The MSP space has been evolving since the day of its inception. The rise in demand for managed IT services by small and medium-sized businesses is all set to drive an unprecedented level of growth in the industry during the next five years. With growth opportunities slowing down in other technology sectors, many new players have turned their attention towards managed services. In this competitive landscape, consolidation is an inevitable trend for MSPs that wish to scale and generate profits.
In its predictions for 2020, Techaisle has estimated that nearly 40 percent of MSPs will foresee mergers or acquisitions over the next three years. Managed services of all sizes have been acquiring one another in the last two years to diversify their product offerings and compete better with other players in the market.
In this blog we’ll touch on why it’s important for MSPs to be M&A ready and how consolidation can help MSPs scale and grow even in a competitive market.
What’s Driving M&As
The IT demands of customers are increasing every day in this digital world. Small and medium-sized businesses are becoming heavily reliant on technology to compete with large corporations. These organizations demand IT services on par with technologies used by large companies. Since customers demand a ‘one-stop-shop’ solution for all their needs, MSPs are forced to acquire new skills and modify their business strategies.
MSPs that lack the skills required to meet the evolving needs of their customers will lose their business to another player who is better equipped to meet the diverse IT needs of modern-day SMBs. Most MSPs lack the expertise and resources to keep up with today’s technological innovations. The best course of action for these MSPs is to acquire companies that have new specializations or to merge with a bigger player that has better resources to compete. Considering this scenario, consolidation is inevitable for MSPs to future-proof their businesses.
How MSPs Can Become M&A Ready
Getting M&A ready is all about positioning yourself as an attractive player in the market. This is something that all MSPs must do irrespective of whether they are acquiring new players or looking to be acquired by a larger firm. Since most MSP consolidations focus on providing end-to-end services to customers, the solutions you offer play a major role in positioning yourself as an attractive player in the industry.
As an MSP, you need to focus on the following factors to become acquisition-ready in the MSP market:
- Customer retention: Your ability to retain customers sends the right message to other prospects in the market. High customer retention means that you have the right offering and you provide great service to your clients. This makes you a solid contender in a consolidating market.
- Consistent growth: Another key factor considered for M&As is consistent growth. If you can grow organically with increasing customers, revenue and profit, you will be an attractive prospect for M&A.
- Revenues and profits: MSPs looking to be acquired by another firm must show that their recurring revenue and profits are consistently strong over a period. If you have strong revenues but lack profits, you need to look at your expenditure and bring it under control.
- Scalable business model: When people look for investment opportunities, they opt for businesses that have the potential to grow. Your business model should be scalable enough to withstand future growth and serve new customers effectively.
To learn more about crucial M&A processes in the MSP world, listen to the webinar “De-Mystifying MSP M&A“.
How M&As Help You Grow
Consolidation can help MSPs grow in many ways. The following are some of the key opportunities that MSPs can leverage through M&A:
- Geographic expansion: MSPs that are looking forward to moving into a completely new geographic area can do so by acquiring a local player with strong growth potential. By expanding to new markets, MSPs can avoid growth saturation in their market.
- Explore new services: Building new service capabilities in-house can be an extremely daunting task for MSPs that are not experts in those capabilities. These MSPs can leverage acquisitions to add new services and diversify their offerings.
- New talent: Sometimes, MSPs acquire other companies for their skilled manpower. Skillful technicians are hard to come by in the MSP space. By bringing in new talent through acquisition, MSPs can serve their customers better and take care of their changing requirements.
What the Future Holds
The IT needs of SMBs are going to evolve even further in the coming years. This means that MSPs must be capable of adopting new technologies and maximizing their offerings in the future. Consolidation in the MSP industry is all set to continue over the next few years as existing players look for innovative ways to boost growth.
Getting a partner to gain access to more resources, skills and industry knowledge is, by all means, a great way to compete better in a crowded market.
To know more about how to grow your MSP business amid this ongoing pandemic outbreak, listen to our webinar How MSPs Manage Sales Manage Sales and Retention in a COVID-19 World.