Thinking Of Buying Or Selling An MSP? Here Are 6 Tips From Experts
A lot of factors are involved in determining if and when an MSP should engage in a merger or acquisition deal. And now, at a time when the MSP M&A space is red-hot, it is more important than ever to understand a company’s value, its cultural fit, and how different buyers including private equity firms approach the deal, according to a panel of experienced MSP M&A professionals.
Prepping To Buy Or Sell In A Red-Hot MSP M&A Environment
The MSP business environment is currently going through an intense round of consolidation as MSPs large and small are being purchased either by their larger peers or by private equity firms.
Why MSPs are being pursued is easy to understand. MSPs with a good base of happy customers and recurring revenue represent an investment that can be hard to pass up.
However, everything else about MSP M&A is not so easy. Going through a merger or acquisition means answering a lot of hard questions, including how to value the business, what is the culture fit, and what plans the buyer has for the seller. The latter question becomes especially important when the buyer is a private equity company who may either look to invest in growth or quickly grab profits.
At The Channel Company’s NexGen+ 2021 Conference, these questions and more were answered by a panel of MSP executives and investors, all of whom have years of experience in the MSP M&A process, both on the buyer side and the seller side. The insight they provided is invaluable to MSPs looking for an exit or a growth spurt.
The panelists included Rocco Musumeche, founder of Exit Maximizer, a San Francisco-based company which helps solution providers increase the value of their companies in preparation for potential sales of those companies; Nathan Phinney, the director of business development at Datapath, an Irvine, Calif.-based solution provider; Linda Rose is founder, CEO, and president of RoseBiz, an Encinitas, Calif.-based boutique technology M&A advisory firm that focuses specifically on technology service providers looking to sell their businesses; and George Sierchio, executive vice president and senior partner at Cogent Growth Partners, an Atlanta-based buy-side focused merger and acquisition advisory firm that works exclusively with clients and candidates in the IT services industry.
For their insight, click through our slideshow.
1. Now Is A Good Time For M&A
There is a lot of money out there hunting opportunities, and investors have seen how the IT community as a whole held up during the COVID pandemic, Rose said.
“For those of you who’ve done well and continue to do well in that environment, you’re highly sought after no matter what your revenue is these days,” she said.
Combining multiple smaller MSPs into larger companies is an important way to multiple the value of MSP earnings, Phinney said.
“It’s a tremendous incentive for businesses to combine, to merge, and to be acquired,” he said. ”And you can see the effects of that in the market right now.”
Musumeche said buyers also like the recurring revenue and great customer satisfaction that the MSPs have.
2. Determine When Ready To Make A Deal
According to the panelists, every MSP has its own reason for pursuing an M&A deal, particularly when it comes to being acquired.
Phinney said his company was started with the idea that the founders would run it for 10 years and then sell. And while the time to sell fell squarely during the COVID-19 pandemic in 2020, the founders followed through on their exit strategy.
“It’s important to know what your exit strategy is, even if it’s to die at your desk,” he said. ”But if you haven’t started thinking about that, that would be the most important thing that you can take away from here. There’s other opportunities out there, and it’s not in everyone’s blood to stay in the same [company].
Rose said she decided to sell her last company while in her mid-50s as a way to finally have time for other activities.
“All that stuff that I wanted to do but I didn’t because I was running a seven-by-twenty-four business,” she said. ”I was just ready to do that. You have to just know in your gut it’s your time. Go with your gut.”
When looking to make an acquisition, long before looking for the money, it’s important to be clear on why and MSP wants to make an acquisition, Sierchio said.
“[You have to be] very comfortable in your own skin because you’re going to add another company to what you’re doing,” he said. ”And that’s also not the easiest thing in the world.... There’s a lot of factors that go into making sure you’re buying the right thing that’s going to get you to where you want to go at the time without actually destroying two companies in one fell swoop.”
3. Decide What A Buyer Really Wants
Understanding what a buyer wants is key in preparing an MSP for a sale, but determining what the buyer really wants is difficult.
Each buyer is different, and may not tell a selling MSP what it is looking for, Rose said.
“Buyers represent certain things, and they may not tell us all the time what it is specifically they’re looking for,” she said. ”Sometimes it doesn’t come out until the end, but you just kind of balance the right bid. Culturally, does it fit? Is this a leadership team you could follow down the road?
Phinney said that when his firm was sold, the buyer was looking for such things as recurring revenue, long-term contracts, and happy customers.
“[Buyers are] trying to take your temperature and see is this business actually going to sustain itself without lots of intervention, because the buyer wants a functioning system,” he said. ”They want to be able to take the best things that you did and keep them. And they want you to come into their systems and processes to fix things that maybe you’re not doing as well.”
Customer satisfaction is crucial, Rose said. MSPs should anticipate that a potential buyer will want to talk to their top five or six customers, and customer satisfaction surveys will probably not be an acceptable substitute.
“Case in point, I had a deal a couple years or so ago where the largest client was actually going through a second phase of an implementation and they weren’t super, super happy,” she said. ”At the end, we all know [the implementation was] going to work out, it just takes a little bit more money and a little bit more time. But it really ended up working out. And so when the buyer went to actually talk to that customer, they weren’t super happy and were very unhappy about the seller. So, word the wise: pre-call your customers that you know are going to get called as part of the due diligence process, and do it way in advance.”
4. Determine The Cultural Fit Between The Two Companies
The question of culture fit is a key determiner of success in M&A, as a clash in cultures could ruin a relationship, but every deal is different, Sierchio said.
“It all depends on what [the buyer is] doing,” he said. ”Are they bolting [the acquisition] to the company? Is it going to be a satellite office? [You may be] actually dealing with the culture of the private equity company who’s going to be sitting on the board. You’re still doing your thing and they’re going to try and change and stuff like that.”
A great way to determine cultural fit is for a team from the potential buyer to visit a prospective acquiree’s office as if they were a potential large customer.
Phinney said Datapath executives did just that, visiting Bright Bear as if they were customers to understand his company’s culture.
“We gave them a tour and everything, and they got to meet a couple of the employees,” he said. ”I don’t know if that’s common, but that was something that was really important to them. We also flew out to their offices and did the same dance. So we knew quite a bit about those organizations before we approached the transaction.”
Rose, however, said it is that can be a risky move given that smart employees might easily sense that such visitors are actually potential buyers and realize the company is being sold.
When she sold her last company, the buyer wanted to visit her office, so she came up with an alternative plan.
“I said, ‘You know what? You can come visit my office when it’s after hours,’” she said. ”And they’re like, ‘Well, we really want to understand the culture of your team.’ And I said, ‘You know what? I think you actually will.’ So I just took them through the office. I interviewed each employee as if they were in their cubicle, and [the buyers] could see how people decorated their cubicles, that everybody had white boards, that we had the goals up on the board, and we had to team member awards, had pictures from our last rewards trip that we had. And I explained that as we went through our entire office. And at the end, they said, ‘We never had anybody do that. We truly get a sense for how you run your company and the culture of your organization, just by the things that we see in your office.’”
5. Understand What Private Equity Firms Want
A few years ago, private equity companies came into potential deals like sharks smelling blood in the water and focusing on the math of the deal, Sierchio said.
Now, he said, his company is coaching private equity firms to look beyond just the math and maybe recurring revenue to understand how MSPs work and the value they bring because of their SMB focus.
“Half our clients at this point are private equity,” he said. ”They saw recurring revenue. They saw and they understood at that point that you can have a much smaller company than what they’re normally dealing with and still make a lot of money.”
Private equity firms vary in how they approach MSP acquisitions, Musumeche said, citing his own experience when his company was purchased by three different private equity firms.
“The first one that dealt with the company that I was with, pretty much every month they had their hand out saying, ‘What’s left? Give it to me.’ So there was no investment,” he said. ”And they were on the sharp horizon to actually transact again. But before that, they actually layered enough on top of what we had to get synergy and some additional growth. Whereas the second company pretty much was, ‘What do you need to grow?’ They provided some different mechanisms so that we would have what we needed when we needed to organically grow. And then they also did an acquisition. But they always said, ‘Just keep the money. Put it into the kitty and just continue to invest in the business.’ [The third one was] running it from more of a business model than a customer-centric model. They were looking at different ways that they could build some silos and sell them out as different companies.”
6. How To Tell Employees About The Sale
Rose said she has always told her employees that eventually she would have an exit strategy.
“I bought a house in Hawaii about a year before I sold my company,” she said. ”Everybody thought that means, ‘Oh my God, she’s going to sell.’ And I had three weeks of panic in the office. I’m like, ‘No guys. I just picked up a new mortgage. I’m not selling.’”
It is important to tell employees that there will someday be an exit, Rose said.
“You can tell people that you have a horizon and that you really want to do what’s right for your people and find the right place because you know you want to move on to something else,” she said. ”No one’s going to hold that against you. And I don’t think it’s going to create any fear, uncertainty, or doubt. I think you’re just being honest with your team. I think the worst thing for me was withholding it from my team until a month before the transaction. It’s so hard because I was always so upfront with my employees. And that meant a lot, that trust.”
It is important to look employees in the eye and make sure they know they will still all have jobs and that they will be part of a larger organization that’s more mature and that has better processes and resources, Phinney said.
“It’s like everybody got a kind of promotion the day we were acquired,” he said. ”And we presented it as a celebration of something that we had accomplished together. But it was hard in the days leading up to the transaction, being so excited and so nervous and not being able to tell anyone. It was challenging for us.”