The Role of Management Service Organizations (MSOs) in Driving Higher Valuations in Private Equity Acquisitions

The MSO has the ability to increase the sale value between 20% and 30% on average in private equity (PE) acquisitions by creating operational efficiencies, reducing risk, and enhancing financial clarity across multiple business entities. However, each case is unique, and the degree to which an MSO impacts valuation depends on how well it is structured, implemented, and integrated into the business model.

Understanding the Role of MSOs in Business Exits

When business owners consider an exit strategy—whether through a strategic buyer, internal transition, or private equity (PE) acquisition—one of the key factors in achieving a higher valuation is operational efficiency. By addressing specific inefficiencies, financial transparency, and multi-entity management challenges, MSOs may provide a centralized solution that enhances business value.

At its core, an MSO is designed to consolidate and manage shared administrative functions such as finance, IT, HR, compliance, and legal support for multiple entities within an enterprise. This structure may improve cost efficiencies, reduce operational risks, and provide better scalability, making the business more attractive to private equity investors.

The MSO Advantage in an Exit Scenario

One of the biggest advantages of an MSO in an exit scenario is that it may provide flexibility in structuring the deal. It may allow businesses to facilitate a stock sale with asset treatment, helping sellers potentially achieve a higher valuation multiple while also offering indemnification upon exit. However, each case is different, and the structuring of an MSO should be tailored to fit the specific needs of the business, the buyer, and the overall transaction strategy.

At exit, the MSO may be structured in multiple ways:

• It may be sold alongside the operating entities as part of the transaction.
• It may be dissolved, with employees and operations reverting back to individual entities.
• If the MSO supports multiple entities, it may continue to operate, even if one of the entities is sold.

Regardless of how the MSO is structured in an exit, the efficiencies, flexibility, and financial clarity it creates may contribute to a higher valuation at sale.

Tax Benefits of Structuring an MSO as a C Corporation

Beyond its role in operational efficiency and deal structuring, an MSO may also offer tax advantages depending on how it is legally organized. When an MSO is structured as a C Corporation, the federal tax rate of 21% may create a significant tax deferral opportunity.

This deferral may provide cash flow advantages for the operating entities, allowing retained earnings within the MSO to be reinvested in business expansion, technology, and operational improvements. As a result, businesses may strengthen their financial stability, scalability, and overall attractiveness to private equity buyers, further enhancing potential exit valuation.

Key Benefits of an MSO in Private Equity Acquisitions

• Increased financial visibility: An MSO may provide clear financial reporting across multiple revenue silos or operating entities, enabling investors to assess performance with greater accuracy.
• Retained earnings flexibility: It may allow businesses to remove retained earnings from individual operating entities and centralize them at the management level, reducing entity-specific financial risk while maximizing enterprise-wide financial flexibility.
• Operational efficiency and scalability: By consolidating HR, finance, IT, and compliance functions, an MSO may reduce costs, streamline operations, and support long-term scalability.
• Regulatory and legal risk reduction: MSOs may help standardize compliance and risk management across multiple business entities, making the company more attractive to investors.
• EBITDA enhancement and improved cash flow: The efficiencies created by an MSO may lead to higher EBITDA, increased cash flow, and a stronger valuation multiple at exit.

Sources:

• SullivanCotter – Valuation of Management Services and MSOs
• FOCUS Bankers – The Physician’s Guide to Private Equity Transactions
• Delancey Street Partners – Pharma Services Transaction Case Study