An IT managed services business (MSP) is valued primarily on a multiple of EBITDA, typically between 4x and 8x for businesses in the $2M–$20M range. However, the multiple you pay — or should pay — depends almost entirely on the quality and predictability of the recurring revenue, not the headline number.
The Two Valuation Methods Buyers Use
EBITDA Multiple
The most common approach. Take the business’s earnings before interest, taxes, depreciation, and amortization, then multiply by a market-based factor. For MSPs:
- 4–5x EBITDA: project-heavy revenue mix, high customer concentration, aging tech stack
- 5–6x EBITDA: solid MRR base, some customer concentration, owner-dependent operations
- 6–8x EBITDA: 70%+ recurring revenue, diversified customer base, documented processes, strong retention rates
Revenue Multiple (MRR-Based)
Some buyers value MSPs at 1–2x annual recurring revenue (ARR) independent of EBITDA. This method is more common when the business has high growth but compressed margins. A $5M ARR MSP at 1.5x = $7.5M valuation regardless of current profitability. Use both methods. If they diverge significantly, understand why before you proceed.
What Actually Moves the Multiple
Recurring Revenue Percentage
This is the single biggest value driver. An MSP where 80% of revenue comes from managed contracts — monthly retainers, not break-fix or one-time projects — commands a premium multiple. Below 60% recurring, expect sellers to struggle justifying above 5x.
Customer Concentration
If any single customer represents more than 15–20% of revenue, that’s a risk factor that compresses value. Buyers and lenders both discount heavily for concentration. Ask for a revenue breakdown by customer before you go further than an NDA.
Contract Quality
Month-to-month agreements are worth less than multi-year contracts with auto-renewal clauses. Review the actual contract terms, not just the revenue totals. A $500K customer on a 30-day cancellation notice is fundamentally different from the same customer on a 3-year agreement.
Key Person Dependency
If the owner is the primary technical resource, the primary sales relationship, or the face of the business to major clients, the business has key person risk. This doesn’t kill the deal but it does compress the multiple and should extend your transition period in the LOI.
Employee Certifications and Tech Stack
MSPs built on major platforms — Microsoft, Cisco, SentinelOne — with certified engineers carry more value than generalist shops. Certifications represent barriers to competition and signal operational maturity.
A Real Example
A $3M revenue MSP with:
- 75% recurring revenue ($2.25M MRR base)
- 22 customers, largest at 12% of revenue
- 3-year contracts with auto-renewal
- 4 certified engineers, owner handles sales only
- EBITDA of $600K (20% margin)
Valuation range: $600K × 6x = $3.6M, or $2.25M ARR × 1.5x = $3.37M. Both methods converge near $3.5M. That’s your anchor for negotiation.
What SBA Financing Looks Like for MSP Acquisitions
SBA 7(a) loans cover up to $5M and are commonly used for MSP acquisitions in the $2M–$8M range. You’ll typically need 10–15% equity injection (your down payment), with the remainder financed over 10 years at current SBA rates. For deals above $5M, buyers often stack SBA with seller financing — seller carries 10–20% as a note, reducing your required equity and signaling their confidence in the transition.
The Number Most Buyers Miss: Seller Discretionary Earnings
For smaller MSPs where the owner takes a below-market salary, the relevant metric is Seller Discretionary Earnings (SDE) — EBITDA plus owner compensation added back. A $600K EBITDA business where the owner pays himself $80K (vs. a market rate of $150K) has SDE of $670K. Use SDE for businesses under $2M in revenue; use EBITDA for businesses above it.
Bottom Line
A well-run IT MSP with strong recurring revenue, diversified customers, and documented processes is worth 6–8x EBITDA. A project-heavy shop with customer concentration and owner dependency is worth 4–5x. Your job in diligence is to figure out which one you’re actually buying — because sellers always present the former while sometimes selling the latter.
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