The MSP Valuation Series | Part 1: Understanding the Key Drivers of MSP Valuation

Based on insights from the MSP Valuation Scorecard workshop series hosted by Kevin Clune of MSP Growth Hacks, featuring Hannah Paige, Director at Worklyn Partners and CFO at Harbor IT.

This article breaks down the five quantitative and four qualitative factors that determine your MSP’s valuation. You’ll learn how to assess where your business stands today, identify the areas that matter most to buyers, and understand how these metrics combine to impact your company’s overall value.

At Worklyn Partners, we invest exclusively in cybersecurity and IT services companies. Led by co-founders Johnny Lieberman and Zack Miller, our mission is to build a national one-stop shop for integrated cybersecurity and managed IT services, serving as the trusted partner for small and mid-sized businesses that lack the in-house resources to go at it alone. Since our founding in 2021, we've invested in six MSPs and MSSPs across the United States.

Our team brings a unique perspective, shaped by evaluating thousands of MSPs over the years and continuing to lead them as hands-on operators. That combination gives us a clear view into something many owners overlook: valuation isn't just relevant when you're ready to sell. Valuation awareness is a continuous process and a strategic lens. It sharpens daily decisions around pricing, growth, hiring, and leadership, which can help you build a more valuable, profitable business today.

The valuation landscape can feel daunting, filled with metrics, acronyms, and technical jargon that even experienced MSP owners find challenging to navigate. That's why we partnered with Kevin Clune, IT industry veteran, creator of MSP Growth Hacks, and author of The MSP Growth Funnel, to demystify the process and offer practical insights on valuation fundamentals, growth strategies, exit planning, and negotiation tactics.

This article kicks off a four-part series:

• “Part 1: Understanding the Key Drivers of MSP Valuation”

• “Part 2: Growing Your Valuation: What Actually Moves the Needle”

• “Part 3: Understanding Buyer Types and Deal Structures”

• “Part 4: Negotiation Tactics and Weighing Multiple Offers”

No matter your timeline or goals, this series is designed to support MSP leaders who want to deepen their understanding of valuation and use it as a lens to unlock the full value of what they’ve built.

Understanding the Key Drivers of MSP Valuation

"It’s never too early to start tracking your valuation," Paige says. "Knowing where your business stands helps you make smarter decisions, whether you're thinking about selling or simply growing."

Understanding these metrics isn’t just about preparing for an exit, it’s about running a stronger business today. The same drivers that matter to buyers also improve profitability, customer stickiness, and overall performance.

Paige is passionate about demystifying this process. "Valuation doesn't need to be mysterious. My goal is to provide a quantitative framework, to get you to a number so you can understand what your value is, how to change it, and how to grow it."

While there’s no one-size-fits-all formula, most investors focus on five key quantitative drivers and four qualitative factors that shape how MSPs are valued.

The "Big Five" Quantitative Drivers of MSP Valuation

"Think of these as the 'big five,' the metrics that tend to have the most weight when determining what your business is worth," Paige explains. "Get these right, and you'll put yourself in a much stronger position when it's time to go to market."

1. Size

When investors evaluate size, they're primarily looking at two financial metrics: total revenue and, more importantly, EBITDA. EBITDA measures your business's profitability by indicating the actual earnings you're retaining before interest, taxes, depreciation, and amortization.

"EBITDA tells you how profitable your business is," Paige explains. "In plain terms, it's how much money you're really taking home at the end of the month, the quarter, the year."

For MSPs, which typically lack significant tangible assets, EBITDA serves as the foundation for valuation. Investors apply EBITDA multiples to determine how much they're willing to pay for your future cash flow.

"Buyers aren't just looking at a single year of profit; they want consistency," Paige says. "What matters is proving your profit is both sustainable and scalable."

Most buyers don't look at raw EBITDA alone; instead, most focus on adjusted EBITDA, a more accurate view of the business's true earning power. Adjustments typically include owner salary, personal expenses, and one-time or non-recurring costs that won't carry forward post-sale.

"We're looking at steady-state EBITDA," Paige adds. "If your revenue is flat but EBITDA suddenly jumps the year before a sale, that raises red flags. Buyers will question what changed and whether that profit level can be sustained under new ownership."

2. Revenue Mix

How you earn revenue matters just as much as how much you earn. Buyers want to see a high percentage of revenue coming from managed services, specifically services delivered by your own employees.

"The highest-margin part of your business is always the services provided by your own employees, your help desk, your NOC, your SOC," Paige explains. Services revenue is defined as all revenue generated by your internal W-2 employees, and it's particularly valuable because you can control the margins, unlike resale revenue where vendors can squeeze your margins at any time. "Resale is a race to the bottom," she notes. "Services are where you add real value."

Most successful MSPs maintain over 60% services revenue. At their core, MSPs are people businesses, the value of your company ultimately rests on the talent and expertise of your team. As Paige emphasizes, "When acquiring an MSP, you're acquiring talent. It's critical that you have the in-house capability to deliver the services you claim to provide." This people-centric nature of MSPs makes the quality and stability of your technical team a key factor in valuation.

Paige also emphasizes the importance of distinguishing true recurring revenue from revenue that just appears stable: "I don't mean month-to-month contracts that charge the same amount every month. I mean yearly agreements that are contractually locked in." While month-to-month arrangements might look consistent, they offer no protection if a client decides to leave. Buyers place much higher value on revenue that’s contractually guaranteed for a year or more, whether from services or recurring third-party software, because it provides predictable cash flow and reduces risk. This includes both recurring services and recurring software/third-party resale. Industry standards show most successful MSPs maintain at least 50% recurring revenue.

When calculating your ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue), Paige recommends two views: one based on trailing 12-month data, and one based on run-rate. The trailing 12-month approach takes your actual monthly recurring revenue across the entire past year, accounting for seasonality and providing a historical perspective on your performance. The run-rate method is forward-looking: "If I take your MRR in December and multiply it by 12, that's your run rate for the next year. It shows what you'll earn if nothing changes, no upsells, no churn." Comparing these two calculations can reveal important trends in your business momentum.

3. Retention

Retention is about stickiness, and it's a huge signal to buyers. "Are your customers sticking around? Are they continuing to buy additional products from you?" Paige asks.

Churn tells buyers how stable your revenue truly is. "2024 was a particularly tough year for a lot of MSPs in terms of growth," she notes. "And a lot of that was due to churn."

"We like to see churn ideally below 5%," Paige shares. "But most MSPs are below 10%. When I say 10%, what I'm really focused on is 10% of your revenue, not the count of customers."

That distinction matters. Losing a single large client could mean losing 15% of your top line. "It's important to look at churn on a dollar basis," Paige emphasizes. Low churn tells buyers your customers are loyal and dependent on your services. High churn raises immediate red flags about business stability.

4. Growth Rate

Growth rate is a clear signal of momentum, and buyers want to see it. "Revenue growth is probably the second most important valuation driver after EBITDA," Paige says. "It shows that the business isn't just surviving, it's thriving."

Revenue growth demonstrates that your business is expanding organically, which is crucial for long-term sustainability. There are two primary ways MSPs achieve organic growth. First, expanding value to existing customers: this includes upselling additional services, increasing seat counts, and cross-selling new solutions to your current client base. This approach typically has higher margins and lower acquisition costs. Second, bringing on new customers: this expands your customer base and diversifies your revenue streams, reducing concentration risk.

Most MSPs initially acquire new customers through referrals and word of mouth. However, as Paige points out, "having a 'hunter' becomes increasingly important as the business reaches the next phase." Dedicating resources to proactive sales becomes essential for consistent growth beyond the startup phase.

Historically, the industry benchmark for MSP revenue growth has been approximately 20% year-over-year. Paige notes that while this level of growth was typical during boom years, many MSPs saw slower numbers in 2024. Even so, sustained growth of even 10%+ remains a major value driver when buyers evaluate MSP businesses.

5. Margins

Margins tell buyers how much of your revenue you're actually keeping as profit. There are two levels worth focusing on: gross margin and EBITDA margin.

Gross margin is calculated by taking your revenue and subtracting your cost of goods sold, which should include all the labor tied directly to service delivery, like your technicians and help desk staff. Divide that gross profit by your total revenue, and you've got your gross margin.

"Too many MSPs forget to include their tech labor in the cost of goods sold," Paige warns. "Your field engineers, help desk staff, the folks in the NOC, anyone directly serving customers, should be accounted for in gross margins." Most MSPs typically run gross margins between 40% and 60%, with 50%+ considered best in class.

EBITDA margin, on the other hand, is your EBITDA divided by total revenue. It reflects how efficiently your entire business converts revenue into profit. EBITDA margin measures how much cash profit a company generates each year without accounting for capital structure or financing decisions.

"EBITDA margin tells you how much of your revenue you're actually keeping," Paige explains. In the MSP space, a 20% EBITDA margin is considered healthy and common. But margins that are too high, say, north of 50%, can trigger concerns. "If you're hitting 50% EBITDA margins, buyers might ask: what aren't you investing in? Are you understaffed, under-marketing, or are you charging an exorbitant amount and not really growing the business?"

Key Qualitative Factors Shaping Buyer Perception

Beyond the numbers, buyers look for certain qualitative traits that consistently influence how MSPs are valued. As Paige explains, Customer Contracts, End Customer Type, Industry Specialization, and Geography are the four that come up over and over again, no matter who the buyer is.

1. Customer Contracts

“Customer contracts, customer contracts, customer contracts,” Paige emphasizes. “I know you’ve heard it a thousand times, but it really is that important.”

The reality is, many MSPs still operate without formal agreements, leaning on trust and long-standing client relationships. And while those relationships might feel rock solid, they can pose a major risk when it comes time to sell. "If you're looking to retire, that relationship is at risk of leaving with you."

That's why buyers put such high value on written contracts, especially three-year agreements with annual price escalators. "As inflation grows, you want to ensure that your contract price grows as well," Paige explains. If you're increasing pay for your team, your pricing should keep pace too. Contracts give buyers confidence that revenue will stick post-close, and without them, your valuation could take a hit of 1-2 multiple points.

2. End Customer Type

Buyers pay close attention to the size and structure of the customers you serve. "Know who your end customer is, because it really changes how buyers value your business," Paige says.

Some buyers focus exclusively on SMBs with 25 to 100 employees, others on mid-market clients with 100 to 500, and some target enterprise customers. Very few try to serve everyone under one roof. That's why clearly defining your customer profile by company size, complexity, and decision-making structure can help align your MSP with the right buyer.

Just as important is knowing whether you're serving those customers profitably. "You may have the best relationship in the world with a customer, but you might be losing $100,000 a year on them," Paige notes. "They call in constantly, and you're not charging for that."

Her recommendation? Use tools like BrightGauge, ConnectWise PSA, Autotask, or Halo to track technician time by customer and make sure your pricing reflects the level of effort required.

3. Industry Specialization

Buyers place a premium on MSPs with deep expertise in specific industries. “Whether you focus on dental, government, financial services, or another niche, the key is knowing your vertical—and understanding which buyers value it most,” Paige explains.

For instance, an MSP serving healthcare practices with 5 to 20 physicians may be highly attractive to a buyer focused on that vertical, but less relevant to one targeting manufacturing clients.

Specialization signals process maturity, operational depth, and repeatability—all critical ingredients for scalability. For buyers executing a roll-up strategy within a specific sector, that kind of vertical focus can significantly increase valuation.

Paige also emphasizes that technological specialization can be just as compelling. Whether it’s deep familiarity with a particular security platform, cloud environment, or Microsoft stack, unique technical capabilities can give your MSP a distinct competitive edge.

4. Geography

Geography might not seem like a major factor, but it can have a meaningful impact. "Geography plays a bigger role than most MSPs realize," Paige says. "Some investors focus exclusively on the Northeast, others on Texas or California."

If your MSP aligns with a buyer's regional strategy, it can boost your valuation. If not, it's not necessarily a deal-breaker, but finding a buyer whose footprint or growth plan fits your location is key. "Be aware of what the buyer's preferences are," Paige adds, "and play that to your advantage."

The MSP Valuation Scorecard: Tracking Your Progress

To help MSP owners apply these valuation principles to their own businesses, Paige and Clune have developed the MSP Valuation Scorecard, a proprietary methodology that allows owners to track their progress across these key metrics over time.

The scorecard functions as both a diagnostic tool and a roadmap. It provides a framework for calculating a weighted average multiple based on your performance in each of the "Big Five" quantitative areas, giving you a reasonable estimation of your overall valuation. For example, an MSP might score highly on recurring revenue and services mix, but lower on EBITDA size and growth rate. The scorecard weighs these factors to produce a realistic valuation multiple.

More importantly, the tool helps identify which metrics need the most improvement to increase your company's worth. "It won't always be perfect," Paige notes, "but it's a good starting point to understand where you stand and what areas need improvement."

The scorecard is designed to be used quarterly, allowing owners to track valuation trends over time. This regular monitoring helps MSP leaders make strategic decisions about where to focus their improvement efforts, whether that's increasing recurring revenue, improving margins, or accelerating growth, based on which changes will most significantly impact overall valuation.

Used consistently, the scorecard not only measures where you are today, it also helps clarify the path to where you want to be.

The Key Takeaway: Know Your Number Early

Ultimately, Paige emphasizes the importance of understanding your MSP's value early, regardless of your exit strategy. "Even if you're not planning to sell for five or ten years, tracking valuation helps you operate like an owner, not just a technician. If you view your business as an asset, you'll always want to know what that asset is worth," she concludes.

This shift in mindset, from service provider to asset builder, transforms how you make daily decisions. When you track these metrics regularly, you begin to evaluate every business choice through the lens of its impact on valuation. Should you invest in that new technology? Hire that additional engineer? Pursue that particular client? The valuation scorecard gives you a framework to answer these questions strategically rather than reactively.

Understanding these valuation fundamentals positions your MSP for informed decision-making and sustained success. By knowing your number today, you gain clarity on what actions will most effectively increase your business's value tomorrow, regardless of your exit timeline.

What's Next in Our Series

Now that we've covered the key drivers that determine your MSP's value, our next article will focus on practical strategies to actually increase that value. In Part 2, we'll explore specific actions you can take to improve each of the valuation drivers we've discussed.

Want to better understand your MSP’s valuation, or explore how to grow it? Let’s talk. Schedule a meeting with me here.