MSP Acquisitions: Advice for a Red Hot Market

By Jessica Davis  |  Posted 2011-10-17 Email Print this article Print
 
 
 
 
 
 
 

The managed services M&A market has never been hotter. Here's a look at what several acquirers and MSPs that have been acquired, speaking at panel discussions during N-able's recent partner conference, advise about how to get the most out of the process.

How hot is the managed services mergers and acquisitions market? So hot that remote management and monitoring platform provider N-able offered three different panel discussions on the topic during its annual partner summit in Scottsdale, Ariz. last week

"M&A has never been hotter than right now," N-able Vice President of Sales Michael Cullen told Channel Insider.  

That's because the ongoing tough economic climate has squeezed many smaller "reactive" MSPs. Cullen classifies these as businesses that take deals for cash flow instead of profitability, that depend on a single anchor account or that provide a fixed fee service at a break/fix price.  These MSPs are getting gobbled up by their bigger competitors.

Acquiring a smaller MSP can lead to a better return on investment for the acquiring MSP than if they simply expanded the sales team to go after organic growth. Cullen said ROI can come in 7 or 8 months with a smart acquisition.

At the same time bigger MSPs are buying smaller ones, large manufacturers in sunset industries such copier manufacturing are looking for a new services-based business to enter.

That's why Konica Minolta acquired MSP All Covered in January 2011, a company that had been on its own acquisition spree before it was itself was acquired. Now it operates as a division of the Japanese imaging solution company and is continuing to acquire at a rate of about a dozen smaller MSPs per year.

Todd Croteau, president of Konica Minolta’s All Covered, and OKI Data America Director Tim Brien were among the panelists during a session at the N-able partner conference that featured companies looking to acquire MSPs. Other panelists included Dan Holt, formerly of HEIT and now with Computer Services Inc. (CSI),

and Carey Balzer, president and founder of White Glove Technologies.

Holt, former CEO of HEIT, also served on the panel of MSPs who were recently acquired along with Brian Ellison, group vice president  of Central Services at All Covered.

So what are acquirers looking for in target acquisitions of MSPs?

Balzer said that White Glove looks for companies that are profitable with revenues that exceed $2 million, that revenue number is just a threshold and revenues aren’t as important as profitability.  Most recently White Glove bought into the legal vertical, and it looks for entrepreneurs who will stay on to run the business after the acquisition.

Most of the acquirers on the N-able panel wanted the owners to remain with the company to help run it. Here are some of the other criteria they looked at when evaluating potential acquisitions:

  • Cultural fit – usually the deal won’t go further than initial discussions if this is an issue.
  • Rate of growth – two companies can have the same revenue number, but if one has been growing at a rate of 20 percent year over year, it’s more valuable than the company with flat revenues
  • Entry into a vertical or geographic market – can the target company provide access to a new market for the acquirer?
  • Contract retention rate – do customers stay put, or are they defecting after their time is up?
  • Strength and value of future contracts – are contracts about to run out or do they have three to five years remaining?

For MSPs who are looking to get acquired, panelists provided the following advice:

  • Get your books in order and focus on profitability. Consider engaging a CPA firm to help.
  • Don't be afraid to reach out to potential acquirers to indicate your interest. It won't hurt your valuation.
  • Demonstrate that you are forecasting out 18 months to 24 months and that you have consistently met previous forecasts.
  • Consider hiring an M&A attorney, not a general attorney. The difference is huge, and can affect your future employment contract with the new firm, for instance.
  • Also consider instituting a real Board of Directors for your company. You can offer board members options in return, and some business leaders will simply be happy to volunteer. The board will keep you in check and also widely expand your list of contacts.
  • Expect that the offer amount will likely not be up for negotiation, but the terms are likely to be much more flexible.

 

 


 
 
 
 
Jessica Davis covers the channel for eWeek and Channel Insider. Her technology journalism career began well before anyone heard of the World Wide Web and has included stints at Infoworld, Electronic News/EDN, and the Philadelphia Business Journal. Her work has also appeared on CNN and Forbes.com. She has covered hardware, software and networking, as well as the business side of technology. She has won several journalism awards, including a national ASBPE award for best staff-written column, and was named Marketing Computers hardest working tech journalist on their inaugural list of top tech journalists. Jessica can be reached at jessica.davis@ziffdavisenterprise.com
 
 
 
 
 
























 
 
 
 
 
 

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