A lower-middle-market IT services or managed services provider is usually bought with a senior cash-flow term loan and a revolver, or a unitranche loan from a private credit fund, often with a delayed-draw facility for add-ons, and with sponsor equity, rollover and sometimes an earnout beneath. Senior cash-flow lenders commonly lend 2x to 3.5x EBITDA. Lenders credit contracted recurring revenue most and project and resale revenue least, and test churn, concentration, contract assignability, key engineers and the company's own security.
- Usual structure
- Senior term loan and revolver, or unitranche; delayed-draw for add-ons
- Senior leverage
- Commonly 2x to 3.5x EBITDA; unitranche stretches further
- What lenders credit most
- Contracted monthly managed-services revenue with low churn
- What lenders discount
- One-off projects, hardware and license resale, break-fix work
- The risk specific to MSPs
- A breach at the provider can reach every client at once
Lending against contracts, not collateral
An IT services company's balance sheet is mostly receivables, some equipment and software subscriptions. The purchase price is mostly goodwill: the client base, the contracts and the team that services them. Lenders that lend against collateral have little to hold, so these deals are financed by cash-flow lenders, banks and private credit funds, that underwrite recurring earnings. How lenders approach a price that is mostly goodwill is in financing goodwill in an acquisition.
Managed services is a fragmented market and a busy one for buy-and-build strategies. The buyers at this size are private equity platforms, strategic IT firms adding a region or capability, independent sponsors and management teams. A company this size has usually outgrown SBA financing, whose 7(a) loans go up to $5 million.
Which revenue a lender credits
IT firms describe revenue in ways lenders take apart. A company billing a large number may keep only a fraction of it, and much of the billing may be one-off. Lenders sort revenue by how likely it is to recur under a new owner.
| Revenue type | How it behaves | How lenders treat it |
|---|---|---|
| Managed services: per-user or per-device monthly contracts | Recurring, contracted, usually the best margin | Credited most; the lender tests churn, contract terms and price increases |
| Security, backup and monitoring add-ons | Recurring, sold on top of the managed contract | Credited like managed services if billed monthly under contract |
| Cloud and software license resale | Recurring but low margin; the vendor keeps most of the price | Credited on the margin kept, not the gross billing |
| Projects: migrations, network builds, office moves | Lumpy; depends on selling new work every year | Credited on a multi-year average, and less than recurring revenue |
| Hardware resale | Low margin, one-off | Largely set aside when sizing the debt |
| Break-fix and hourly support | Unpredictable; tied to technicians' time | Discounted, especially if it shrinks as clients move to contracts |
The figures lenders ask for follow from that table: recurring revenue by month for at least two years, client count and churn, gross margin on managed services after the cost of tools and technicians' time, and revenue per technician. A firm that shows monthly recurring revenue rising steadily, with few clients leaving, is a strong credit even with little collateral.
Lenders size debt on EBITDA and cash flow, not on a multiple of recurring revenue. A seller who has priced the business on a revenue multiple may be asking more than the earnings can repay; see will a lender finance the purchase price. Where revenue is recurring, some private credit funds lend on recurring revenue rather than EBITDA to software businesses, but managed services providers are usually underwritten on EBITDA.
Contracts, consents and concentration
A managed-services contract is only worth what it says about term and termination. Lenders read a sample of client agreements, and the largest in full, looking for three things.
- Term and termination. A contract with a multi-year or annual term and auto-renewal is worth more than one a client can end on short notice. Month-to-month books can still be strong where the retention history is.
- Assignment and change of control. In an asset purchase, contracts must be assigned, and some need the client's consent. In a stock purchase, a change-of-control clause may give the client a right to terminate. See change-of-control consents and asset vs stock purchase.
- Concentration. An MSP whose largest client is a big share of recurring revenue carries that client's risk. Lenders size down for it, ask for the relationship to be tested before closing, or look for an earnout or seller note to share the risk. See customer concentration.
Firms with government clients face an extra step: public contracts often cannot be assigned without the agency's approval. Lenders will want to know how much revenue depends on it.
People, certifications and the tools
In an IT services firm, the engineers are the service. Clients stay because a technician they trust answers. Lenders ask who the key technical and account staff are, how long they have stayed, how they are paid, and whether they stay through and after the sale. Retention bonuses, new employment agreements and rollover equity for key people are common and help the file. Lenders also want a management team, a service delivery lead and a finance lead, that can run the business and report to a lender without the founder.
| Item | Transfers with the business? | What the lender checks |
|---|---|---|
| Client contracts | By assignment or, in a stock deal, with the entity; some need consent | Term, termination rights, consents obtained |
| Vendor partner status and distributor accounts | Often tied to certified staff and reviewed on a change of owner | Whether the firm keeps the pricing and support partner status gives |
| Monitoring, ticketing and security tool licenses | Licensed to the seller's entity; reassigned or re-contracted | That the stack the business runs on continues on day one |
| Engineers and their certifications | Certifications belong to the person | Who is staying, and whether partner tiers depend on them |
| Client documentation and credentials | Transferred with the business, securely | That the buyer can service every client without the founder |
Cyber risk is a credit risk
An MSP holds administrative access to its clients' systems. A breach that starts at the MSP can reach every client at once, end relationships and bring claims. Lenders ask what security the firm runs on its own systems, whether it has had incidents, and what cyber and professional liability insurance it carries. Diligence that finds a past breach, or weak controls over client credentials, can change the terms or the price. A quality of earnings review will test the recurring revenue; lenders increasingly expect a technical and security review beside it.
The purchase agreement's representations about security incidents protect the buyer; the lender will read them too.
Structuring the purchase
| Layer | Role in an MSP acquisition | Watch for |
|---|---|---|
| Senior term loan | Funds most of the price against recurring EBITDA; commonly 2x to 3.5x | A leverage covenant and a coverage covenant |
| Revolver | Working capital, often lightly used | Borrowing-base terms if asset-based |
| Delayed-draw term loan | Funds add-on MSPs on terms agreed at closing | Pro forma leverage tests and credit for acquired EBITDA |
| Unitranche | One larger loan from a private credit fund | A higher blended rate and call protection |
| Earnout tied to retention | Shares the risk that clients leave after closing | Subordinated to the senior lender and paid only within covenants |
| Seller note and rollover | Bridge price and keep the founder invested | Subordination terms the senior lender sets |
Many MSP deals are priced with an earnout tied to client retention, and conventional lenders accept that when the earnout sits behind them; see how earnouts interact with acquisition debt. The choice between one larger loan and senior debt with a subordinated layer is in senior debt vs unitranche. Buyers building a platform should read financing add-on acquisitions and delayed-draw term loans.
What goes in the file
For the term loan, lenders start with the P&L, the balance sheet and the debt schedule, with a year-to-date P&L through the last month-end and an AP aging where available. A revolver adds an AR aging by client with days outstanding. The acquisition adds the target's latest full year of figures for every company being bought, never an older year, and the letter of intent. For an IT services firm, add:
- Monthly recurring revenue by client for at least two years, with clients added and lost.
- Revenue split by type: managed services, projects, resale and hourly work.
- The client contract template and the largest contracts in full.
- A staff list with roles, tenure and certifications, and who is staying.
- Vendor partner agreements and the tools and licenses the business runs on.
- Insurance policies, including cyber and professional liability, and any incident history.
Senior bankers run every Midas Partners engagement. Once the documents are in, Midas Partners builds the financing model, lender presentation, blind teaser and underwriting memo in a day; built by hand the same package takes at least a week. Software does the analyst work and a senior banker checks every page before the client approves it. Of the 1,800+ lenders in the book, 1,148 write term and private credit; those that fit see a blind teaser first, and the client approves each by name.
Common questions
- Will a lender lend against a multiple of recurring revenue?
- For most managed services providers, no. Lenders size debt on EBITDA and cash flow and the coverage they produce. Recurring revenue makes those earnings more reliable, which supports more debt, but the debt still has to be repaid from profit.
- Can the seller be paid more if clients stay after closing?
- Yes, through an earnout, which is common in MSP deals. The senior lender will require it to sit behind its loan and be paid only while covenants are met.
- The target's largest client is a big share of revenue. Is that a problem?
- It is the lender's main question. Expect it to ask about the contract, the relationship and whether the client has met the buyer, and possibly to size the debt as if that client were at risk.
- Do lenders care about the MSP's own security?
- Increasingly, yes. A breach at the provider can reach every client, so lenders ask about controls, incidents and insurance, and read the security representations in the purchase agreement.
- Is a stock purchase better than an asset purchase for an MSP?
- A stock purchase can avoid assigning every client contract, though change-of-control clauses may still apply, and the buyer inherits the company's history. Lenders finance both.