When reviewing an MSP business valuation, establish which earnings measure the quoted multiple applies to and how that figure is calculated. The headline multiple is not enough to compare offers or estimate what you would receive.
The multiple sits on normalized earnings, not raw revenue. And the number the buyer names is total consideration, not cash at close. Both of those will shape every estimate you make from here, so let's build the whole thing from your P&L up.
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 check 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.
| Line item | Amount | Why it's there |
|---|---|---|
| Recurring revenue (contracted managed services) | $1,800,000 | What a buyer can finance and predict |
| Project and hardware revenue | $600,000 | Real, but discounted heavily; it doesn't recur |
| Direct delivery costs (techs, tools, dispatch) | -$1,100,000 | The cost of actually delivering what's contracted |
| Other operating costs (rent, admin, insurance, software) | -$1,030,000 | Costs a new owner keeps paying; reported profit is now $270,000 |
| Add back: owner salary and benefits | +$150,000 | SDE adds this back; EBITDA would deduct a market salary instead |
| Add back: owner discretionary perks (vehicle, meals, travel) | +$40,000 | Personal costs that won't exist for the buyer |
| Add back: one-off legal and advisory fees | +$25,000 | Sale preparation costs, not ongoing operations |
| Normalized earnings (SDE) | $485,000 | The number a multiple applies to |
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.
What Multiple Can I Defend?
One person who sold MSPs reports offers around 5 to 8 times earnings, with part paid against performance. One buyer reports making offers around 5.5 to 6 times, with part carried or paid as an earnout. A prospective buyer found an estimator's range below the broker's asking multiple. Those are individual reports; ask which earnings measure and payment terms sit behind any comparison offered for your business.
For the running illustration, assume a buyer offers 5.5 times the $485,000 SDE figure: $485,000 × 5.5 = $2,667,500, or about $2.67 million. An assumed offer at 7 times would be $485,000 × 7 = $3,395,000, or about $3.4 million. These are hypothetical offer calculations, not a market range to apply automatically. Before comparing offers, examine these parts of your business:
- Recurring revenue quality: separate contracted managed services from projects and hardware. Ask the buyer how each stream enters the earnings calculation.
- Customer concentration: list revenue and gross profit by client, then calculate what losing a large account would leave. Ask the buyer to explain any concentration adjustment rather than applying a universal cutoff.
- Growth and standardization: show the recurring-revenue trend, stack exceptions, and contract differences. Ask which assumptions the buyer would change and how those changes affect the offer.
For an EBITDA-based comparison, the approved model uses a size-dependent curve: 4.0 times below $500,000 of adjusted EBITDA, 4.75 times at $500,000, and 6.5 times at $1 million, with straight-line interpolation between those two anchors. The anchors come from iTValuations' 2025 results; the below-$500,000 step is the model's adopted assumption. Review the market year before relying on it.
The model's US example has $730,276 of adjusted EBITDA and a calculated multiple of about 5.56, giving a model value of $4,057,386 using the unrounded multiple. That curve uses EBITDA after a fair-market owner salary, so don't apply it directly to the illustration's $485,000 SDE, which adds the owner's salary back. Rebuild that earnings measure with your accountant before using an EBITDA multiple.
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.
| Structure | Cash at close | Later payment | Your risk |
|---|---|---|---|
| All cash | $2.67M | None | No deferred payment in this hypothetical. |
| Cash plus note | $1.8M | $870K note over 3 years | Note depends on buyer's credit, not your performance. |
| Cash plus earnout | $1.6M | $1.07M if clients stay and earnings hold | Earnout depends on the buyer's decisions and your clients' behavior. |
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 up front with a note than $1.6 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. One owner who sold said 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. List the differences in service scope, renewal terms, and supported technology before proposing changes. Ask the buyer to show any resulting adjustment in the earnings bridge or multiple; don't assume the cleanup earns a particular price.
Review concentration before negotiating. Calculate the revenue and delivery costs attached to each major client, and test what losing one would leave. Grow or diversify where you can, and ask the buyer to explain the concentration risk in their offer.
A part-time salesperson on commission or a part-time admin hire can free you to make these changes without dropping delivery. One owner reports that a commission-based sales hire let them grow to a similar income with fewer staff. Another owner who hired techs first wishes they had hired an admin before adding techs. 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.
Build the earnings bridge with revenue, direct costs and proposed owner add-backs shown separately. Reconcile the adjustments before using the result in a valuation discussion.
mspoutpost.com/articles/msp-business-valuation-earnings-multiples-and-cash
Written by Graham Whitfield
MSP Outpost publishes information, not legal, financial, insurance, tax or compliance advice, and reading it creates no professional relationship. For decisions about your business, talk to a qualified professional.
