Within the managed services market, MSP mergers and acquisitions still occur on a weekly basis. But I think it's increasingly difficult for quality buyers to find quality sellers. And even when two quality companies enter M&A discussions, challenges like valuation, earn-out parameters and non-compete agreements can destroy the deal.
No doubt, potential MSP buyers are networking like crazy -- infiltrating the MSPmentor 100 list, checking in with coaching organizations like TruMethods, and hanging out in peer group organizations like HTG. Buy-side MSPs also work closely with advisors like Cogent Growth Partners, while sell-side IT service providers work with companies like 4-Profit.
Some key MSPs and IT service providers remain on the acquisition trail. All Covered intends to become the U.S.'s largest provider of IT services to small business, with M&A assisting the effort. And Technology Capital Investors (TCI) is hunting for vertical market MSPs. But I think it will become increasingly difficult for All Covered, TCI and other would-be buyers to find quality sellers.
- MSPs generating $5 million or less in annual revenues are often considered too small for strategic acquisition -- unless they have impressive margins, vertical market expertise or a highly valued regional footprint.
- Several MSPs in the $5 million to $10 million revenue range tell me they intend to build their businesses for at least another 2 to 3 years before seeking potential buyers. The reason: Valuations increase significantly as you scale a business and flow more money to the bottom line.
- And MSPs in the $10 million+ revenue range? They're really hard to find.
Many MSPs seem to be rethinking their potential exit strategies. It's sort of like getting on a game show and holding out for the bigger and bigger prize because you believe in your current momentum.
Indeed, I think a healthy number of MSPs now believe they can pocket more money if they just... hold out... a little bit... longer...
Or am I wrong?