What Your MSP Is Actually Worth: The Multiple, the Earnings, and the Cash

What Does a Buyer Apply the Multiple To?

The plain answer: it's almost never revenue. It's earnings, and specifically earnings the buyer can verify and that reflect what a new owner would actually keep. My view: the multiple applies to what's called normalized EBITDA or seller's discretionary earnings (SDE). EBITDA is earnings before interest, taxes, depreciation and amortization. SDE is the same idea plus the owner's salary and perks. Pick one, but know which one you're using, because they produce different numbers.

Say you run a 12-person MSP doing $2.4 million in revenue, with $1.8 million recurring. A multiple of 6 on revenue gives you $14.4 million. That's not a real number. The same business might show about $485,000 in normalized earnings, which we build below. Six times that is about $2.9 million. The gap between those two figures is where deals actually happen.

The second thing to know: when a buyer quotes "six times," that's the total price, not the cheque they'll write at closing. We'll get to that. First you need the earnings number itself.

How Do I Turn Monthly Recurring Revenue Into Earnings?

Take the same $2.4 million business. Here's how the bridge works, line by line. This is the one-page document you build before you talk to any buyer, and it's worth a few days of your time or your accountant's.

Notice what moved the needle. The owner add-backs of $190,000 are nearly 40% of the final earnings number. Getting those right matters more than arguing about whether the multiple is 5 or 6, because a $190,000 swing on a 5.5 multiple is just over a million dollars of price.

My rule for what counts as recurring: only contracted recurring revenue counts. Time-and-materials work from the same clients is not recurring, and pass-through hardware is not recurring. And add-backs are only legitimate if a buyer would actually stop paying them. Your below-market salary counts. Your spouse's car that sits in the shop lot doesn't, and buyers know the difference.

The result of that bridge is the earnings number. Now you can ask the question that actually matters: what multiple can you defend on it?

What Multiple Can I Defend?

Owners who have sold their MSPs report realized offers roughly in the 5 to 8 times normalized earnings area, often with part paid as an earnout or note, and a realistic offer more often around 5.5 to 6 times. Asking multiples can run higher than what buyers actually pay, according to the same owners. Your job is to figure out where your business sits in the range that clears, not the range in a listing.

For the running example, normalized earnings of $485,000 at 5.5 times gives about $2.67 million. At 7 times, $3.4 million. The range is real, and where you land depends on three things:

• Recurring revenue quality: contracted managed services with defined scope support a higher multiple than projects or hardware, which a buyer sees as risk, not value.
• Customer concentration: one client at 30% of revenue is a discount. Two at 15% each is manageable. A buyer prices the chance that a single account walks after close.
• Growth and standardization: consistent clients on the same stack, with prices near market, support the top of the range. A patchwork of one-off agreements and below-market pricing sits at the bottom.

My view: start your own estimate at the middle of the range and adjust down, not up. A defensible first estimate is 5.5 to 6 times your normalized earnings, and then ask what in your business justifies moving up from there.

But the multiple is still only half the story. Two buyers can quote the same 6 times and pay you very different amounts of cash.

Why Is My Cash at Close Lower Than the Multiple?

The headline multiple is total consideration, not cash at close. Part of the price can come as a note or an earnout, so take the example's 5.5 times on $485,000 and look at three ways it could be paid.

The same multiple produces a $1.07 million difference in cash at close. That's the number that funds your next move. The earnout might pay, and it might not. A buyer who re-prices your clients, changes the service scope, or assigns accounts differently controls whether you ever see it.

So compare offers on two numbers: expected total payment and how much risk you carry. A lower headline with more cash can beat a higher headline paid mostly out of future performance. I'd rather bank $1.8 million with a note than $2 million with an earnout I can't control. If the buyer won't separate cash from contingent payment, that tells you something about the offer.

The structure also changes your tax position, and that's a conversation for your local accountant. Know both before you choose.

Now, the part you can actually do something about. If the number is lower than you hoped, you have a year to move it.

What Can I Do a Year Before Selling?

The regret I'd most want you to avoid is realizing you should have charged more from the start. Owners who have been through this say exactly that: charging more early would have made the business more profitable and more attractive. Raising prices late is harder than pricing right early, but a year before sale is still the right time to start.

Raise prices toward the market at each renewal, if your renewal terms permit it. A 10% increase on $1.8 million of recurring revenue is $180,000, and if most of that drops to earnings, that alone can move your normalized earnings from $485,000 to $600,000, which at 5.5 times is worth $630,000 more. The catch, and it's real: raising prices assumes your renewal terms permit it and clients stay. Some clients will leave, and if your coverage is already stretched, higher service expectations can break delivery. Some owners will rationally sell as-is rather than risk churn for a multiple they might not get. That's a legitimate choice, not a failure.

Standardize contracts and the stack. My view is that buyers discount accounts on five different stacks with bespoke terms. One service catalog, one scope definition, one renewal pattern. That's a lower risk discount, which is a higher multiple.

Reduce concentration. If one client is 25% of revenue, that's a discount you carry into every negotiation. Grow or diversify where you can, and be honest that you can't always.

A part-time salesperson on commission or a part-time admin hire can free you to make these changes without dropping delivery. Owners who have tried this report that a commission-based sales hire let them grow to a similar income with fewer staff, and an admin hire first, then techs, worked better than hiring techs alone. Just make sure the hire's cost is tied to results, not a fixed salary that eats the margin you're trying to build.

One more thing worth doing: ask the buyer to show you the same earnings bridge they used on their last acquisition. If they won't, that's a signal about how they'll treat your numbers too.

When Should I Ignore This Whole Exercise?

The normalized earnings multiple stops being trustworthy in specific situations, and it's worth naming them so you don't lean on a tool that doesn't fit:

• Revenue is mostly one-off projects. If 60% of your revenue doesn't recur, a multiple on earnings built from recurring revenue overstates what a buyer can finance. Use a revenue multiple or asset-based check instead.
• Financials can't be reconstructed. If you can't separate recurring from project revenue, or the P&L mixes streams, no buyer will trust your normalized number. Get an accountant to rebuild it before you go to market.
• The buyer won't verify recurring revenue. A deal can stall when a broker refuses to show contracts before an LOI, as some owners have found. If the buyer won't look at your contracts, they're not pricing your recurring revenue, they're pricing a guess.
• The sale is distressed. If you're selling because you're burning out or the business is failing, a multiple on current earnings is fiction. Price the business on what a buyer can actually finance, and get local specialist help before you commit to a number.
• You need all cash immediately. If the structure is mostly earnout and you can't absorb the risk of non-payment, the multiple is theoretical. Walk away or negotiate for more cash.

If any of those apply, get a local broker or M&A advisor before you price anything. The math in this article is a starting point, not a substitute for someone who knows your jurisdiction's tax treatment and your market's actual deal terms.

If none of them apply, here's your Monday task. Build the earnings bridge: one line per revenue stream, one line per direct cost category, one line per owner add-back. That single page will tell you more about what your business is worth than any multiple a buyer quotes you, because it's the number they're going to use anyway.