Managed services News
The Purple Guys CEO Talks Latest Acquisitions And Why If The ‘Cultures Don’t Align, We Walk Away’
Joseph F. Kovar
‘.As we have talked about previously, culture is a really big deal for us. ... If I’ve learned anything in my years of doing these acquisitions, it’s that the people inside the business are a reflection of the owner, or owners if there’s more than one,’ says The Purple Guys CEO Kevin Cook.
Building A Bigger, Better MSP
The Purple Guys, a Shreveport, La.-based MSP named after the color of the shirts its original employees wore, has made its seventh and eighth acquisitions of fellow MSPs in under four years.
The Purple Guys is what is known as a platform MSP, which is formed when investors, typically private equity firms, acquire an MSP with the goal of using that acquisition as a platform for purchasing additional MSPs to scale managed services in an otherwise fragmented industry characterized by lots of smaller companies.
Kevin Cook, CEO of The Purple Guys, told CRN in an exclusive meeting that his company has one of two goals when making new acquisitions: building density and adding vertical expertise.
“[We will focus on] building density in markets where we already have a presence and where we want to get bigger,” he said. “We need more people and a larger base that allows us to scale and do things in a much more efficient manner. And we always want to be the dominant player in every market that we serve. [And] vertical market expertise on the go-forward-kind of thingsare the big drivers for us right now.”
The Purple Guys, which is owned by two private equity firms, used a combination of cash and debt to make its two newest acquisitions, Houston-based Advantex and Arlington, Texas-based Herrod Technology. The Advantex acquisition happened because the previous owners actively looked at getting purchased as a way to grow, while the Herrod Technology acquisition happened because of the relationship between that company’s owner, who was told by the owner of another company acquired by The Purple Guys about her experience.
Cook, while declining to discuss specifics related to the cost of the acquisition, did discuss some of his thought processes related to the use of EBITDA and other measures to place a value on an MSP acquisition.
There’s a lot going on with MSP acquisitions, and The Purple Guys in particular. Here is what Cook had to say in his interview with CRN.
So The Purple Guys made two more acquisitions. What’s going on, Kevin?
This marks acquisitions No. 7 and 8 for us in the last three and a half years. Both of these are in Texas, which was very intentional in our purpose. We have been heavily focused as we started to build the platform out on geographic expansion, acquiring MSPs that looked and felt a lot like we do, and as we move forward in 2023 and into 2024 we will focus on a couple of things. First, building density, which was largely what these acquisitions were about. Building density in markets where we already have a presence and where we want to get bigger. We need more people and a larger base that allows us to scale and do things in a much more efficient manner. And we always want to be the dominant player in every market that we serve. So this is one way for us to get there.
We’re also focused on vertical market expertise on the go-forward-kind of things that are the big drivers for us right now.
The two MSPs you acquired give you density in the Texas market. Are you also getting any vertical expertise that you didn’t have before?
Stay tuned for more to come around some vertical expertise. But no, both of these new acquisitions for us were not focused on new vertical expertise. And what I mean by that is we were not necessarily hunting for new verticals. But the two have some vertical focuses. So we will be driving additional expertise in areas where we’re already very good. We just want to get better.
Talk about the two. Who did The Purple Guys just acquire? And what are the focuses of those two?
The first is a business called Advantex, small company, a great MSP with a pretty broad focus in terms of its client base. The nice thing about Advantex is it got us into the Houston market, where we’ve been trying to enter. Now we’re in Houston, Austin and Dallas, where we have physical locations covering the state. At this stage of the game, we’re doing business in about 43 states and two foreign countries. So our footprint has gotten rather large, but we wanted to add that extra presence in Houston, which for us is a huge potential market. We’ve found when doing business in Texas, your clients will be in the major metros across Texas. So it really helps us better serve the clients we have today. And vice versa. The Advantex business had plenty of clients with offices in Austin, for example. And so we can very quickly help each other’s clients.
Herrod Technology is located in the Dallas and Fort Worth area, with a little heavy emphasis on Fort Worth because of where the majority of its clients are. So it’s a little bit of an expansion west for us. A great business that’s been around 20-plus years with a fantastic ownership group, including [the owner] Kelly Herrod who’s staying on with us. A very well-run company.
When we think about acquisitions, we’re not looking for businesses that need a lot of work and focus and attention. We’re looking for best-in-class MSPs that are high-performing, that have really talented people. Herrod brings to us a pretty mature security focus, and everything we’re talking about with our clients today is focused around security. So adding some additional security team members, some additional expertise around some of the tool sets that we use, was exciting for us.
Will the former owners of Advantex stay with The Purple Guys?
There are two owners in Advantex. One of them, Eliot Vancil, was really a silent owner in that business, a very entrepreneurial guy. He had his hands in a little bit of everything. And so he’s not staying on. He was not involved day to day. He was really a financial owner in that business. And Eddie Garcia, the other owner in Advantex, stayed on.
Were both companies profitable?
Oh, absolutely. We only buy pretty high-performing MSPs.
Why did those two companies decide to sell? Were they looking for a buyer? Or did you make them an offer they couldn’t refuse?
It was two different scenarios.
Advantex was interested in doing something. Eliot had been in the business for a while and was looking for a potential exit strategy for himself. That was one driver. Second, it was a fairly small business, and for them to be able to do the kinds of things that they need to do for their clients to really serve them in the right way and provide advanced solutions, specifically around security, it seemed much easier to be acquired by a larger entity that has solved those problems already. We can simply plug our solutions into their client base. So we were a good answer for them.
Herrod Technology was a little different story because Kelly had no real interest in selling the business. I got connected with Kelly through a peer group that I’ve been a member of for 13-plus years now. Kelly has also been in that group for a long time. I had the opportunity to meet him in one of those peer group meetings, and we had a fantastic chat. As we have talked about previously, culture is a really big deal for us. If the cultures don’t align, we walk away. The cultural fit felt fantastic with Kelly, and if I’ve learned anything in my years of doing these acquisitions, it’s that the people inside the business are a reflection of the owner, or owners if there’s more than one. And so that gave me a great deal of confidence. And, interestingly, Kelly, in a smaller group inside that peer group, knew the owner of another company that we had acquired, Golden Tech, who said some really, really good things about us. When we started talking to Kelly, he reached out to that former owner and said, ‘Tell me about The Purple Guys. What was your experience? How did that go?’
She actually went back to the peer group and put together a whole presentation on her experience, kind of start to finish, how the process went, how it worked with The Purple Guys, her representation in that transaction, how her experience was. And I’ll tell you, I think it really helped us solidify the relationship with Kelly and move that process forward much more quickly than maybe it would have without that reference.
Where did the funding for the acquisitions come from? Was that from cash on hand or through your investors?
Our PE [private equity] guys are Kian Capital Partners and ParkSouth Ventures, great partners of ours now for over three and a half years. We typically do acquisitions using cash on the balance sheet and debt, additional debt, which is how we funded these last two transactions.
What’s the relationship between Kian Capital Partners and ParkSouth Ventures?
We have two private equity firms involved in the business today. Kian is our lead partner. We actually met the Kian Capital guys through ParkSouth Ventures. Very early on both really wanted to be involved with The Purple Guys on a go-forward basis. And so we see them as one. We treat them really as one organization. But they are two private equity firms.
I have to ask: What was the cost of the acquisitions?
We never disclose the financial terms. But I know you have to ask, and I have to always say we never disclose.
A lot of talk around MSP acquisitions revolves around valuing the transaction as a multiple of EBITDA. Can you talk a little bit about the multiples you saw with these two?
What’s interesting, without giving too many specifics, is there’s a lot of things that play into that. For us, typically it is a multiple of EBITDA in some way that we’re basing our evaluation. There’s a lot of different metrics that go into what’s happening, including how big a pile of EBITDA dollars the business has. Certainly, when you get to that million-dollar EBITDA mark, the business becomes a little bit more valuable. For sure, we see it that way. The market is ever evolving, as you know. Interest rates have had some impact, although I would say that interest rates have not really pushed down the multiples that we have paid for MSPs in the last 12 months. It’s a little counterintuitive because when interest rates go up, usually those multiples go down. And certainly our costs have gone up some because we’re doing this with debt. Our interest cost is going up fairly significantly because of interest rate increases.
But for us, these assets are incredibly valuable. And there’s still plenty of high-quality MSPs out there, but many have been acquired in the last three, four years, and so the valuation multiples that we have seen have been anywhere from around 5X to the low-double-digit multiple of EBITDA, and have held very strong. That’s what we have seen, and that’s what my peers are telling me they’re seeing in this space as well.
And then, depending on the size of the business, in some of these deals that we we’ve looked at and others that require you kind of get into that $2 million EBITDA range, you start to get into the low double digits. At the end of the day, we’ve not done anything in the double digits for ourselves. Not yet. You never know. Never say never.