MSP 501 Profile: Capstone IT Strikes the M&A Iron While It’s Hot
Company Name: Capstone IT
Company MSP 501 Rank: 195
Co-CEO: Michael Fowler
Headquartered: Rochester, NY
- Office 365 Cloud
- Computer IT support
- Hardware and software procurement
- VoIP phone systems
- Website design and development
- Network and data security services
- Onsite Apple support
- Consulting (M.I.S.C.)
- Business and technology fit assessment
- Staff development training
- IT consulting
The past few years have brought us a level of M&A activity that the channel has never seen, which has changed and reshaped our world in countless ways.
While some companies have used this as an exit strategy, others, such as Capstone IT, have used it as a growth opportunity. Owner and co-CEO Mike Fowler saw the opportunity to expand Capstone’s product offerings, and jumped on it. On July 1, 2019, Capstone IT completed a merger with four other IT companies to form Iconic IT. It now has offices in Rochester, Wichita, Dallas and Denver – all four of which are on the 2019 MSP 501 list.
“I saw this as an opportunity for us to grow, expand our market, offer opportunities for our employees and provide more advanced services to our clients,” recalls Fowler.
It’s a route many MSPs are taking these days, and for good reason.
Here, Fowler talks about how Capstone IT has differentiated itself from other MSPs in terms of the prospects they pursue, how the increase in M&A activity has impacted their business and how being members of a peer group has been a big success factor.
CF: You recently went through a big merger with three other IT companies. We’re seeing a lot of this as private equity flows into the channel. What should MSPs looking to leverage that opportunity be focusing on?
MF: The influence of private equity has made one thing clear: Size matters due to how it increases earnings before interest, taxes, depreciation and amortization (EBITDA) multiples, which in turn increases valuations. Valuation has become a KPI for MSPs. This is great because whether you want to sell soon or run your business for 20 more years, the march to increase valuation is now part of your decision making. A higher valuation means your decisions must include the health of all aspects of the business.
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To maximize valuation, you must also show that you have proper processes and controls in place, steady growth among existing clients, a marketing and sales process that can consistently acquire new customers, and that you can efficiently integrate acquisitions. If you are looking to grow, unlike any time I can remember, today’s market provides the incentive.
To tie all of this together, a higher valuation provides more access to capital and attracts PE investments, which in turn allows more growth. No one knows how long this will last, but right now, this is really a good time to be an MSP.
There are of course risks to some MSPs. The companies that decide to invest in growth in order to capitalize on higher valuations will be outspending other MSPs, particularly in marketing, building sales teams, and research and development. You must have a strategy in place to combat this or you risk losing market share. Many are probably already seeing this.
CF: Valuations, EBITDA, maximizing efficiencies: These aren’t things that many MSP owners are naturally familiar with. How did you learn what to watch out for, what to focus on and how to get where you wanted to go?
MF: Capstone and the other three businesses that formed Iconic IT have been providing IT services for over 15 years. Success was not overnight. But over the last 10 years, our companies have taken off. We are fortunate to have great leaders and dedicated employees and there are many other ingredients to our secret sauce, but I believe the biggest factor …