Blog2025 in the Rearview, 2026 on the Horizon: Key Insights on M&A, Valuations, and Tax Strategy for MSPs
By: Reed Warren, CEO, iTValuations
As 2025 comes to a close, MSP leaders face a landscape shaped by economic stabilization, accelerating consolidation, and evolving demands around AI, cloud, and security. In a recent webinar, IT Valuations’ Reed Warren, Corey Kerns, and Greg Northrop unpacked the macro-economic forces, valuation trends, and tax-planning opportunities shaping the MSP market heading into 2026. Here are the most important insights leaders should carry into the new year.
A Strong Market—but With Higher Expectations
Industry reports continue to project the managed services market growing at an 11–12% CAGR over the next decade. But as Reed notes, that growth rate is table stakes. If your business is only growing at the rate of the overall market, you are not gaining market share.
Instead, MSPs should expect to generate at least 11–12% revenue growth through rate increases, cross-sell and upsell motions, and net-revenue expansion—before calculating the impact of new logo sales.
Economic conditions also point to a more stable operating environment: easing inflation, declining interest rates, and resilient demand from businesses that increasingly rely on MSPs for mission-critical infrastructure, security, and governance.
AI Conversations Begin With Infrastructure and Governance
While AI dominated the industry dialogue in 2025, Corey emphasized that the smartest MSPs aren’t selling AI—they’re preparing clients to be ready for it.
That readiness conversation often starts with regulatory needs, security posture, and the underlying infrastructure supporting AI adoption.
Many MSPs are seeing revenue lift from this approach: using AI as the entry point, but monetizing the foundational infrastructure work needed long before an AI rollout.
Gross Margin Still Determines Profitability (and Value)
With over 120 valuations processed through ITV’s Valuation-as-a-Service platform this year, Greg shared fresh performance benchmarks that reveal a consistent truth:
profitability begins with gross margin, not overhead cuts.
Top-quartile MSPs show:
- Gross margin: 44–55%
- EBITDA: 17–31%
- DLER (Direct Labor Efficiency Ratio): ~2.8x return on every dollar of direct labor spend
Bottom-quartile firms see lower gross margins largely due to weak labor efficiency, mis-priced services, tech stack bloat, or unprofitable clients.
Improving gross margin—even by a few points—can yield a 50–100x return within a year and dramatically improve valuation outcomes.
Tax Law Changes Present Major Opportunities
From the recently passed “One Big Beautiful Bill” to expanded R&D credit eligibility, 2025-2026 will be unusually favorable for MSPs that plan ahead. Key takeaways:
- R&D Tax Credits: Many MSPs qualify for 5–13% of expenses—often more at the state level. Retroactive credits for 2022–2024 are available through July 4, 2026.
- Bonus Depreciation: 100% expensing remains in play for 2025, creating significant year-end planning opportunities.
- QBI Deduction: The 20% flow-through deduction stays intact, but Greg recommends revisiting the perennial “S-Corp vs C-Corp” question given expanded Section 1202 benefits.
- Trump Accounts: A new 2026-forward mechanism that could offer advantages for owners and employees.
Bottom line: 2026 is a year to get highly proactive with tax strategy rather than reactive.
M&A: A Tale of Two Markets
The M&A landscape softened early in the year due to economic uncertainty, tariffs, and election-year caution. But the second half rebounded sharply—driven largely by private equity groups under pressure to meet growth commitments.
For Strategic Buyers:
Competition with PE firms has made acquisitions harder and more expensive. The market is extremely active, and smaller deals are attracting large buyer pools.
For Sellers:
Demand continues to push valuations upward—especially for top-quartile firms and those demonstrating strong year-over-year momentum. Even average-quartile businesses that are improving may see multiples typically reserved for stronger performers.
Conversely, bottom-quartile firms (or firms with declining trends) may experience downward pressure on multiples over the next 12–24 months as more aging business owners bring companies to market.
Where Multiples Are Heading
Two valuation ranges are outperforming expectations:
- EBITDA between $500K–$1M
- EBITDA between $1M–$2M
Competition for deals in these buckets is strong, which has pushed multiples higher. Conversely, multiples above $2M EBITDA have held steady rather than rising—largely because supply is limited and buyers are more selective.
ITV’s data shows that strategic bundling—multiple smaller MSPs joining forces—can materially increase valuation and expand the buyer pool.
Should You Build, Buy, or Sell?
The team closed with one of the most common questions owners ask:
Given the current market, should I build, buy, or sell?
The answer depends on:
- Your growth trajectory
- Your EBITDA margin
- Your operational bottlenecks
- Your personal timeline
- Your long-term wealth goals
But in general:
- Strong growers should keep building.
- Stagnant firms may get a better return by selling sooner than later.
- Those with a 3–5 year horizon and operational maturity may see meaningful value-creation through targeted acquisitions.
Final Thought
The MSP market remains one of the most resilient, in-demand industries in the U.S. But the gap between top-quartile performers and everyone else continues to widen.
Heading into 2026, the firms that win will be those that:
- Double down on gross margin
- Operationalize AI-readiness conversations
- Leverage tax law advantages
- Bring clarity to their M&A strategy
- Maintain clean financials and operational discipline
If you’d like to discuss how these trends apply to your business, the ITV team is happy to dive deeper.