Is an M&A Crunch Coming?

Over the last few years, business and technology have advanced at a furious rate. Within the MSP space, mobility, cloud computing, and the move to hosted software and hardware solutions have profoundly changed the landscape. But along with all the change comes a good deal of opportunity … and potential pain. After a record-breaking number of mergers and acquisitions in 2015 and a recent lull in unions, "There will likely be a pickup in M&A activity," says Bob Dale, a partner at tech M&A firm Austin Dale Group Inc., based in Austin, Texas.

For MSPs, this environment could mean big changes in valuations over the next few years. What's more, as owners gray and look for the green, the trend could accelerate and possibly lead to a glut of sellers. If you're thinking of cashing in and aiming to fetch top dollar, there are some important things to consider. How big might the M&A wave be? When is the ideal time, if any, to put the business on the selling block? And what can a company do to maximize the price?

Mergers Emerge
While there's a constant ebb and flow to mergers and acquisitions, a long-term trend toward industry consolidation is firmly in place. In many cases, valuations are higher than in the past, and the idea of gaining customer lists, talent, or intellectual property is enticing to larger companies seeking to expand their footprint. If you're looking to sell, it's important to pay attention to a few key factors, Dale says.

Most important, it's critical to differentiate a company. "There are hundreds of thousands of IT services companies in North America. You have to stand out in some way—whether it's skill sets, intellectual property, a geographic fit, a technology offering, or something else," Dale notes. He suggests conducting an internal inventory and understanding what the lure would be, as well as the potential value for a suitor. "In some cases, the buying interest isn't in whether the company is operating profitably, it's that it can bolster the acquiring firm in a strategic way."

It's also key to determine whether it's the right time to sell. Although no one can predict the future, the MSP industry is maturing and changing while a growing wave of older owners may soon be looking for the exit. This will likely translate into increased competition and possibly sagging valuations.

As a result, Rick Murphy, CEO and managing partner at Cogent Growth Partners LLC, in Woodstock, Ga., says that it's important to determine the underlying motivation for selling and to fully understand the repercussions. For example, a seller may desire to stay on in some capacity—but he or she must understand what that means. Not everyone is equipped to transition from owner to employee at the new company.

Dollars and Sense
To fetch top dollar a seller must show that the company is operating at maximum efficiency and has up-to-date customer lists, human resources files, and financial records, says John Austin, a partner at Austin Dale Group. When a buyer sees subpar bookkeeping or bad customer lists, the yellow flag—and sometimes the red flag—goes up. It's also important to have the legal pieces in place, including whether a noncompete agreement is desirable. "An acquiring company doesn't want to encounter questions about integrity and accuracy—and especially improprieties." What's more, if the sale manages to go through, muddled records can lead to a conflict or lawsuit later on.

In the end, Austin suggests running the business as if you're trying to sell it—every single day. That way, when it comes time to cash in, the company will already be in tip-top shape. "The focus should be on creating maximum value for customers and building a business that achieves maximum value for the owner," he says.

Murphy agrees: "If you focus on running a lean, mean shop, when the moment of opportunity knocks you will be completely ready and able to get the best possible price for the business."