Evolving market dynamics can have an immense impact on a company’s valuation and overall deal making. Understanding shifts in the market is especially important when deciding to buy or sell a business. Executing deals that are mutually beneficial at the right valuation can be a tricky balance across any industry, but for privately-owned managed service providers (MSP), the time may be now to sell or think through future transition planning.

MSPs, which encompasses outsourced IT services managing networking, data backup, recovery, software installations, and security, have grown significantly over the last 5-years as the need for specialized IT expertise has driven new demand and more small and medium sized businesses (SMBs) have turned to third-party vendors for additional cost savings. The complexity of technology even in small businesses continues to rise, and rather than investing in their own tech departments, many SMBs have turned to MSPs.

The ripple effect is an abundance of thriving MSPs, with Michael Birmingham, Managing Director of the MSP team at FOCUS Investment Banking, estimating there are around 20,000+ MSPs in the marketplace today.

“The MSP landscape is heavily populated by founder-led businesses, reflecting entrepreneurial drive and personalized client relationships, yet this fragmentation poses unique opportunities for market consolidation and additional scale,” says Birmingham.

Business complexity drives growth in outsourced IT services

Beyond this potential for consolidation, the MSP industry is also increasingly attractive to investors because of its asset light business model. Besides the initial cost of laptops and other small tech-related equipment, MSPs can operate with very few fixed expenses other than overhead.

“There is strong revenue visibility in these businesses because clients are typically signed to three-year contracts and beyond,” says Birmingham. “From a forecast perspective, this provides three years of concrete revenue visibility, and then there’s little to no capital expenditure required.”

Additional market drivers impacting the industry include automation, the rising complexity within security, and the shift to remote work. As the simple art of doing business revolves more around technology, the need for MSPs and new services is only growing.

The demand for MSPs to become a one-stop shop has pushed firms to expand their outsourced IT services to meet evolving customers’ needs. Services like around-the-clock support, robust managed security, and comprehensive IT vendor management is now becoming more common. Businesses are looking to MSPs to create centralized IT services not only to improve operational efficiency but mitigate risk. This requires more people, money and resources that many small MSP firms currently don’t have access to.

Interest in automating IT services is also growing. Tasks like password resets, workflow processing, and creating visualization through dashboards can all be automated. More businesses are shifting workloads to cloud infrastructure, as well, accelerating adoption of cloud services. MSPs can help navigate hybrid cloud, database, and server challenges. Furthermore, more remote work means growing security and compliance risks as cyber threats and breaches are causing costly disruptions for customers.

“MSP, now more than ever, is being pushed to expand its service offerings to include security services beyond basic antivirus and firewall management,” says Birmingham. “We are now starting to see best-in-class MSP’s gently pivot to include security services and make this a staple of its offering.”

A market ripe for consolidation

The opportunities for MSPs are seemingly endless in today’s business climate, and continued growth in the space has attracted a slew of sophisticated investors who see an opportunity to execute a traditional roll-up strategy. Many lower middle market MSPs have turned to investors who offer additional resources to meet and monetize the growing demands placed on them by customers. While there has been notable consolidation of the market thus far, MSPs who boast strong growth and stable margins stand to benefit from strong market tailwinds.

In the last five years, there’s been a massive uptick in interest from private equity to consolidate MSPs and generate return for their investors. As these consolidations continue and larger MSPs enter the market with greater resources, there are new signs lower middle market MSPs seeing new competitive service and price pressure.

“We see multiples are still strong for lower middle market MSPs but with larger players continuing to scale, we are on the lookout for early signs of multiple erosion” says Birmingham. “The fact is this pattern of consolidation is a theme that that’s played out in a number of industries.”

And while this may sound alarm bells, Birmingham emphasizes while the music may slow in 2025, the music has not stopped, and market dynamics are still very attractive for lower middle market MSPs to explore new partnerships and take advantage of consolidation in the market. For most this journey begins by speaking with a trusted M&A advisor who can guide you through the process and having closed nearly 30 successful transactions in the space, FOCUS Investment Banking can help.

“Market conditions are still favorable to sellers, but this may not always be the case,” says Birmingham. “We know how it’s done, and we know the active buyers that see the intrinsic value of a well-run MSP. There is nobody else better in the market to have a conversation around, ‘How much is your company worth, and what is it going to look like if you’re ready to sell?’”