When three nearly identical MSPs went to market recently, something fascinating happened. All three had similar revenue figures within half a million dollars of each other. All had solid client bases with no major concentration issues. Yet one sold for significantly more than the others.
The difference? Recurring revenue.
This real-world example from M&A advisor Adam Borst highlights a critical truth that many MSP owners overlook: how you structure your revenue directly impacts your exit value and strategic options.
Why Recurring Revenue Commands Premium Valuations
According to Borst, who specializes in IT business M&A at Vista Business Group, the MSP with 60-70% recurring revenue dramatically outperformed the one with just 15% recurring contracts.
“It speaks to a higher level of relationship that you have with the client,” Borst explains. “You’re more of their trusted advisor versus transactional.”
This isn’t just about the money—it’s about what recurring revenue represents:
- Predictable cash flow that buyers can count on
- Deeper client relationships that reduce churn risk
- Higher barriers to switching that protect market position
- Scalable business model that doesn’t require constant sales efforts
For MSPs thinking about their long-term strategy, this insight should fundamentally shape how you approach client relationships and service delivery.
The Three Critical Factors That Determine MSP Acquisition Success
Whether you’re considering buying another MSP or preparing for your own exit, Borst identifies three essential considerations that can make or break a deal:
1. Business Type and Revenue Structure
Not all MSPs are created equal. The key question: Are you acquiring a true managed service provider or a break-fix shop?
Borst defines a “pure play MSP” as having 60% or more recurring revenue. But he adds an important caveat: “If you have the sales skill set to be able to convert somebody from break-fix to an MSP contract, then great. That makes a lot of sense.”
The lesson for MSP owners: If your sales skills aren’t polished, stick to acquiring businesses with established recurring revenue models.
2. Size Relative to Your Current Operations
Here’s a counterintuitive insight: bigger isn’t always better when it comes to acquisitions.
“As a general line in the sand, especially for the first acquisition, acquire somebody that’s your size or smaller,” Borst advises.
Why? Because running a business requires different skill sets at different scales. An MSP owner successful at $5 million might struggle immediately jumping to manage a $20 million operation.
For growing MSPs, this suggests a methodical approach: Scale systematically rather than trying to double your size overnight.
3. Geographic Proximity and Market Dynamics
Geography plays a crucial role in acquisition strategy, but not in the way you might think.
“If you have an MSP and you’re $500,000 to a million in revenue, it probably doesn’t make sense for you to consider an acquisition halfway across the country,” Borst notes.
However, concerns about cannibalizing your own market by acquiring locally are largely unfounded. The long sales cycles and relationship-based nature of MSP services mean there’s usually room for consolidation even in the same metropolitan area.
The Hidden Challenge: When MSPs Outgrow Their Operational Capacity
One of the most revealing insights from Borst concerns the “accidental entrepreneur” phenomenon in the MSP space.
“A couple of years go by and they pick their head up and they go, ‘Oh crap, I have a business to run. This isn’t any fun. But yet they love the work itself,'” he explains.
This scenario highlights a critical scaling challenge: Many MSP owners are exceptional technicians who find themselves overwhelmed by business operations as they grow.
The solution isn’t necessarily selling—it’s building systems that let you focus on what you love while the business runs efficiently.
Building Systems That Support Strategic Options
Whether your goal is organic growth, acquisition, or eventual exit, the foundation remains the same: systematic, scalable operations.
Here’s what that looks like in practice:
Documented Processes Over Hero Culture
MSPs that depend on key individuals (including the owner) limit their strategic options. Buyers want businesses that can operate without constant intervention.
Predictable Lead Generation Beyond Referrals
While referrals are valuable, they don’t scale reliably. Systematic cold outreach and thought leadership create more predictable growth.
Clear Value Proposition and Market Position
Generic “reliable IT support” messaging commoditizes your services. Clear differentiation supports premium pricing and better valuations.
Financial Transparency and Clean Operations
Buyers conduct thorough due diligence. Clean books, clear contracts, and well-documented client relationships eliminate deal friction.
The Strategic Decision Every MSP Owner Must Make
Borst’s insights reveal a fundamental choice facing every MSP owner: Will you build a business that depends on you, or one that can thrive without you?
This decision impacts every aspect of your operation:
- Client acquisition: Systematic processes vs. personal relationships
- Service delivery: Documented workflows vs. institutional knowledge
- Team development: Scalable roles vs. key person dependencies
- Growth strategy: Methodical expansion vs. opportunistic decisions
Preparing for Strategic Options: A Practical Roadmap
Based on the M&A insights shared, here’s a practical framework for MSPs serious about building strategic value:
Phase 1: Foundation (Months 1-6)
- Audit current recurring revenue percentage
- Document core service delivery processes
- Implement basic CRM and project management systems
- Establish regular financial reporting
Phase 2: Optimization (Months 7-12)
- Develop systematic lead generation beyond referrals
- Create client onboarding and retention processes
- Build team capacity and reduce key person dependencies
- Refine service offerings for higher margins
Phase 3: Strategic Positioning (Year 2+)
- Establish thought leadership and market presence
- Consider strategic acquisitions for growth
- Prepare comprehensive business documentation
- Engage M&A advisor for strategic planning
The Bottom Line: Building Value Beyond Just Revenue
The conversation with Adam Borst reveals an important truth: MSP valuation isn’t just about revenue—it’s about the quality and sustainability of that revenue.
Recurring contracts, systematic operations, and scalable processes don’t just make your business more valuable to potential buyers. They make it more enjoyable and profitable to run day-to-day.
Whether your five-year plan includes acquisition, organic growth, or strategic exit, the fundamentals remain the same: Build systems that create predictable value for clients and sustainable operations for your team.
The MSPs that understand this distinction will be the ones commanding premium valuations and strategic options in an increasingly competitive market.