MSPs Should Expect Plenty of M&A in Q4

Have you been contacted by venture firms or investment bankers asking to buy your business? 

If your answer is “yes,” you’re not alone. 

Within the last few months, more private equity/venture firms and angel investors have been focused on MSPs. There are a number of deals in progress right now and I predict we’re going to hear several M&A announcements in Q4.

Why are PE/VC firms getting more active in this space? Because they’re starting to see signs of MSP market consolidation  – which some of us have been predicting for a while – please see previous blog on market consolidation – which equates to big opportunity for investors who excel at:

• Selecting the right leadership teams
• Selecting best of breed companies to acquire
• Selecting the right sales/service strategy based on where the market is headed, not where it is
• Raising enough money to do several “tuck in” transactions to create scale
• Raising enough money to weather a storm or two over a five to eight year horizon. 

So how will the next three to 12 months play out?

Right now investors are scrambling to acquire the right MSP “platform” company. 

A platform is a foundation. If you’re going add on to a house, the foundation needs to be strong.  The same principle applies here. You need a strong and healthy company on which to build.  Platform or foundation companies fit the following profile:

• $10 – $50 million in total revenue
• Strong recurring revenue (at least 60 percent revenue is recurring)
• Profitable (healthy EBITDA)
• Strong management team
• Existing sales engine (proven ability to consistently grow sales organically)
• Strong client retention (service delivery operation keeps churn to a minimum).

If you meet the criteria of a “platform” MSP, then it’s a good time to be you, because you’re in demand.

But make no mistake, MSP owners should not overplay their hand and wait too long, or get greedy.

Institutional investors are smart and disciplined, they would rather find two solid MSPs to create a platform company, than overpay for one large company. 

In next three to 12 months we will see a number of investors emerge with their platform companies. Several deals have already been done within the last year, such as Sverica Capital Management acquiring Synoptek, and Court Square Capital Partners acquiring AHEAD. 

The subsequent 12 to 24 months will bring the “tuck in” stage, when companies with $2 to $10 million in total revenue, with strong recurring revenue and other quality attributes, will be acquired by the platform companies.  

The net result will be larger national and “super-regional” service providers within the next 36 months.

This market activity will also put a lot more pressure on smaller MSPs, especially those holding onto outdated business models.

Of course the idea of a “roll up strategy” in the MSP market isn’t new.

Mindshift and All Covered, both backed by institutional investors, started acquiring MSPs in the early 2000’s with mixed results initially. 

However, since both companies have been acquired by Ricoh and Konica Minolta, respectively, I believe their track record for acquiring MSPs that produce meaningful results and scale have improved. 

The difference between now and the early 2000’s is that there are dozens of investment groups who recognize the opportunity to scale an MSP business through standardized managed and cloud services, in addition to consolidating a very fragmented marketplace.

So, how are you preparing your business for market consolidation?

The author can be reached at jimlippie@claritychannel.com.