A Surprise Buyer for Managed Services Providers
Consolidation continues in the managed services market, where large MSPs, vendors, telcos and other types of companies have stepped forward to acquire smaller MSPs. But in some cases, those small MSPs may be overlooking a potential bidder. Who is the potential buyer? Here’s the surprise answer.
In some cases the answer is your own employees. A case in point: IT Solutions, a well-known MSP in Philadelphia, is an employee-owned company that leverages an ESOP (Employee Stock Ownership Plan). CEO Ted Swanson discussed the ESOP strategy a bit during the recent TruMethods Schnizzfest conference in Philadelphia. According to the IT Solutions web site:
At ITS, every employee doesn’t just act like an owner, every employee is an owner. Not just through stock options or public stock that anyone can buy. ITS employees own actual stock in the business through our Employee Stock Ownership Plan (ESOP). When ITS succeeds, they succeed. And every ITS employee knows that ITS only succeeds when our clients succeed.
Our employee-owners understand how a business operates, what’s important to an organization’s success, and how to control costs. And they apply those principles every day when it comes to your technology.
So how exactly can an ESOP work within an MSP? The answer to that question certainly varies from company to company. But let me set up a hypothetical scenario:
- The Owner: Let’s assume you’re CEO of an MSP and you own 100 percent of the company. You’ve thought about selling the company and you’d like to diversify your assets — but you don’t really want to give up control.
- The Employees: Meanwhile, you’d like to reward employees for their hard work. Plus, you’d like to create a culture where employees have a real stake in the business. You want your staff to take pride in controlling expenses, driving profits and delivering great customer service.
That’s where an ESOP potentially enters the picture. In the hypothetical example, the CEO could sell a minority share of the company — say 40 percent — to his or her employees. A bank could fund that purchase, and the purchase could be paid back from profits. (Here’s some info about such a scenario, called a leveraged ESOP).
Of course, I’m greatly simplifying how a potential ESOP can work. And there are numerous alternatives I haven’t covered. Wikipedia suggests that there are about 11,500 ESOPs in the U.S. covering 11 million employees, almost all in closely held companies. For deeper details check in with your accountant and financial advisors.
- How many MSPs promote ESOPs?
- How many MSPs would consider an ESOP approach rather than outright selling the company to an outside buyer?
I don’t have the answers to those questions. But we’ll continue to watch MSPs like IT Solutions closely. The company proudly promotes employee ownership on its website. And I suspect that gives customers peace of mind about IT Solutions’ staying power.
On a somewhat related front, we’re seeing some privately held technology companies extend stock ownership to employees. ConnectWise, for one, in May said it was “sharing its continued success with the disbursement of more than $3 million in company stock to its employees.” All ConnectWise employees own a stake in the company, CEO Arnie Bellini noted in a prepared statement.
If ConnectWise ever launches an IPO or gets acquired, those shares ensure employees will participate in the event. However, ConnectWise does not have a specific timetable or immediate plans in those areas. “But if and when something like that does occur, we want all of our employees to be able to participate,” said Jeannine Edwards, director of community at ConnectWise.