To Merge or Not to Merge: The Future of MSPs

Sponsored Blog Post from ReachOut Technology

Over the past few years, merger and acquisition activity has skyrocketed in the IT channel. Experts forecast that the managed services market will hit $329.1 billion in 2025 within a huge growth industry, while simultaneously consolidating. In 2019, two-thirds or more of MSPs considered being acquired by a bigger agency, with 20% of larger agencies thinking about buying an MSP. Continuing COVID-19 pressures have kept these trends on course. Even if the prediction falls shy at 10%, small-to-midsize MSPs should be open to opportunity.

What does this unprecedented level of activity mean for your MSP business?

According to a recent IT Glue Survey, 53% of the 501 companies on the 2018 Channel Futures MSP 501 list considered merging or being acquired within two years. There are several key reasons for this M&A activity inside of the MSP space.

Baby Boomers are bowing out

Channel e2e reported thousands of baby boomer owners are looking to exit their businesses to capture the net worth from the companies they built.

Customers calling for a ‘one-stop shop’

It can’t be denied that managed information security (IS) services and IT services are being combined. It makes more sense to the consumer when they are looking for a complete service. If you do not provide all the services customers request, you risk customers leaving for one-stop-shop competitors.

Falling behind the IT trends

When focused on growth, many businesses stop focusing on innovation, new technologies and advanced training of teams. Customers continue to grow their own businesses and want the newest solutions. Skills and resources can often fall behind or be out of reach due to limited capital.

Coming up short on cash

Delivering more service coverage and scaling your MSP business always equals bigger (and bigger) cash needs.

Remote, remote, remote

MSP acquisition may be on a meteoric rise because the world no longer demands that businesses stay brick and mortar or within the same zip code. MSPs that band together can now easily take the market share in any region.

Boost ‘business’ skills

Apart from enabling you to bring in the skills you need to keep abreast of new technologies and customer expectations, weaknesses in areas such as process and methodology, compliance or even sales and marketing, could be remedied by merging with or acquiring an MSP with complementary skills.

Investors imagine MSPs and MSSPs as great opportunities

The majority of MSPs are “lean” so growth prospects are good – especially when they have strong relationships with their customers. Channel Futures reports that VCs are scooping up MSPs and OEMs to create powerhouse entities. Valuations are high and capital fairly cheap, making IT services, technology companies and MSPs favored amongst venture capitalists.

Can small-to-midsize MSPs survive?

At ReachOut here are some facts that shed light on what the future has in store for MSPs:

  1. Demand for managed services has never been greater
  2. More MSPs are entering the profession every day
  3. Baby boomers want out, but at the best valuation
  4. Geography is no longer a hindrance to collaboration

The other definite is that while investors are swimming around small-to-midsize MSPs like sharks in the water, they are looking for a particular size. For example, when ReachOut Technology brings an MSP under the family umbrella, we look for specifics like:

  • Minimum of three employees
  • $1 million to $5 million in annual revenue
  • 50% of contracts must be monthly recurring revenue

With PE firms seeking out MSPs typically with a minimum of $15 million in annual recurring revenue and double-digit margins, it narrows down the opportunities considerably.

Is the ‘Super MSP’ inevitable?

MSP consolidation is actively happening and is a big part of the IT space’s future. That question has been answered. What remains to be answered is:

  1. Who will be left standing?
  2. How will customer trends impact mergers?
  3. Will the “Super MSP” come out both bigger and better?

“Big” may be better and bring benefits such as access to more resources, a wider range of skills and experience – and access to capital, for example.

However, “small can be beautiful” and when applied to MSPs, it can mean greater agility, a closer connection to customers and the ability to serve niche markets cost-effectively.

At ReachOut, we are focused on blending both scenarios with an aim to acquire 75 MSPs and bring them under the family umbrella with exceptional training and support so that customers only see the positive of the mergers. The key thing is to keep our customers happy.

There’s no one-size-fits-all solution when it comes to acquiring the new skills needed. Many are developed in-house, but we cannot ignore the new services expected by our customers. Under the ReachOut umbrella, we are passionate about advancing our skills and staying ahead of the ever-changing landscape.

Calculate your MSPs value here and consider living the life of your dreams.

Business man shaking hands

Mergers and Acquisitions: Pros and Cons for MSPs

Until the pandemic hit businesses in full force in 2020, high levels of mergers and acquisitions (M&A) activity were seen in the MSPRead More