The Impact of Billing Reconciliation on Valuation

We’ve talked about how billing reconciliation can help you uncover missing revenue (Discover Lost Revenue) and we don’t even need to tell you how much of a pain it is to have to do billing reconciliation the old fashioned way (How to Do Billing Reconciliation the Easy Way). 

If you want that glorious hockey stick revenue chart, you'll need to make sure your billing game is on point.

But we’ve saved the worst for last. The short term impacts on revenue aren't even the biggest thing to think about.

When you’re not billing accurately, the loss of revenue has a negative impact on the valuation of your MSP.

Most acquisitions are valued on a multiple of EBITDA. As a general rule, the EBITDA multiple increases the more revenue the MSP has.

Acquiring MSPs tend to target larger, more mature MSPs because they want MSPs that aren’t dependent on a single individual for their success. There’s more to maturity than revenue of course, but revenue is often a pretty good proxy for maturity. As such, the more revenue an MSP has, the greater the EBITDA multiplier that will be applied.

That makes the impact of revenue on valuation an exponential relationship. If an MSP with $2M in revenue is valued at 5x, an MSP with $6M in revenue might be valued at 8x.

When we talk to MSPs, the majority know they’re missing out of revenue because they aren’t billing for services they’re providing. In many cases, they don’t know the amount, but we’re hearing anywhere from 3-10% of revenue is pretty normal. In some cases, we’ve heard more like 20%.

Let’s take a look at the impact of this on valuation, using a $2M MSP that’s missing out on 10% of revenue.

The valuation of that company is more than double.

TL;DR uncovering all your missing revenue, and getting paid for everything you do, can more than double the value of your business.

So tightening up your billing reconciliation process isn’t just a matter of “oh, cool, I found a few extra bucks today”, it’s a matter of setting you and your family up for the brightest possible future after you exit your MSP.