Bryon Beilman, President and CEO, iuvo Technologies

Written by Allison Francis
April 22, 2021

“PE firms build portfolios of money from investors. Right now there is a lot of money (or dry powder) that they need to invest. When they create a fund, they have a timetable to invest those funds, and often you can ask them where they are in their investing schedule.

MSPs were a hidden gem for a while because they are recurring revenue and profit. The big questions asked of MSPs are “what is your EBITDA?” and “What percentage of your revenue is MRR?” There are a lot of MSPs out there and a lot of recurring, contracted revenue that they can buy and grow.
They chose MSPs because they are largely started by technical founders who grew the business. Being in peer groups with a lot of other MSP executives, it is clear that the majority of them are much better at delivering technical service than they are at running a business. Sales, marketing and accounting are typically all weak spots in an MSP. PE firms can invest in MSPs while bringing on their own strength of business (sales, marketing, cost containment, etc) and bring up their EBITDA.
Many MSPs are being acquired because these factors:

A) Have a majority of their wealth locked into the value of their MSP.
B) May be looking to transfer that value into cash, and a chance to earn more later.
C) Might enjoy going back to a different role where their strength is, or join something bigger than they could do on their own.

The PEs will typically get one anchor MSP with a revenue of $10 million-plus, and then do bolt-ons with the chance to grow the EBITDA and then sell the whole thing down the road for more because the multiple goes up as the value and EBiTDA climbs. MSP owners can typically benefit from this second part of the sale. It could be a win-win for both.

“In terms of the projected success of these investments, I think there is mixed success on this. I have met many people who have sold their MSPs and then wind up doing something in a related field because the cash out and PE-dictated terms did not end up bringing in as much money as they thought. In other cases, I have seen a platform company (PE acquired) work to buy smaller MSPs, which brings about integration and pricing challenges (caused by culture and business misalignment).

“I know of quite a few successes where there is business alignment and the process is very thoughtful (expand geography, complement offerings, exposure to new verticals). In those cases, the job of the MSP changes to realizing the synergy and growth, but the focus ends up being more about growth of EBITDA to meet the PE’s goals for a future liquidation event.

“There is a lot of FOMO for MSPs right now in terms of getting acquired. ‘The market is good right now, you should do it because when the market falls, so will your valuation.’ ‘The earlier you get in on a roll up the better your terms are as part of the whole package, so don’t miss out on this opportunity.’ I think MSPs have these messages constantly in their mind these days.

“To sum up, I think that this MSP M&A trend can be a good thing and make MSPs stronger if there are complementary skills and services that make the whole package better and stronger. And of course the most important is cultural alignment.”

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Allison Francis

Allison Francis is a writer, public relations and marketing communications professional with experience working with clients in industries such as business technology, telecommunications, health care, education, the trade show and meetings industry, travel/tourism, hospitality, consumer packaged goods and food/beverage. She specializes in working with B2B technology companies involved in hyperconverged infrastructure, managed IT services, business process outsourcing, cloud management and customer experience technologies. Allison holds a bachelor's degree in public relations and marketing from Drake University. An Iowa native, she resides in Denver, Colorado.