LAST YEAR broke records in technology merger and acquisition activity, and if the first half of 2018 is any indication, this will be another banner year for M&As involving MSPs.
Should providers be looking for an exit? If so, how can they prepare for an acquisition?
Some providers may choose to ignore the M&A trend and seek to define their own path, convinced they can grow at a preferred pace. Industry consolidation could leave them in danger, however. In 2016, Pomeroy and Tolt Solutions combined to create a service provider worth nearly $1 billion in annual revenue.
Office equipment companies are also proving aggressive in their acquisition efforts, snapping up companies such as AllCovered, which is now a division of Konica Minolta Business Solutions USA Inc. Sharp Business Solutions has made strategic acquisitions of Continuum partners as well and will emerge as a major leader in this category. With vast resources and economies of scale, larger providers will prove difficult to compete with, raising frightening prospects for smaller players.
To succeed, service providers must switch from a purely technical way of thinking to a business owner’s mindset. Questions about growth trajectories, planned outcomes, and the steps required to reach those objectives should be top of mind when thinking about their future.
Make Your MSP an Acquirer’s Dream Target
Service providers who decide to pursue an exit through acquisition must take heed of market trends and build businesses that attract today’s acquirers.
Experts at Service Leadership, a channel advisory firm in Plano, Texas, suggest that private equity groups are leading the current service provider M&A charge. Such firms first target companies with a minimum of $5 million in EBIDTA, with a preference for those achieving $10 million or more. They then use those first purchases as a platform for secondary market acquisitions of MSPs that are often smaller but have similarly strong metrics.
With those likely acquirers in mind, providers seeking an exit must examine how they can build their businesses into attractive prospects. Advancing their sales and general business acumen should be the start of that process.
IT service providers tend to focus on technical capabilities first and see sales as an afterthought. That should come as no surprise, since most managed service businesses are founded by people with technical backgrounds who depend on personal networks for new leads and contracts. The game has changed, however. As private equity groups look for providers with seven-figure EBIDTA numbers, MSPs with proven sales models can command premium prices.
This is where a strong sales team capable of growing a business into “acquisition territory” comes into play. MSPs must prove their ability to increase revenue, and that evidence is usually found on their balance sheet. Many of last year’s acquisitions involved firms experiencing rapid revenue growth, such as Vista Equity Partners’ purchase of Minneapolis-based device management software vendor Jamf. That company’s revenue soared 40 percent over three quarters before its sales announcement.
Seize the Security Opportunity
Acquirers are also looking for service providers with a strong future, and no market offers more immediate and long-term promise than security. Indeed, 60 percent of small companies go out of business within six months of an improperly defended and remediated attack, according to the National Cyber Security Alliance, and only 14 percent rate themselves as “highly effective” in mitigating cyber threats, according to research from Keeper Security Inc. and the Ponemon Institute.
Figures like those ensure that security has become the dominant factor in determining which MSPs get hired and fired. MSPs that do not have a meaningful security practice including SIEM and SOC services will not survive the transformational dynamic. Providers who serve their clients with flexible, powerful, and efficient security solutions that protect endpoints amid a fluid threat landscape have the greatest opportunity to grow into prime acquisition targets.
The M&A trend will likely accelerate in the second half of this year. MSPs must therefore build and operationally optimize their way to the magic EBITDA figure that acquirers are seeking. The payoff will be a serious opportunity to make worthwhile money in 2018.
MICHAEL GEORGE is CEO of Continuum, an IT management platform company that allows MSPs to maintain and back up on-premises and cloud-based servers, desktops, mobile devices, and other endpoints for small- and medium-size businesses.