In the ever-evolving world of managed service providers, knowing your numbers and understanding what drives business value isn’t just helpful – it’s essential for survival and growth.
Paul Cissel, a veteran MSP valuation expert and business advisor, recently shared his insights on what makes MSPs truly valuable and sustainable. His practical wisdom, drawn from years of analyzing and advising successful MSPs, offers a roadmap for owners looking to build lasting value in their businesses.
Why MRR Matters In MSP Valuation
Understanding what drives MSP valuations is crucial for making strategic decisions that build long-term value. Whether you’re planning an exit or just want to grow smartly, these metrics provide a clear picture of what matters to potential buyers and investors.
- Overall Valuation Multipliers: MSPs with strong fundamentals can expect around “5 times all cash” in valuation. As Paul says, “If you’re doing $4 million in revenue with 20% EBITDA ($800K), you’re looking at a 6-6.5x multiplier.”
- Monthly Recurring Revenue (MRR): MRR is valued at approximately $1.60 per dollar, signaling stability and predictability to buyers.
- Project vs. Product Revenue: Hardware and other non-recurring product revenue often gets only $0.14 on the dollar. Paul emphasizes: “Building a services-based monthly recurring organization brings a whole lot more corporate value than just having a high revenue number with hardware.”
Revenue And Margin Targets For Top MSPs
Success in the MSP space isn’t about top-line growth alone – it’s about smart, profitable growth. These benchmarks help you understand where you stand and where you should be aiming.
- Gross Margin Targets: Best-in-class MSPs target a 30% gross margin on product revenue. “Twenty-five percent of companies out there are asking for that margin – and they’re getting it,” Paul explains.
- Growth Rates: The MSP industry typically sees an 11% growth rate historically, although growth can drop to 6% during presidential election cycles.
- Efficiency in Staffing: “You should be doing at least $17,000/mo in revenue per headcount in the technical department. Hitting $20,000/mo is a good target,” says Paul.
Boost Your MSP’s Efficiency With Proven Project Management
Strong project management and billing practices are essential for healthy cash flow. Paul’s guidelines ensure MSPs aren’t unintentionally financing their clients’ projects.
- Quote Validity: Limit quotes to a 7-day validity period to maintain control.
- Billing Practices: “Nobody gets a project until the money comes in,” Paul advises. Recommended structure:
- 100% of hardware costs upfront.
- 50% of labor upfront to secure a spot in the project queue.
- Discretionary Spending for Tech Support: Include a contract clause allowing for immediate spending of $500-$1,000 to resolve critical issues quickly.
MSP Client Management Strategy
Not all revenue is good revenue, and not all clients contribute equally to your bottom line. Making smart choices about who you serve is crucial.
- Peer Review for Low-Margin Quotes: Require a review for quotes with less than a 25% margin.
- Selecting Nonprofits: “There are two types of nonprofits: those that want to make you nonprofit, and those that run a solid organization and raise money well,” Paul says. He suggests working only with quality nonprofits unless it’s a personal cause.
- Focus on Quality over Quantity: “You can’t let a single client run you around,” he emphasizes. For new MSPs shifting from a VAR model, track the year-over-year shift from product-centric to MSP-centric revenue.
Client Retention And Operational Excellence
The difference between good and great MSPs often comes down to operational discipline.
- Annual Budget Review: “Things go from order to disorder without energy applied,” Paul notes. Review each expense line item annually to keep costs in check.
- Budgets vs. Forecasts: Paul clarifies, “A budget is a plan set at the beginning of the year. A forecast is what you adjust every month or quarter based on current trends.”
- Quality Control: “If you don’t spend 5 minutes on every QBR that goes out, then it didn’t happen,” he insists.
MSP Growth Strategies
Growing an MSP requires a balanced approach between expansion and maintaining quality service.
- Onboarding New Accounts: For MSPs with a fixed technology stack, plan a 12-18 month implementation period.
- Project Revenue Targets: Your client base should generate approximately 150% of their annual recurring revenue (ARR) in projects over 12 months. For example, clients generating $700,000 in ARR should yield about $1.05 million in project work through:
- Regular technology refresh cycles (typically every 4 years)
- Network infrastructure upgrades
- Complete system “forklift” upgrades
- Implementation of standardized technology stacks
- Note: This applies even to smaller clients – don’t overlook project opportunities just because a client has fewer users
- Communicating Price Increases: “We make it personal,” Paul says. “When we do price increases, we have conversations with our clients to give them a heads-up.”
Final Thoughts
Time is your most precious asset. Paul closes with a reminder: “It’s not like we all have extra time in our businesses. That’s the most precious asset we have.” The key to sustainable growth? Focus on quality recurring revenue, maintain strong margins, and never compromise on operational excellence for short-term gains. As Paul’s insights demonstrate, building a valuable MSP isn’t just about growing revenue—it’s about making strategic decisions that build lasting value.
Maximize Profits And Streamline Client Success—Join The FREE Account Management Masterclass!
Ready to grow your MSP by up to 20% without adding a single new client? Paul Cissel and a panel of industry pros are leading a free, full-day virtual training on November 6, packed with practical steps to boost your service margins, onboard clients effectively, and convert low-margin clients into A+ accounts. Learn how to drive profit by mastering account management fundamentals. Don’t miss out—secure your spot today! mspmarketingteam.com/account-management
