MSP Acquisitions: Advice for a Red Hot Market

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.