How you could achieve a 20-times multiple for your MSP

A panel of private equity experts with experience in investing in MSPs will answer your questions at CRN's Channel Conference MSP next week

We've seen a spate of private equity buyouts in the channel over recent months, as investors look to tap into the strong recurring revenue that managed service providers (MSP) can generate.

But how can owners best shape their companies to receive the highest possible valuation?

MSP bosses will have the opportunity to quiz private equity experts on how they can maximise the value of their business during a panel discussion at CRN's upcoming Channel Conference MSP.

Resellers and MSPs can register to attend the event, held in London next Wednesday, free of charge.

You can view the packed agenda for the day here.

Speaking to CRN ahead of the conference, Micky Patel, partner at August Equity, said that the way an owner positions the company they're selling, or the "exit story", is key to achieving a strong valuation.

August Equity, which owns Charterhouse, sold managed security service provider SecureData to Orange earlier this year for a reported £120m, an EBITDA multiple that was into the twenties.

"The way we positioned the exit to focus on a trade sale was really important," he explained.

"We didn't want to speak to private equity at all because we knew what we had. We focused on Orange and some other large businesses like that who could sell their existing businesses into [SecureData's] customers, so they had to give us a synergy multiple.

"We had a really good set of mid-market and large customers. These were 50-seat-plus across the UK blue chip [market], so if you want to try to get into those customers, you really need credibility.

"If you can sell them on [your] credibility on cyber, where people can end up paying a massive fine, you can sell them on other things.

"The market would have said that SecureData would have been worth 12 to 15 times [EBITDA], but with the synergy opportunity for Orange it was higher than 20 times. So it's about how you position the story for the exit."

Patel said that as a buyer, one of the first things he does when assessing a potential target is look at the gross margin, particularly with a lot of the services that MSPs provide coming down in price.

He explained that MSPs need to anticipate the margins they make from services provided by the likes Microsoft contracting further still.

"The quality of earnings is the most important part of this business model - in contracts, churn and in low-customer concentration," he said.

"If a business has that in this sector, it's going to be more highly valuable than a business that hasn't got it.

"The other thing is around gross margin. Some of these products are now coming down. If you look Microsoft CSP, there is wafer-thin margin there, so in the future if you've got a 25 per cent gross margin, where is that business growing?

"I would advise companies to look at their gross margins and look at whether they can wrap some support services or some managed services around that to improve their gross margins to the 40 to 50 per cent level."

Another important element for August, Patel said, is the businesses they're looking to acquire having a rough idea of other companies they'd like to acquire.

It is far quicker for a business to grow if it has already assessed a handful of businesses that it could bring into the fold before it takes on private equity investment, he explained.

"It means that they can get to scale very quickly," he said.

"We do a lot of work on that and we have an origination team here that looks constantly for businesses that are in unified comms, IT services more generally and in network connectivity.

"We're constantly meeting those businesses, but if a team has an idea about one or two of those, hopefully there will be some marriage of minds because we'll already know them, or it helps us do the deal quicker because we can easily get to a much higher EBITDA because they have a clear idea of the acquisitions."

Finally, Patel said that it is crucial for firms considering taking on investment to build a rapport with one potential suitor.

August was looking at Charterhouse for two years before a deal was completed, and spent 12 months talking to SecureData before making the acquisition.

He said that creating a bidding process can hamper the building of a relationship.

"Build a relationship with one partner that you get on with which can deliver your overall terms and really focus on them," he said.

"If you create a process, you can lose some of the intimacy and you won't end up with an understanding of people.

"I think it's about focusing on good people, and you need to make sure that they have done it all before and come out on the other side with a good outcome."

Among the other event highlights, award-winning cybersecurity blogger Graham Cluley will be exploring how MSPs can build a compelling narrative around cybersecurity.

Back by popular demand, the CEO and CTO of ANS will also be laying out the Manchester-based firm's (almost overnight) reinvention from reseller to cloud services provider.

Former England rugby scrum-half Andy Gomarsall - who is now a director at IT lifecycle management outfit N2S - will also be reflecting on the parallels between sport and business.

See here for the full agenda.