Guide
4 min read
By MSP Margin Editorial
MSP owners tend to describe their business by one number: monthly recurring revenue. It is a useful number, and buyers care about it. But a buyer's diligence team will not stop at the total. They will take it apart, customer by customer and agreement by agreement, to judge how likely that revenue is to keep coming in after the owner leaves.
Two MSPs with the same recurring total can look very different once that work is done. The difference comes down to a handful of factors that owners can see and influence well before a sale.
Contract terms do a lot of the work
Start with the agreements themselves. Revenue backed by a signed multi-year agreement is more predictable than revenue from a month-to-month arrangement, even if the monthly amount is identical. A buyer reading the contract wants to know how long the customer is committed, what happens at the end of the term, and how easily the customer can leave.
Auto-renewal language matters here. An agreement that renews automatically for another term unless the customer gives notice keeps revenue in place by default. An agreement that simply expires puts the burden on someone to go get a new signature, and in a transition that someone may be a new owner the customer has never met.
Termination clauses deserve a close read. Some MSP agreements allow the customer to cancel for convenience on 30 days' notice, which makes a three-year term look a lot like month-to-month in practice. Others limit termination to cause, or require an early termination fee. Buyers also look for change of control or assignment provisions. If a customer must consent before the agreement transfers to a new owner, that customer effectively gets a chance to renegotiate or walk.
Price escalation clauses are another detail buyers notice. An agreement that allows annual increases, or ties pricing to device or user counts, gives a new owner room to keep up with vendor cost increases without reopening the contract.
Who the revenue comes from
Customer concentration is the next lens. If one customer accounts for a large share of recurring revenue, the business carries that customer's risk. A single departure could change the economics of the whole deal. Buyers look at the largest customers individually and as a group, and they ask how long each relationship has lasted and who on the MSP side owns it.
That last question points to a related issue: relationship concentration. When the owner is the only person a key customer talks to, the revenue is tied to someone who is planning to leave. Revenue spread across many customers, each served by a team rather than a single person, holds up better through a change in ownership.
Margin on the agreements
Recurring revenue is only as valuable as the profit it produces. A buyer will look at gross margin on managed services agreements, meaning the revenue less the direct cost to deliver it: technician labor, tools, and third-party licensing passed through to the customer.
This is where bundled agreements can hide problems. If a flat monthly fee includes Microsoft licenses, security tools and backup, and those vendor costs have risen without a matching price change, the agreement may carry far less margin than it did when it was signed. An MSP that tracks margin by agreement, and by customer, can show a buyer which revenue is healthy and which needs repricing. One that only tracks total gross margin may not know until diligence tells them.
Resold licensing deserves its own line in your reporting. It recurs, but it usually carries thin margin and is easy for a customer to move. Buyers generally treat it differently from managed services revenue, so separating the two in your books saves time.
Churn tells the history
Finally, buyers look at what has actually happened. A churn history covering lost customers, downgrades and seat reductions shows whether the recurring base has been stable or quietly eroding. Net revenue retention, which compares what a group of existing customers pays now with what they paid a year ago, captures both losses and expansion in one figure.
Consistent, explained churn is easier for a buyer to accept than a clean-looking total with no supporting detail. If you lost customers for clear reasons, such as an acquisition or a business closing, document it.
What to do with this
Review your agreements for term, renewal, termination and assignment language. Track margin by customer. Keep a churn log. None of these steps changes your recurring total, but each one changes how confidently a buyer can rely on it.
This article is general information, not legal, tax or transaction advice. Before making decisions about a sale, work with your CPA, an M&A advisor and an attorney.