Price Hike: What is Driving Higher Valuations of MSPs and IT Firm

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Valuations for managed service providers and IT firms are increasing, and we’re seeing higher prices across locations and sectors. We’ve seen a number of factors driving higher valuations, leading to a market that is hotter than it has been in years. What this means for business owners is significant. On one hand, this may represent the right time to exit the business through a sale. On the other hand, there are compelling reasons to seek an acquisition to drive meaningful growth for your business.

In our view, these prices are not artificially high, because there are identifiable reasons that IT and managed service organizations are growing in value. From improved appetite in the broader market for IT services, to an increase in acquirer interest all around the globe, this post will examine why prices for IT and managed services organizations continue to rise. Further, we will explore how both buyers and sellers can make the most of the current market conditions.

The Tech Sector is Booming

One of the primary drivers of increased valuations for managed service providers and IT firms is the overall growth of the tech sector. In recent years, there has been a surge in demand for tech products and services across industries, as businesses of all sizes look to improve their digital capabilities. This has led to strong growth for many companies in the sector, and investors are eager to get a piece of the action. As a result, they are willing to pay premium prices for quality companies in the space.

This trend is likely to continue in the years ahead, as the demand for technology continues to grow, and as our digital transformation settles in. Businesses are increasingly reliant on digital tools, and that reliance is only going to increase over time. As a result, the tech sector is likely to continue its rapid growth, leading to even higher valuations for companies in the space.

Ongoing Consolidation

In recent years, there has been a surge in M&A activity as big firms have looked to acquire smaller ones to gain market share. This has put pressure on buyers to act quickly and to offer top dollar when they find a company they’re interested in acquiring.

Another factor that is driving consolidation is the shortage of qualified workers in the IT sector. With the rapid growth of the industry, there are not enough workers to meet demand. This has led to a situation where companies are willing to pay a premium to acquire talent. In some cases known as acqui-hires, the primary motivation for the acquisition isn’t to add new customers or lines of business, it’s to bring aboard the target company’s employees.

While this consolidation trend has been happening for a while, it’s likely to continue in the coming years. Ultimately, ongoing industry consolidation suggests sellers can expect high valuations for their businesses.

The Pandemic has accelerated Demand

The COVID-19 pandemic has had a major impact on the IT sector, accelerating demand for many products and services. For example, the shift to remote work has led to an increase in demand for cloud computing and other virtualization technologies. And as businesses look to improve their digital capabilities, they are increasingly turning to managed service providers for help.

These changing work norms for businesses around the world have also changed the services required from MSPs. Employees working remotely means that security and operations extend outside of the traditional workplace in ways they never have before. Businesses are more reliant on their tech partners than ever before.

Another factor brought on by the pandemic pertains to owners of IT firms nearing retirement age. For many of these owners, there were difficult challenges with customers, partners, and vendors in 2020, 2021, and even into 2022. And for some, these headaches accelerated their retirement plans, becoming the onus for entering the market as a seller.

New Types of Buyers in the Market

We are seeing new types of buyers enter the market for IT and managed service providers. In particular, we are seeing more foreign buyers and those in cross-functional industries showing interest. This is adding even more competition to the market and driving up prices.

It isn’t just buyers in other American locations coming to the table. Buyers from other countries and continents are coming to the table with aggressive offers as well. These acquisitions are being made for strategic reasons, the expansion of the provider’s service area, or for wholly financial reasons that have nothing to do with technology, staff, or capability at all.

In addition to foreign buyers, in recent years, there has been a growing trend of private equity firms going downmarket (evaluating smaller firms than they would have in the past) in the managed services space. This trend is being driven by a number of factors, including the desire to add new capabilities to existing portfolios and the increasing importance of digital transformations.

The “I” word

Finally, it would be a mistake to not consider the role of inflation in rising prices. Inflation is impacting the economy across the board. While six or eight months ago inflation was primarily affecting automobiles and gasoline, the devaluation of a currency relative to goods and services is now touching everything from food to aluminum. This broad wave pushing the economy to and fro certainly impacts the value of IT businesses looking to sell.

Critically, this impact is felt in different ways by buyers and sellers. For buyers, the raw number of an offer must be higher on account of inflation. For sellers, they are also likely considering the downstream or longer term effects of inflation by wondering to themselves: “if this continues, I’ll need even more money to comfortably retire or start a new venture. I’m not just thinking about now, I’m also thinking about five or ten years from now.”

Will these Valuations Continue?

While predicting the future of the IT and MSP market is as much supposition as science, market trends and conditions do indicate continued growth. Because no single factor is driving prices up then it stands to reason that the combination of factors at play will continue. For example, if there were a scarcity of IT companies, then that might drive prices higher until more companies came to market. However, a wide range of things is pushing valuations higher in different locations and segments of the IT space.

That, combined with the entrance of a larger buyer pool into the market indicates that IT and managed service providers will continue to be valued highly.

However, there is one caveat worth considering: commoditized services. Some services like basic network monitoring and help desk continue to head towards the realm of commoditization. In this scenario, customers have a hard time differentiating the quality of service between providers. These companies will struggle to keep up with the valuation growth that other, more specialized companies are experiencing. IT providers that offer a very deep and specific service – think modernizing legacy IBM workloads to work in a hybrid cloud or pen testing for public utilities or of course MSSPs – will continue to see increases in value.

How to Make the Most of the Current Climate

There are a few things that both buyers and sellers can do to make the most of the current market conditions. It’s important to have a clear understanding of what you’re looking for and what your goals are. This will help you to narrow your search and focus on the right opportunities. Make sure to do your due diligence. With prices as high as they are and with the risk of overpaying, it’s even more important to make sure that you’re getting what you’re paying for if you are an acquirer. If you are a seller, it is important to find an acquirer that meets not only your financial goals but also to ensure there is a cultural fit and that your timeline for a complete exit is met.

If you’re a buyer:

Be prepared to act quickly and pay a premium price.

Look for companies that are in high-demand sectors such as cloud computing and virtualization.

Consider acquiring talent through an “acqui-hire.”

If you’re a seller:

Now is a great time to sell your company. Valuations are at all-time highs.

Be prepared to negotiate hard and get the best price for your business.

Focus on buyers who are willing to pay a premium price and close quickly.

Entering the Market When the Time Is Right

With the market for IT and managed service providers heating up, prices are increasing across locations and sectors. There are a number of factors driving this increase, including broader growth in the tech sector, consolidation as seen previously, COVID and work from home, hiring and resource needs – “acqui-hire”, and new segments of buyers including foreign buyers and those in cross-functional industries. With all of these factors at play, it’s no wonder that prices are on the rise, and will likely continue to be.

Here at The Host Broker, we have helped hundreds of managed service providers and IT organizations through the acquisition process. We match buyers to sellers and serve as a trusted advisor throughout the process. Our team has the dedication, care, and expertise necessary to make the purchase or sale of an IT company a success. Contact us here to learn more about how The Host Broker can help when it’s time to buy or sell a hosting company, IT organization, or managed service provider.