I finally made it back out into the conference world and spent time with the team at the Channel Company. They always do such a spectacular job putting together conferences focused heavily on what comes next for the most progressive MSPs and cutting-edge IT vendors.
NextGen 2021 took place in Anaheim at the end of October, and this session was specifically focused on mergers & acquisitions in the MSP market and how they continue to get a lot of attention. We know that, for some partners, its part of their exit plan; for others, it’s a strategic pillar in their growth initiatives; and, for many, they are still making sense of their options & opportunities.
I was part of this diverse panel of M&A experts who shared not only personal experiences in selling (myself and Nathan), but also provided an M&A advisor perspective (George on the buy-side and myself on the sell-side).
The panel was a success as usual, scoring one of the highest session scores for the conference. Since it was a very closed group of 200 MSPs, I thought it would be worthwhile to recap a few points we made on stage for those who were not able to attend:
How has COVID changed the MSP M&A landscape?
COVID has really demonstrated who was able to land and expand their businesses quickly, and who was also diversified enough to weather the downturn in many industries. It has highlighted that you don’t want to put all your eggs in one basket when it comes to a specific industry. In short, COVID was a recession of sorts, and those who prospered during it or survived without a reduction in revenue will receive the best and highest offers.
Why do most MSPs overestimate their value?
MSPs, as well as all other technology service providers, tend to overstate their value for two reasons. The first would just be plain misinformation given out by other brokers, vendors, and sellers. If you are on a webinar and hear that an MSP just sold for 10x EBITDA and he had a company that was $30M in revenue, you cannot make the assumption that you can too, especially if your company only bills $3M annually. The two don’t compare! A transaction price is dependent on the following variables: top line revenue, gross profit margins, amount of recurring revenue and what hits the bottom line. Also, don’t listen to vendors of products like Microsoft, IBM, Citrix, etc. who like to hype up how partners can radically increase the EBITDA multiple by representing their products.
Secondly, all partners equate the value of their company to how much money they need at retirement. Many times, these two do not equal one another. Instead, it is better to either get an actual IT Valuation done (good if you have multiple partners who cannot agree), or to take an online assessment like the Value Maximizer Assessment that I created for this exact purpose.
Who is still making acquisitions, and what is the impact of money flowing into this space?
Other than a three- or four-month hiatus during the early months of COVID, it seems everyone is back in the game. Strategics are in the game because interest rates remain low and the access to capital remains high. Private equity is still in the game because they continue to have so much dry powder on the sidelines that needs to be deployed. Does this mean that it is driving up prices? Maybe. It really depends on the deal and the structure. Buyers are still being very diligent and taking their time with due diligence. They want to make sure it is the right fit and can scale at their pace.
What is fueling so much activity in the MSP M&A space, and when might this end?
As mentioned above, there is still a lot of access to cheap money, in addition to over $1.3T in “dry power” sitting on the sidelines with PE firms. So, as long as interest rates remain relatively low and capital gain rates don’t go up dramatically, I think this activity will continue. What this also does is continue to push both buyer types down market to find additional sellers. So, whereas once upon a time PE firms wouldn’t look at anything less than $5M in revenue and $1M in EBITDA, that now has changed.
How important is “culture” in the acquisition process?
Culture is an important aspect of any deal. But what exactly is culture? And how quickly can you determine what it is? Does is matter if you are remote and your office stays remote as part of the acquisition? These are all questions you need to decide for yourself. Also, are you making some predetermined judgments on culture based on the company? For example: what if a CPA firm approaches you (they are very much an active buyer of IT firms)? You might think that that “culture” would not mesh with your team. Sure, they may be a little more conservative than you like, but many firms have become very progressive and surprise many sellers.
In addition to culture, you should look to the leadership of the acquiring group: who the visionary is and whether their vision aligns with yours. That is actually equally important, if not more so, if you have an extensive earnout or an equity interest in the acquiring company. Many sellers don’t spend enough time really getting to know the new leadership
To recap, this was a great conference as always. If you are an MSP, I highly recommend attending a Channel Company event. NexGen 2021 turned an eye to what’s next for MSPs. This event brings together the most brilliant futurists, forward-leaning partners, and innovative technology providers to showcase what’s possible for the channel. You can learn more at https://events.thechannelco.com/events