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VARs and MSPs need to know where to go for capital to expand their businesses or risk missing new market opportunities.
July 20, 2018
What channel partner doesn’t have profit and growth on their vision board? Many do, but few understand how to realize expanding and building their business. Most importantly, they often don’t know where to go for capital.
Jeffrey Kaplan, managing director at ThinkStrategies, helps VARs and MSPs with new market assessments, competitive analyses, go-to-market strategies, and market messaging and positioning. And when the time comes and if the fit is right, he introduces his partner client to Super G Capital (SGC).
Kaplan has noticed that very often owners and executives managing VAR and MSP companies are reluctant to grow their businesses in response to rising demand. Why? Because, they’re not aware of the financial mechanisms available to them.
Not only does this hesitancy prevent partners from investing in new technologies, staff, or sales and marketing efforts, it often results in them missing new market opportunities.
“This isn’t new, it’s always been an issue facing VARs and MSPs,” Kaplan said. “But, it has become more acute as the competition in the market has intensified.”
Most of the partners doing business with SGC are businesses with less than $10 million in revenue, are young and need capital. The lender specializes in funding businesses with monthly recurring revenue (MRR). Jon Engleking, chief operating officer and co-founder of SGC, sees a number of trends in the industry.
For example, he says that today, MSPs are going through what VARs selling point-of- sale (POS) systems and credit-card processing went through 15 or 20 years ago.
“In the late 1990s, these VARs went out and made their money by selling the POS terminals upfront and then got a small monthly servicing fee from the merchants,” Engleking said. That business model changed dramatically in the early 2000s. That’s when the partners started giving the equipment away for free and increased their monthly recurring revenue.
That created a cash huge drag on the partner’s business, and they had to rely on the MRR to catch up, which often took many months to realize the income. SGC financed the cash drag — which is how the lender got started in this space.
Engleking sees a similar thing happening with MSPs.
“A lot of them are converting to a managed-services platform and they need cash to be able to service their clients and buy equipment, especially the smaller companies [that] don’t have enough cash to achieve the growth they want to do,” he said.
Another trend among MSP businesses that have a solid platform is wanting to expand via acquisition. These MSPs are seeking acquisitions in locations where they’re looking to expand. Acquiring is often easier than building a business up from scratch.
“They can buy MRR right on the spot,” said Engleking, who notes that acquisitions and growth capital are the two top reasons why VARs and MSPs turn to his firm.
He’s also noticing that there are many partners interested in mergers and acquisitions that are looking for a valuation of their business.
“A company is worth a lot more, the bigger they are. So if a company is doing $1 million in annual recurring revenue vs. a company that’s doing $5 million, the valuation is almost double in terms of what a buyer is willing to pay for that business,” Engleking said.
Many smaller MSPs need cash to build their businesses if they’re interested in selling; however, like Kaplan, the lender said that many partners don’t even know that there’s capital out there for them to tap into. And they often don’t understand using non-dilutive debt capital versus private equity.
Engleking argues that debt, an alternative way of getting money, is better for partners, because if they’re growing, they retain 100 percent of their company.
“You don’t have to give anything up or have partners, and you don’t have to report to people,” he said, referring to private-equity deals.
Banks typically won’t look at a business doing under $5 million in annual revenue and they look at a partner’s net capital to be able to service the debt. SCG takes a different approach.
“We look at the value of the monthly recurring revenue and use that as the asset. The loan amount is strictly about the ability to service the debt,” said Engleking.
For MSPs considering finding capital from a firm such as SGC, criteria the lender considers include: strength of their contracts; strength of MRR; attrition; past accounts and how long they’ve been on the books; the types of services the partner is selling – niche security vs. Office 365 – and their clients.
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