IT M&A Experts: 5 Business Strategies To Get Acquired

‘There’s lots of different reasons for M&A, but our conclusion was, it’s basically around skills, people and capabilities,’ says Mark Williams, a senior consultant for The Channel Company and founder of MRamsey Consulting.

Looking To Be Acquired? Here’s 5 Things You Need To Know

As mergers and acquisitions in the channel reach new heights, there are several strategic business decisions solution providers can make to increase their chances of being acquired by a private equity firm, investors or other channel partners.

Approximately 20 percent of all of the Solution Provider 500 companies are involved in M&A activity, according to new research unveiled at XChange 2020 this week from CRN parent The Channel Company. Around 50 percent of the largest top 100 solution providers in the world on CRN’s Solution Provider 500 list are currently involved in M&A activity, while about 8 percent of the SP500 companies have been acquired.

IT and channel M&A experts weigh-in on several key factors solution providers need to focus on if they are looking to be acquired.

Transformation To Recurring Revenue

A solution provider could have $100 million in annual sales, but if it doesn’t have a solid recurring revenue stream, potential buyers will likely not see them as a viable company.

Linda Rose, an expert technology M&A advisor for RoseBiz, said solution providers looking to be acquired should focus on driving recurring revenues as valuations for channel partners are closely tied to a company’s recurring services. Solution providers need a healthy percentage of their total sales to be coming via recurring revenues, she said.

“Making that transition to recurring revenue does take quite awhile. That even means taking what you bill now on a time and material basis, wrapping that up into a package and selling that on a monthly basis,” said Rose. “You’re really looking at a three- or four-year transition period.”

People, Skills And Capabilities Are Key

One of the largest areas of interest from potential IT buyers is around the people, skills and capabilities inside a solution provider, according to Mark Williams, a senior consultant for The Channel Company and founder of MRamsey Consulting.

“There’s lots of different reasons for M&A, but our conclusion was, it’s basically around skills, people and capabilities. That’s what folks are buying and that’s what is important,” said Williams.

The M&A expert said the shortage in IT talent across the industry is adding to investors and larger solution providers’ aggressive acquisition charge in 2020.

3rd Element Consulting CEO Dawn Sizer said capturing a company’s talent is top of mind for people who are looking to buy a fast-growing solution provider like hers.

“They are trying to pull talent into other places where they can’t get it. So buying a company like us helps that,” said Sizer, who also co-founded her Mechanicsburg, Pa-based MSP. “All my people stay with me. I have top talent. So how much would that cost for them to really go out to find and hire them? So I get it. For a big company, it would honestly be worth it for the 10 people we have, especially if you keep the talent and keep the client.”

The 5 Key Interest Areas

According to M&A data compiled by The Channel Company, there are five top areas of interest potential buyers are looking for in a solution provider.

Those key areas are cloud, managed services, product offerings, application development and integration, and digital transformation.

“Cloud, whether it be from consulting or from an infrastructure perspective is important,” said Williams. “Managed services is also a key area. Some of the bigger companies were actually buying products [via M&A). So they actually needed to fulfill their products and support their product offerings so they were acquiring services organizations to do that. Interesting, application development and integration and software skills [are important]. Then some sort of digital transformation, whether it was digital agencies or some form or fashion of that perspective.”

Services Sales More Important Than Product Revenue

Buyers are laser focused on the revenue mix of a solution providers with service sales more valuable than product revenue.

Brad Badgley, director of M&A for Evergreen Services Group, said companies having a healthy mix of services versus product revenue is key for solution provider seeking to be acquired.

“It’s depends on what your revenue mix is,” said Badgley. “If we go look at a business and it’s 90 percent product revenue, that’s going to get valued completely differently than a business that is 90 percent recurring revenue.”

Size Doesn’t Really Matter

Although some buyers will have a minimum threshold for revenue and/or EBITA (earnings before interest, taxes and amortization), having a top-notch team of people and skills trumps a company’s “mass,” according to Williams.

“The buyers are looking for quality organizations, not just mass,” Williams said.

For example, 3rd Element Consulting is a fast-growing MSP with around 10 employees that gets approached by buyers almost on a daily basis partly due to the company’s highly talent group of executives.

“I had absolutely no idea there were so many firms out there looking to purchase smaller companies like us, I mean, we get approached probably two to three times a week,” said 3rd Element’s CEO Sizer. “We’re a small company but we get emails, we get LinkedIn messages, we get phone calls – it’s just constant.”

However, if a CEO or owner is too involved in the business, it could be an issue for buyers.

“As far as the size is concerned, there’s a lot more risk where your go into a smaller organization where the owner is the accountant, the primary driver of sales, and your lead engineer – versus a company that is larger that has all of those things broken out,” said Badgley. “If you pull that owner out of the equation [it is important] that the business continues to run as a business as oppose to something that really is the embodiment of the owner or owners of the organization.”