financial statements. The question is whether the economic cost actually disappears after you leave.

Recurring Revenue Has to Be Transferable

The same kind of thinking applies to recurring revenue, because the buyer is not just looking at what exists today. They are looking at the quality of that recurring revenue and how likely it is to keep producing earnings after the sale. MSP owners tend to focus heavily on monthly recurring revenue, and that makes sense. Recurring revenue is one of the things that makes the MSP model attractive. But a buyer is not going to look at every dollar of recurring revenue and value it exactly the same way.

They are going to look at the contracts, margins, retention, churn, customer concentration, and how likely those relationships are to survive the sale. A customer under a strong agreement, with healthy margins and a long history with the company, is different from a customer who can leave next month, barely makes you any money, or is really only there because of their personal relationship with you.

How Dependent Is the Business on You?

If you are the primary salesperson, you manage all the important client relationships, and every major problem still ends up on your desk, the buyer may not view all of those earnings as fully transferable. The business may be profitable today. The question is how much of that profitability is still there once you are gone.

The Buyer Has to Believe the Numbers

And even if the earnings look great, the buyer still has to believe the numbers. If the financial statements show strong profitability, but during due diligence the buyer starts finding missing expenses, unrecorded liabilities, inconsistent revenue recognition, or margins that just do not make sense, now you have a bigger problem than bookkeeping cleanup.

The buyer may start questioning everything else you have told them. Unexplained inconsistencies cost you time and erode the buyer’s confidence. If they have to reconstruct the story behind your numbers themselves, you lose some control over how that story gets interpreted. That can slow down due diligence, reduce the price, change the terms of the deal, or in some cases cause the buyer to walk away.

Start Preparing Before You Are Ready to Sell

This is one of the reasons I think you want to start preparing well before you actually intend to sell. If you have a few years, you may have time to improve margins, reduce customer concentration, strengthen contracts, clean up the financial reporting, and make the business less dependent on you. You can also start identifying legitimate add-backs and documenting why those expenses are not expected to continue under a new owner.

Cleaning up the financials by itself does not make the company more valuable. But it can help you clearly demonstrate the value that is already there. It can also reduce the risk the buyer thinks they are taking and help you identify things in the underlying business that you still have time to improve before you sell.

And none of this is about dressing up the numbers or trying to make the company look better than it really is. The buyer is going to find the weaknesses eventually. I would much rather you find them first, while you still have time to do something about them.

At the end of the day, a buyer may offer you some multiple of EBITDA, adjusted EBITDA, seller’s discretionary earnings, or another earnings measure. The multiple matters. But the earnings number they are applying that multiple to matters just as much. You need to understand which adjustments they accepted, which ones they rejected, and what risks they think could reduce the earnings after the sale. Because the value of your MSP is not just based on what it earned last year. It is based on what the buyer believes the business can continue to earn after you leave, and how confident they are that the numbers support that conclusion.

This article is for educational purposes only and is not tax or legal advice. Every business is different, and you should talk with your own professional about what makes sense for your situation.