It’s an ideal time to be an MSP. The pandemic transformed the way we work. Companies were forced to go remote, and organizations turned to MSPs to help them navigate their new IT environments. The pandemic has stabilized, but many businesses opted for hybrid work scenarios moving forward and, in some cases, went virtual permanently. Business for MSPs soared and continues to do so given the current digital transformation. Mergers and acquisitions (M&A) activity is all the buzz in the MSP industry right now. Technology is growing at a fast pace, and investors are paying attention, especially to disruptive, high-growth companies such as large MSPs with 55 employees or more. Smaller MSPs will also continue to do well, but the larger ones are poised for a higher growth rate and profit margins. The reason is because they tend to have more resources, time, and opportunities to work on the business, therefore improving core functions and processes.
What Drives The M&A Movement?
There are various factors driving MSP mergers and acquisitions. First, it’s a massive market. Businesses with lower churn, good margins, and a large total addressable market attract private equity interest. The accessibility of private equity, whether it’s venture, capital, growth equity, or buyout equity, has grown to unprecedented levels, providing funding opportunities for growth-oriented technology.
Additionally, the tech economy is exploding. Even in the private equity world, there is a labor shortage. The number of professionals with software, technology, and technology distribution experience is still relatively small. As the industry evolves over the next several years and the private equity sector gains experience, more financial experts in the space will come online, and there will be an increase in asset allocation to that category. More funds will go toward software and technology services.
Become More Attractive To Potential Investors
The top way to catch the eye of investors is to make the revenue stream predictable, and this can be achieved by having customers sign multiyear contracts. Many MSPs are reluctant to go this route because they fear pushback from clients, but the reality is that most customers appreciate it because it allows them to lock in prices during times of high inflation.
When investors are courting a company, this is among their biggest concerns. They ask, “Will customers leave? What happens with the revenue when the company changes hands?” The predictable revenue stream is one of the primary differentiators between MSPs that receive high valuation and financial success and those that do not.
Overcome Organic Growth Limitations
One of the greatest challenges for MSPs when they think of growth is their focus on acquiring new customers. They erroneously believe new sales are tied to new customers. The truth is that most of the growth for any MSP lies within their existing customer base! However, MSPs are not good at seeing how they can optimize their current customers by selling to them.
Tapping your current client list is the best pathway for additional growth — analyze what services your customers may be missing or how you can help them grow their own business and increase profits and uncover a multitude of opportunities to cross-sell.
The Top 3 For MSPs
When it comes to M&A, there are three things to keep in mind. First, do you have a strategy? Ask yourself this: Are you a buyer, a seller, or neither? Be definitive with your strategy; otherwise, you won’t be making the right decisions. This doesn’t mean you can’t change your mind as your MSP evolves. Just be sure to take regular pulse checks on your business. Next, if you haven’t done so already, plan to dedicate professionals within your organization to sales and marketing.
MSPs are getting more professional every day on how they run their business. The competition will be better at coming after you, so make sure you have a good offense, not just defense. And finally, lean into the new realities of the global labor market. It will never go back to what it was, so make sure all your technicians are as efficient as they can be and that you are not reliant on one super techie. The tech job market is incredibly competitive right now — there’s more demand than supply, and good people are difficult to find and retain. Ensure your compensation structure makes it challenging for them to leave, and again, don’t be over-reliant on any one person. Turnover is very real.
Given the state of remote work combined with the explosion of tech, it’s an exciting time to be an MSP. It’s only going to get better. By the end of this decade, around 7 out of 10 small IT shops will be outsourcing some, or all, of their IT to MSPs. This will open a market twice as large as the one currently being served. MSPs with people dedicated to the business side who can sell, market, and deliver services will excel. The private equity sector will recognize that and want a piece of it.
Mark your calendars for Connect ITGlobal, June 20–23, 2022, at the MGM Grand Resort in Las Vegas. Make sure you attend the M&A Summit on June 20, where you will hear Kaseya CEO Fred Voccola and other MSP leaders, private equity groups, and investors discuss what is making the MSP one of the most valuable businesses of our time. Tickets are available at ConnectIT.com.