Mergers and acquisitions (M&A) have been a hot topic in the channel for a while now. Economic disruptions and uncertainties in 2020 might have stalled things a bit, but activity has risen over the past year and shows no signs of slowing down.
A growing number of MSP mergers and acquisitions reflect the interests of private equity in the channel. Managed services are good business! Those of us who work in the MSP world know this, and now we’re seeing larger organizations and investment firms take an interest. Especially during the pandemic, demand for IT services from remote work solutions to infrastructure to cybersecurity has soared.
Meanwhile, global IT spending—particularly in cloud computing—is only going up. By extension, MSPs and IT providers in general are sitting in a great spot with respect to long-term profitability. With increased competition and staffing challenges, MSPs themselves are taking a harder look at M&A as well, with more than 25% saying they’re looking to acquire other MSPs over the next few years.
No matter which way you slice it, M&A should be on your MSP’s radar. Even if you’re not planning to buy or sell, having a potential exit strategy or a plan for when a potential buyer comes knocking is a good idea. Chances are high you’ll be hearing a lot more about MSP mergers and acquisitions in the near future.
Why would an MSP consider M&A?
Other than the benefit of just being good business planning, there are all kinds of reasons an MSP would consider a merger or acquisition. Regardless of whether or not you’re looking to take over another solution provider or managed services business tomorrow, potential M&A scenarios should still be a part of your playbook.
From a seller’s perspective, maybe you’re looking for a bigger company to help share financial burden, or want to use the profits of a sale for a new endeavour. Maybe you’re simply ready to get out of the business. Either way, the M&A market could offer an attractive option for allowing your business to live on—if stepping away is the path you choose to take.
If you’re on the buyer’s side of things your motives are probably a bit different. Ultimately, you probably want to grow your business and generate more revenue; buying or merging with another MSP can help you achieve economies of scope and scale. To the same end you might be looking to expand your portfolio. Acquiring another MSP that specializes in the services you want to add to your stack can be a faster route to achieving your goal, as opposed to hiring the necessary talent and building out the service internally.
Market saturation with increased competition is another reason MSPs consider an M&A strategy. Merger and acquisitions traditionally involve a certain level of risk. But in a market where it’s increasingly harder to differentiate yourself, customer acquisition costs are rising and taking on that risk is less of a barrier. So if you’re looking to consolidate market share or take on larger clients, merging with or acquiring another MSP could be your answer. Like they say, if you can’t beat ‘em, join ‘em.
What you’ll need on your M&A journey
You can’t just stumble blindly into the M&A market unless you want a disaster on your hands. Buyers and sellers should have several key elements in order before they get into the process and on-hand throughout their M&A journey.
- Identify your needs and requirements: Why do you want to buy or merge with another MSP in the first place? What are you looking to gain from the transaction? What kind of products, solutions or services are you after? What type of clients? These are all questions you should answer before starting down the M&A path.
- Audit your prospects: Like with any big purchase, you need to do your due diligence. Sure, you have to conduct a full financial audit of any company you might buy, but don’t leave any stone unturned as it goes beyond financials. You should be looking at systems and tools to make sure the integration time and training costs don’t skyrocket. Internal processes and efficiency often go hand in hand—are those documented and replicable? Are contracts with major clients in order? Are agreements with key vendors transferrable?
- Don’t forget about culture: A bad cultural fit between combining organizations can sink the whole deal in many ways. To help prevent employee churn and ensure a smooth transition, make sure the cultures of both companies are compatible. The role of the exiting business owner (who probably built the clientele) is often overlooked. The same holds true for the client base, which can erode quickly with culture shock.
- Keep your financials in order: Just as it’s recommended for buyers to audit an MSP they want to buy, sellers are advised to have clear records available to share. Potential buyers will want to know that your business is sustainable and in good financial standing. Not having those in order can have prospective buyers walk away even before the due diligence phase.
- Document your processes: Buyers need to have a clear overview of each of your business functions and what role each person plays. Buyers are looking for clear signs that they can optimize profitability by combining and eliminating redundant roles. Not being able to provide this might cause doubt as to the effectiveness (and profitability) of your business, making it less attractive for buyers.
- Keep putting in the work: Preparing your business for a sale is one thing, but maximizing the value of the transaction is something else entirely. Thanks to recurring revenue, it’s not uncommon for MSP owners to exit with a 4xto 7x multiplier. However, it rarely comes without having certain key elements in place at the time of transaction. It can also often involve an earnout that motivates the seller to stay on board for one to three years to maximize the return.
Navigating the M&A space
With more and more announcements of MSP mergers and acquisitions coming out daily, it makes sense that many channel partners are weighing their options. It doesn’t matter if you’re not planning to sell your MSP or buy another one right now, but it does matter that you’re prepared. Having a plan sketched out before getting into the thick of things will help you find your footing if the situation ever does arise.
In the meantime, working with a strong channel partner can help you develop such a plan. Sherweb has tons of expert resources on hand to help make it happen. Reach out to us for more information about how we can help your business achieve its goals.