MSP entrepreneurs love building their business, but their hearts truly flutter when they sell at a huge profit, or buy another MSP that greatly expands their operation.
That is why experts advise that you run your MSP as if it is already for sale, by pushing growth, moving to greater monthly recurring revenue (MRR) as a portion of sales, and not being overly reliant on a handful of clients that put you in jeopardy if that business goes away.
Kaseya regularly runs symposiums on M&A for MSPs where company executives such as Kaseya CEO Fred Voccola and industry experts share their expertise in person.
M&A activity amongst MSPs is on fire. Last year, M&A deals among tech-enabled services increased 74 percent in value and 27 percent in volume compared to the same period in 2016, according to the JEGI 2017 M&A Overview. What is truly amazing is that for software vendors, there was a 60 percent decline in value and a 30 percent decline in volume during that same time.
This all means that sellers are ready to sell, and buyers ready to buy – and your prospects for either are bright.
Voccola presented at Kaseya’s most recent M&A Symposium before a roomful of MSP business executives. The CEO pointed to data from the MSPmentor 501, which indicates a growing disparity between many managed service providers.
“While the average MSP in the 501 grew 22% in 2017, seven percent of the MSPs lost revenue on a year over year basis. This tells us that the strong are getting stronger – and the weak are getting weaker,” Voccola noted. “This dynamic generally leads to market consolidation, which is something we have observed to be increasing over the last 12-24 months in the service provider space.”
There are more economic indicators of consolidation. “The numbers tell us that while there is growth in the MSP market in both revenue size and total number of MSPs, it turns out that the revenue is expanding at a greater rate than the MSP count. That means that revenue is spread out over few MSPs – which is a phenomenon that began a few years ago when consolidation really started to occur,” Voccola concluded.
Three Paths to Success
After working with hundreds of MSPs, Voccola found three main paths for future MSP success, which are:
- “Acquire one or more other companies to bolster resources, create synergies and better position your company for the pending market pressure
- Position your company to be sold over the next few years to a strategic buyer, cash out and protect your business from the larger competitors
- Identify a specific vertical, technology or niche to service that separates you from the rest of the pack”
Benefits of Size
Larger MSP size comes with a wealth of benefits, which is why you see so much M&A activity across industries. One advantage is buying power – you get better pricing from vendors, savings that are highly meaningful when you are talking about tens of thousands of end points. Here are four more reasons from Voccola:
- “Cash flow – When you have more cash, you can make more investments for the future
- Credit – When you’re larger and have a bigger balance sheet, you are allocated more credit to make investments
- More margin for error – you can more easily absorb mistakes because one failed experiment won’t crush the organization
- Access to a larger network – some of the best employees come from other employees, so more employees you have the larger the organizations network for recruiting quality employees”
Why Buy or Sell Now
While buyers are beating the bushes for deals, it is also a great time to sell. Prices/valuations are high, interest rates are low, and recurring revenue is worth more today than in the past.
Meanwhile, buyers find they can easily reduce costs and keep customers.
Sellers are finding a ready market, not just from larger MSPs, but also from institutional money that is pouring into the market. These investors are attracted by margins, the growing MSP market size, and ability to scale through M&A and consolidation.
Rick Murphy, CEO of Cogent Growth Partners which helps MSPs find acquisitions, said it is never too early to get your company ready to sell. “Most business owners don’t think about their exit plan until it’s too late to do anything about it, and they unknowingly miss all of the benefits that can come from having the plan in place from day one. While it might seem outlandish to be contemplating an exit while your business is young, professional investors know you don’t invest unless you understand how you are going to exit, and small business owners can benefit from this thinking,” Murphy argued.
For more insight check out our De-mystifying MSP M&A webinar.