There’s no denying the rising consolidation trend in the world of MSPs. If you follow channel news outlets, you’ll hear about a new deal happening nearly every week. In fact, in 2019, Channel Futures found that roughly half of all MSPs were at least considering a merger or acquisition in the next 12–24 months. So, whether you are planning to grow your MSP by way of a merger or acquisition, are considering how to make your eventual exit, or simply want to ensure that you’re operating your business in a way that strategically maximizes the value of your business, now is the time to get your MSP ready for mergers and acquisitions (M&A).
“Every growing industry that’s fragmented eventually starts to consolidate,” explains Jim Lippie, senior vice president of MSP partner development at Kaseya. Lippie has an extensive history with MSP development and M&As, including time as the CEO of an MSP purchased by Staples in 2006, the first MSP acquisition in the space to a Fortune 100 company. “Take a look at the office products industry for example — once upon a time, every town had an independent office products store, but when Staples launched in 1986 and then OfficeMax in 1988, they lapped up small stationary stores around the country, and today, they’ve consolidated the market. Bookstores, hardware stores, and even pet supply stores have all gone much the same way.
“At this point, there are well over 50,000 MSPs worldwide. The vast majority of those MSPs are between 5–15 employees and produce $1–$3 million in revenue, and then there are a few dozen MSPs that have demonstrated more significant benefits of scale, which creates a fertile environment for consolidation, which is one of the reasons we have seen an influx of private equity investment into the space over the last few years — and that trend will only accelerate in the coming years,” says Lippie.
With that understanding, every MSP should determine how they’re going to position their business. Does an MSP acquire additional MSPs to develop scale, sell to those looking for quality businesses, merge with other MSPs to also gain the benefits of scale, or become so vertically specialized that the bigger guys can’t touch you in your area of expertise? In any case, it’s going to be critical for every MSP to select a path, develop a strategy, and execute a plan.
To Buy Or To Sell?
The reality is that the paths to preparedness for buying and selling look much the same. There are key foundational requirements to follow that make MSPs either desirable to acquire or put them in a position to be able to acquire other MSPs. Even though the roads look similar, size is often a good indicator of which direction you should lean. Where your MSP is right now will influence your path quite a bit, but whichever way you go, the road to get there doesn’t fundamentally change. Clear operational readiness will either make you attractive to someone looking to acquire or stable enough to acquire others yourself. A quality business means creating enterprise value, and the core of that value comes from knowing your numbers and having a great culture.
Know Your Numbers
No matter what the business is, every time you watch an episode of “Shark Tank,” what’s the first thing you always hear the Sharks ask the entrepreneurs? “What are your numbers?” If they don’t know them, the investors won’t know if it’s a business worth getting into. If you don’t know your numbers, you can’t know if you’re moving backward or forward. Operational metrics, sales, marketing, and finance are what help you make decisions. They are fundamentals that need to be at the forefront of every business. There are a lot of metrics to know, and it might not be the most exciting part of the job, but it is one of the most important parts of any M&A deal. Know all the numbers, even the seemingly obscure ones, such as days outstanding, employee utilization, service capacity, customer satisfaction, number of tickets closed — these are all important because you can’t manage what you don’t measure.
Have A Great Culture
Your management team is the biggest indicator of how healthy your company’s culture is, and culture displays the personality of your business. If you’re looking to acquire another MSP, you have to make sure it’s the right fit. Money matters, but if personality drags operations down, profits can’t fix it. You achieve great management and, subsequently, great culture by having people in positions that work on your business, not just in your business. Your team members should be thinking about how to help the company grow rather than just mindlessly putting out everyday fires. Foster a culture and personality that wants great things for the business. You’ll be a standout for any MSP looking to acquire you, and you’ll recognize kindred personality in those who you’re looking to acquire.
It All Points To Profit
Everything is a driver to profit. Every MSP wants to drive as much to the bottom line as possible, and operational readiness is what fuels that action. Ultimately, when you look at your numbers and culture, you’re looking at your valuation, and that valuation points directly to how well your MSP builds profit. “By and large, creating profit means making your employees more efficient, and you make employees more efficient with a platform that revolves around automation,” says Lippie. “Automation allows you to service a lot more customers with a lot less resources. When technicians bounce around between 10 different applications to tackle 10 different activities in a day, they’re wasting time, which means they’re not maximizing profit.” Consolidating everything into one platform that allows technicians to handle all those activities in one place makes them more efficient and creates more profit.
Platform Is King
Having a comprehensive IT management platform in place is the entire backbone of your services, and that’s why so much recent M&A activity has centered around platform. The industry has gravitated toward comprehensive IT infrastructure platforms that offer a range of monitoring and management, automation, security, and data protection services. A platform is a great inheritance for a first-generation buyer looking for technical maturity. A well-financed but technologically lagging MSP will receive an instant upgrade from an expanded, well-implemented platform.
Smart processes, solid strategy, and modern thinking automatically make an MSP more attractive or qualified when it comes to M&As. A well-integrated platform demonstrates all of those and has enormous implications for both buyers and sellers.
The trend is already here; we’re in the midst of it. Now, it’s time to help your MSP create a successful transition into your next phase, whatever it may be.