Internet M&A: The perfect number and blend of MSP services to offer
There are over 50 individual services a “Managed Service Provider” can offer customers. Many CEOs have asked me … in order to maximize their company valuation and liquidity is it better to specialize in 3-5 services or try to offer as many services as possible … and which combination of these services is best.
In my opinion, there isn’t a perfect number of services. CEOs should focus on leveraging what their team members are good at, and what fixed assets and IP they own or have unique access to which are a strategic advantage over other MSPs. At some MSPs the senior team members have a common history around SaaS, while others around infrastructure, and others around support business models.
My advice is not to think about the total number or blend of services offered as being either a positive or a negative, rather analyze each service and its contribution to increased customer acquisition, customer quality, customer retention, EBITDA and of course free cash flow. We all know of profitable MSPs which offer 5 or less services, and others which offer more than 20. What tends to happen is the MSP which specializes in just 3-5 services will be a nice strategic fit for other MSPs wanting to add these services to their offering, and the MSP which offers 20+ services will be attractive to larger MSPs wanting to add scale, and of course to the army of financial buyers. One important and comforting reality is, there will always be buyers for profitable and growing recurring revenue businesses regardless how many services they offer.
After having this chat with owners, I tell them if they insist on worrying about something, they can focus on the % of total revenue which is recurring vs. one time. In almost every case the greater the % of total revenue which is recurring, the more valuable and liquid the company will be. So, in the difficult analysis of adding an additional service to an MSP’s total offering, the first big question is … is it one time or recurring revenue. If the answer is “one-time revenue”, my thought is … it better be an essential service to lock in recurring revenue customers otherwise it will probably be a drag on valuation, liquidity and perhaps cash flow.
As we know, this topic is way bigger than just a 1 page article, so thanks for your patience.
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Photo by: Christina Morillo