🟠 Why I love MSPs (Managed Service Providers)

Welcome to the SMB Scoop. I LOVE managed service providers (MSPs).

A MSP is a third-party company that manages a customer's IT infrastructure and end-user systems. Small and medium-sized businesses, nonprofits and government agencies hire MSPs to perform a defined set of day-to-day management services.

10 Reasons Why I'm in Love with the MSP model

• significant recurring revenue from monthly service fees & sales commissions for software sold to customers from vendors

• services have either high switching costs or are just a cost of doing business (not material enough to shop around for), therefore are very sticky

• expand portfolio & services as you grow to provide more critical services to your customer base

• the best MSPs provide something truly differentiated like a white glove local service component, focus in a particular industry/vertical, or a unique suite of specialized necessary services

• highly fragmented market, but tons of private equity consolidators (many exit opportunities)

• sales growth via increasing spend by current customers & hunting new ones

• technology is only getting more complex, SMBs have barely scratched the surface in terms of understanding their cybersecurity & IT risk in my opinion

• so many acquisition opportunities in terms of geography & service lines (cyber & security is growing incredibly fast right now), highly fragmented

• high cash flow conversion, very limited to no CapEx (EBITDA actually is cash flow unlike a lot of industries that require CapEx)

• customers pay up front typically for services so has an attractive growth profile

MSP Service Landscape

There are so many different types of MSPs, some offer just 1 service, others 20. The space is very competitive, but I believe those who excel at sales & offering quality service will continue to win over the long run. Types of services MSPs provide:

Characteristics Drive Value & Opportunity

Digging in...MSPs come in all shapes and sizes, but ultimately the characteristics drive it's value. Below are the key factors to look at when assessing the quality of an MSP or a potential add-on to an MSP. As an operator, I look to this to understand what buyers find more appealing for every $ of profit. For example, selling quality services on a recurring basis is worth significantly more than say a one-time hardware sale. Factors that drive company value:

Revenue Type Impacts Valuation

Not all cash flow is valued the same.

I recently read an awesome blog post called Quality of Revenue that goes into the 'why' of how different types of revenue might be more worth more than others - not MSP specific but it's spot on in if you want to understand this concept generally.

In general...contracted long-term recurring > contracted month to month > not contracted month to month > re-occurring > one-time

For MSPs, recurring revenue is the golden goose. On the flip side, hardware sales tend to be lower margin, lower value, and one-time in nature. Companies with more higher margin recurring revenue are worth more (as you would expect). The goal for MSPs should be to attain more sticky recurring revenue. Hardware sales can even be thought of as a loss leader to get deals done...or convert that hardware sales into a recurring component as well.

Accredited Investors: Want to get in the flow of passive SMB and ETA deals? I'm starting a LP/investor list where I'll send you off-market SMB deals through my network. A few great sponsors seeking intros to quality investors is about to go out:

At Bardo Capital, I buy B2B companies ($1-$6M of EBITDA) mostly from retiring owners. There's something really special & important in being a steward of another entrepreneur's legacy.

Ben Tiggelaar