MSPs have a new option for full or partial exit strategies: private equity.
Traditionally, private equity firms have looked to acquire businesses with hard assets that can be financially leveraged. But experts suggest things are changing. Over the last year in particular, private equity investors have been snapping up MSPs. Accepting those offers can be an excellent option for channel pros in search of an exit strategy, provided they find the right match.
For NetServe365, an MSP in Pittsburgh, that match was NewSpring Holdings, of Radnor, Pa. Selling to Magna5, a NewSpring portfolio company in Dallas, provided investment capital for scaling the business, according to former CEO Justin Cameron, who is now senior vice president of IT services.
Private equity firms seek undervalued companies with strong short-term growth potential. When buying MSPs in particular, they look for steady cash streams. Most will eventually sell those companies to realize a full return on their investments.
“More private equity firms are getting into the market because they realize these businesses are trending more toward recurring revenue,” says Rick Murphy, CEO and managing partner of Woodstock, Ga.-based Cogent Growth Partners, which provides M&A advice to both sellers and potential buyers of IT services companies. Steady monthly income translates to solid cash flow that can be used to acquire other capital assets. Service-based business owners are often forced to finance additional purchases otherwise, a costlier option that increases risk.
Managed services is a potentially profit-rich business model too. “Over the last five to seven years, the technology we use to support our clients has significantly improved, allowing us to do more work remotely and over the phone,” says J. Michael Jenner, CEO of NexusTek, a Denver-based MSP with two rounds of private equity investment under its belt. Those innovations allow the management team to extend its sales efforts beyond a single geographic area and increase the company’s economies of scale.
However, the fit must be right. Owners who stay on will now report to a boss. And coming to terms with your partners, if you have any, can be tricky if your interests differ. That scenario can lead to a “divide and conquer” situation, says Zina Hassel, president of ZLH Enterprises, a Manalapan Township, N.J.-based communications consulting company. “Who’s willing to sell for less because they want to get out?” she asks.
Private equity is an exit option worth exploring just the same. MSPs that find a suitor should always bring in professionals to assist with valuation and negotiations. Murphy’s recommendation is to start with a tax attorney; most have more experience in M&A than CPAs and can address sales taxation plans and concerns.