Managed Services Acquisitions: Why MSP Mergers Succeed & Fail

Managed Services Acquisitions: Why MSP Mergers Succeed & Fail

During the recent Kaseya Connect User Conference, several well-known MSPs told me they receive regular takeover inquiries from a national IT support provider. I asked a few of the MSPs why they haven't sold out just yet. I asked others when they would sell. Here's what I heard.

One prime answer involved a U.S. East Coast MSP. He has a set asking price for his company. Potential suitors must agree to the asking price before any official M&A discussions can even start, the MSP founder says. So far, no suitors have met the asking price and the MSP isn't ready to budge on valuation.

Is that an arrogant attitude or smart business? In my mind, it's smart business.

M&A Ain't All Roses

Sometimes, the media (including MSPmentor) paints M&A activity with too positive a paint brush. We gloss over the hidden challenges. The financial risks. And the reality that selling your business means potentially giving up control.

Check out this startling insight from CNN:
"...a 2004 study by Bain & Company found that 70 percent of mergers failed to increase shareholder value. More recently, a 2007 study by Hay Group and the Sorbonne found that more than 90 percent of mergers in Europe fail to reach financial goals."
There are nine reasons why mergers and acquisitions fail, notes Harvard Business Review. They include:
  1. No guiding principles
  2. No ground rules
  3. Not sweating the details
  4. Poor stakeholder outreach
  5. Overly conservative targets
  6. Integration plan not explicitly in the financials
  7. Cultural disconnect
  8. Keeping information too close
  9. Allowing the wrong changes to the plan

Should You Really Sell?

So, am I against MSP mergers and acquisitions? Certainly not. I'm just calling for MSPs to enter negotiations with their eyes wide open.
  1. Know what your business is worth
  2. Know what makes you happy
  3. Check the potential buyer's M&A track record
  4. Negotiate in good faith
  5. Check the corporate culture and make sure you have mutual goals. For instance, ETG CEO Mike Jones says he'll only sell out to a potential buyer that has a like-minded focus on the health care vertical
  6. Make sure you're pleased with all the details discussed at the negotiating table. If you're not happy during negotiations, how are you possibly going to be happy post-sale?
  7. Have a clear understanding of your role post-acquisition. Will that role continue to make you happy? If not, will the up-front financial compensation ease your pain?

Numbers to Know

There's plenty of M&A chatter across the managed services industry. Don't get caught up in the hype. Of the 80,000-plus VARs and MSPs across North America, only a few dozen deals will happen this year.

I suspect the best M&A deals succeed for four reasons:
  1. The seller really got what they wanted
  2. The buyer really got what they wanted
  3. Customers really got what they wanted
  4. There was a cultural fit that spans the buyer and seller
If you embark on a deal let me know how it turns out. I promise to share the details with only a few thousand friends.

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