Preparing An MSP For Private Equity: ITPartners+ CEO Lays It Out

“The best way to approach it is instead of thinking what’s in it for me and how much am I going to get out of it, ask, ‘Hey, what are your strategic goals, Mr. Private Equity? Switch your narrative from ‘What am I going to get?’ to ‘Here’s how I can complement you,’” says ITPartners+ CEO Kevin Damghani.


ITPartners+ CEO Kevin Damghani

An MSP looking at the possibility of being acquired by a private equity firm has a lot of work to do to get prepared, including making some counterintuitive moves.

That’s the word from Kevin Damghani, CEO of Grand Rapids, Mich.-based ITPartners+, who told an audience of fellow MSPs at this week’s XChange August 2023 conference that, while his company is not private-equity-backed, he has interviewed 30 private equity firms in the past year and has received perhaps the best education on the intricacies of dealing with such companies.

The XChange August 2023 conference is hosted by CRN parent The Channel Company and is being held in Nashville, Tenn., this week.

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ITPartners+ is listed on CRN’s 2023 Managed Service Provider 500.

Damghani, without citing his source, said 435 MSPs with an average EBITDA of $2.5 million were acquired in 2020, while over 1,000 MSPs with an average EBITDA of $5.0 million were acquired in 2023. That data doesn’t include the smaller transactions, and so the actual EBITDA of MSPs being acquired today is likely higher, he said.

When a private equity company acquires an MSP, it typically acquires a majority of the company, Damghani said. It is common for a private equity firm to acquire 80 percent of an MSP while requesting a 20 percent rollback, which is money the seller is expected to invest in the new combined company, he said.

“And that’s not a good thing or a bad thing,” he said.

MSP owners will notice a big change when their company is acquired by a private equity firm, as he or she all of a sudden now has a boss, Damghani said.

“And that boss sets goals and metrics on top of you,” he said. ”And all of a sudden, that business, which was running and growing at this level, is now growing [at a higher level] because somebody else set the goals. Somebody else set that metric on top of them.”

EBITDA, or earnings before interest, taxes, depreciation, and amortization, is a key measure of the value of an MSP looking to be acquired, Damghani said.

“EBITDA is really just how much do you have left in the bank at the end of the year,” he said. “That’s really the easiest way to figure it out. And the average transaction size for MSPs was [an EBITDA of] $2.5 million in 2020. In 2023, you’re looking at $5 million or more. And you’re seeing this upward trend of transactions. … But really, private equity firms are typically seeking deals now $2 million [in EBITDA] or higher,” he said. “And so that’s the sweet spot.”

Smaller MSPs have a choice if they want to get to the $2 million in EBITDA needed to be a good acquisition candidate, Damghani said. They can grow their business organically or can combine with other MSPs as part of a roll-up to reach that number, he said.

That can be a lot of work for a small MSP, but it is worth the trouble, Damghani said.

“Private equity obviously can give us more money,” he said. “There’s nothing wrong with more money. … Private equity is going to bring a lot of business savvy. That’s absolutely what’s going to happen.”

Damghani said MSPs looking to increase their valuation in preparation to become an acquisition target should start with cleaning up their financials.

“If you’re thinking about taking private equity, or sell, or merging, if you’re thinking about acquiring, whatever the case is, clean up your financials,” he said.

As an example, Damghani said that if the owner of a company trading at a five-times multiple of EBITDA spends $5 at McDonald’s with the company card, he or she has taken $25 off its top-line valuation.

“So make sure your books are clean, whether it’s personal expenses, or whatever the case is,” he said. “Whenever multiple you’re trading at, whether it’s one-time multiple or 14-times multiple, it makes an impact.”

Maintaining an MSP’s leadership is important to private equity firms, Damghani said.

“The leadership is a really big piece,” he said. “Many companies have owner-led sales. ... If you take the owner out in six months, the business is worth less. Or you could replace the owner for say, $100,000, but the owner has skin in the game. They’re the salesperson. They’re the ops manager.”

That said, many MSP organizations are overstaffed, particularly companies that have more of a family lifestyle instead of strictly a business managed by key performance indicators (KPIs), Damghani said.

“This is what kills me in running my MSP: cutting employees,” he said. “I want the personal aspect of it. But when you start trimming a little bit of that fat to be able to get to the numbers you need to be at, that’s going to have a big impact on multiples.”

An important approach for the owner of an MSP looking for a sale to a private equity firm is to switch how he or she views the benefits, Damghani said.

“The best way to approach it is instead of thinking what’s in it for me and how much am I going to get out of it, ask, ‘Hey, what are your strategic goals, Mr. Private Equity?’” he said. “Switch your narrative from ‘What am I going to get?’ to ‘Here’s how I can complement you. And here’s how I complement your efforts.’” And complementing those efforts is huge. There’s not a ‘multiple’ effect that you can assign to that. But now, all of a sudden, you’re a much better fit.”

Damghani also suggested when interviewing private equity firms to ask how much of their own money is in the fund.

“Many of them will have a $1.5 billion fund, and they have $15 million of their own money in the fund, which means they’re probably not on the same side of the table as you are.”

The valuation of an MSP acquisition is based on a number of factors, Damghani said.

He said there are four types of MSP. Ranked from lowest value to the highest are those that focus on hardware revenue and that depend on new projects to grow, those that have significant consulting and implementation services revenue with potential for recurring revenue expansion, those that sell software subscriptions and are able to move toward mission-critical opportunities and add recurring revenue, and those with contracted recurring services and hosted revenue and are able to demonstrate high customer retention.

In particular, Damghani said, an MSP with poor internal systems, a low amount of revenue from managed services, variable revenue, monthly recurring revenue accounting for less than half of all revenuemight expect a private equity firm to give it a value of 1X to 3X of its EBITDA.

On the other hand, he said, an MSP with strong internal systems, a high amount of managed services revenue, a majority of revenue coming on a recurring monthly basis, fast-growing revenue, and an EBITDA of $4 million to $5 million might expect to see offers of 8X to 10X of its EBITDA.

Hoss Milani, president of Final Frontier, an Armonk, N.Y.-based MSP, told CRN that while his company has been growing organically in the 19 years it has been in business, it is now thinking it may be time to consider the option of making an acquisition.

“Sometimes we feel it might be easier to try to grow by leaps and bounds by acquiring another company, Milani said. “So I’m always open to the idea. I never say never. We haven’t done that in the last 19 years. But we are always open to the idea.”

Damghani’s presentation helped Milani to understand the trials and tribulations that are part of becoming a target of private equity.

Damghani, for instance, talked about the need to make an MSP more efficient to increase its value, which Milani said is something he has done with several companies including his own.

“I help companies in terms of what they need to grow,” he said. “So I’m always looking at what is out there.”

Damghani’s experience from interviewing those 30 private equity firms was very helpful, especially for MSPs that have not yet started the process of getting ready to get acquired, Milani said.

“For example, he said we should spend time with the owner of the private equity firm,” he said. “That’s something I should have done in retrospect. So understanding that kind of stuff is important. A lot of it is stuff we do now, so it was reinforcing what we need, and that was great. But I know a lot of people here don’t have as much experience as I have had. So it would be very valuable for a lot of MSPs to learn about the intricacies in preparing to get acquired.”