Managed Services Acquisitions: Why MSP Mergers Succeed & Fail
During the recent Kaseya Connect User Conference, several well-known MSPs told me they receive regular takeover inquiries from a national IT support provider. I asked a few of the MSPs why they haven’t sold out just yet. I asked others when they would sell. Here’s what I heard.
One prime answer involved a U.S. East Coast MSP. He has a set asking price for his company. Potential suitors must agree to the asking price before any official M&A discussions can even start, the MSP founder says. So far, no suitors have met the asking price and the MSP isn’t ready to budge on valuation.
Is that an arrogant attitude or smart business? In my mind, it’s smart business.
M&A Ain’t All Roses
Sometimes, the media (including MSPmentor) paints M&A activity with too positive a paint brush. We gloss over the hidden challenges. The financial risks. And the reality that selling your business means potentially giving up control.
Check out this startling insight from CNN:
“…a 2004 study by Bain & Company found that 70 percent of mergers failed to increase shareholder value. More recently, a 2007 study by Hay Group and the Sorbonne found that more than 90 percent of mergers in Europe fail to reach financial goals.”
There are nine reasons why mergers and acquisitions fail, notes Harvard Business Review. They include:
- No guiding principles
- No ground rules
- Not sweating the details
- Poor stakeholder outreach
- Overly conservative targets
- Integration plan not explicitly in the financials
- Cultural disconnect
- Keeping information too close
- Allowing the wrong changes to the plan
Should You Really Sell?
So, am I against MSP mergers and acquisitions? Certainly not. I’m just calling for MSPs to enter negotiations with their eyes wide open.
- Know what your business is worth
- Know what makes you happy
- Check the potential buyer’s M&A track record
- Negotiate in good faith
- Check the corporate culture and make sure you have mutual goals. For instance, ETG CEO Mike Jones says he’ll only sell out to a potential buyer that has a like-minded focus on the health care vertical
- Make sure you’re pleased with all the details discussed at the negotiating table. If you’re not happy during negotiations, how are you possibly going to be happy post-sale?
- Have a clear understanding of your role post-acquisition. Will that role continue to make you happy? If not, will the up-front financial compensation ease your pain?
Numbers to Know
There’s plenty of M&A chatter across the managed services industry. Don’t get caught up in the hype. Of the 80,000-plus VARs and MSPs across North America, only a few dozen deals will happen this year.
I suspect the best M&A deals succeed for four reasons:
- The seller really got what they wanted
- The buyer really got what they wanted
- Customers really got what they wanted
- There was a cultural fit that spans the buyer and seller
If you embark on a deal let me know how it turns out. I promise to share the details with only a few thousand friends.
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Having helped lead M+A of 4 companies in my career, I believe by far, the #1 reason for M+A failure is what one of my mentors told me years ago, “It’s all about assimilating the people. Everything else can be perfect, if that doesn’t happen great it will certainly fail”
Todd Hussey
Todd: I agree to a certain extent. Success or failure often depends on people and culture.
But on a somewhat related note, I also have a strong view on “mergers” vs. “acquisitions.”
Generally speaking, I think mergers fail. As a PR person once told me: There can never be a true merger of equals. Somebody has to lead. That’s why I believe in acquisitions with a clear leader (i.e., John Chambers, Larry Ellison, etc.). At the end of the day, somebody has to make the difficult decisions that may not please everyone…
-jp
At this point most (successful) providers use nearly the same tools, resell the same products, provide the same services and even attend the exact same staff amp; owner training. The more and more these providers “share” with each other, the more replaceable they become and their valuation crashes down to pure numbers with a lot of the baggage (PSA licensing, RMM licensing, long term equipment leases, etc) just making the whole deal potentially poisonous.
IMHO, the “I have a number you must hit” is arrogant and getting dumber with each passing day as MSP margins are getting slimmer and slimmer. If their number isn’t hit today, it likely never will be – which may not be bad news all together because most buyers are looking for a distressed deal and a great group of people.
Nearly all my “friends” in the space that did them, some even on pure numbers with nothing to lose (ie, “You’ll be paid for the purchase price based on how many clients stay on with us after the switch”) ended up with a collosal mess on their hands that nearly broke them – with current staff leaving, to inheriting the mess they didn’t find in the original due diligence, etc.
I’m often brought in as an advisor and an interesting (although depressing) topic is also why most Mamp;A proposals die.
-Vlad
Vlad: Thanks for such a hopeful, upbeat message 😉
Kidding aside, I do appreciate the healthy reality check you just offered.
I still think it’s healthy to have a set financial figure that the buyer has to hit. And I do think there are plenty of suitors looking for regional MSP gems rather than “distressed deals.”
But again, I always appreciate your views. I never have to wonder where you stand. Best
-jp
Joe,
Let me know if you ever need a motivational speaker 🙂
Seriously, like I said, it’s not all bad news. A profitable business with good personnel and strategy has no reason to sell unless seriously high multiples are offered. I agree with you there. From both sides though, the acquisitions I’ve seen have been for typically regional purposes and mostly on the small side (with just a handful of employees).
I kind of have to be careful what I say because my travel stuff is now public on Twitter and everywhere else – I visited a CEO of a large MSP and we talked about the process of mentoring MSPs vs. outright acquiring them and implementing the same process in a new location. I (well, OWN amp; ExchangeDefender) sponsor a TON of training seminars along with some high profile stuff that MSPU pulls off, and the kind of holes these series patch (and the questions that come as a result of it) make you wonder how these places even stay open. These aren’t sole proprietors or sub-$1 mil places, some run very healthy busineses – and the appeal of a huge salary with the risk removed, great health care with some control let go is appealing to many.
When buyers look, they are looking for a deal. The arrogance is shared by both buyers and sellers alike – Sellers have a premium because they think they are worth more than they currently make but are on the path to eventually make it. Buyers look for a deal because they have more money because they know better and just want to implement their model with the solid personel, not buy someone elses baggage and wrong decisions that brought them to the place in the first place. Like I said, arrogance is shared – and those on polar opposites tend to lose out because of it.
Somewhere in the middle great stuff happens.
-Vlad