MSP SUMMIT/CHANNEL PARTNERS LEADERSHIP SUMMIT — Managed service providers (MSPs) will grow their businesses by 15% per year over the next decade, according to estimates. Despite those projections of steady growth, MSP leaders are still nervous about the effects of inflation and an economic downturn.

With approximately 20,000 MSPs in North America alone, that’s a lot of collective anxiety.

However, financial experts say there are steps MSPs can take to mitigate the effects of temperamental economic times. They spoke Wednesday at the MSP Summit and Channel Partners Leadership Summit in Orlando.

“If you’re an MSP with high EBITA numbers and have quality recurring revenue, there’s not as much stress and pressure on those types of organizations,” said Neil Medwed, executive director strategic partnerships and M&A at Meriplex.

Tim Mueller is president at ITX, and agreed with Medwed’s assertion. Recurring revenue adds stability in uncertain times, especially when it comes to mergers and acquisitions.

“Recurring revenue, when it comes to long-term contracts, mitigates risk for the buyers because all of sudden they know that these contracts are secure should they decide to make an acquisition,” Mueller said.

However, just because an MSP has recurring revenue, doesn’t mean it has built a broad enough client base. Even if one large customer is bringing in sizable revenue, it doesn’t mean the business is recession proof.

“You have to double down on your efforts with new business development in order to dilute that large customer when it comes time to go to market because you will get dinged on your own valuation,” Mueller said.

M&A

That said, there’s one thing that seems to be advantageous for MSPs. Even under trying economic circumstances, mergers and acquisitions have rapidly increased over the last two years for them.

Yet, when the M&A honeymoon period is over, what does an MSP need to do to be successful?

“Make sure you do a little bit of a stress test ahead of time with your legal and financial books,” Mueller said. “We’ve seen everybody holding hands and singing Kumbaya after the beginning. But then we start getting into due diligence and QVE earnings reports. They fall short.”

For small- to medium-size MSPs, due diligence is as simple as opening up QuickBooks.

“Create a month by month on a single-tab spreadsheet which will allow you to take a look at the trends in business,” said Mitch Morgan, CEO of New Charter Technologies. “It gives you an understanding of the peaks and valleys and whether you have consistent MRR growth over that time period.”

For M&A, New Charter seeks businesses that have steady growth and that are supported by increases in top line revenue, Morgan added.

Regardless of whether MSPs are advantaged by a merger or acquisition, there was a final point that the speakers raised. Nothing else matters if a company is not on the same page with a firm that they acquire.

Evan DeCorte is partner at Columbia Capital.

“This is the No. 1 thing about great businesses. They are philosophically aligned,” DeCorte said. “If you are not aligned in this way, the other stuff doesn’t matter.”