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HTG and the Entrepreneur’s Journey: Where’s Your Map?

Scott Scrogin

Scott Scrogin

Arlin Sorensen

Arlin Sorensen

Rewind to 2015 or so. I was in Las Vegas for a Hewlett Packard Co. customer conference. HTG Peer Groups CEO Arlin Sorensen also was in town. In some ways, we were both at a crossroads.

Yes, Arlin and the HTG team had built successful peer groups. Many of the members were MSPs who successfully shifted — or expanded — from product reselling to recurring revenue models. For many MSPs, the basic blocking and tackling work (remote monitoring, basic business automation) was done. At the time, I could tell Arlin and his team were formulating some next-generation strategies for HTG and its members.

I was in a similar boat. Amy Katz and I had co-launched, built and sold online media brands like MSPmentor, The VAR Guy and Talkin’ Cloud. In some ways I was losing my hearing — at least in terms of the IT industry. I needed silence to figure out exactly what I wanted to do next with my career. Ditto for Amy.

The 2015 Inflection Point

Gradually, it occurred to me that all of us — Arlin, hundreds of HTG members, Amy and I — were on similar journeys. Each of us had built our own businesses to achieve creative freedom and financial freedom; to ultimately spend more time with our families. But far too often, Arlin told me about entrepreneurs who became prisoners in their own companies — trapped by the very walls that were supposed to set them free.

During that 2015 meeting in Las Vegas, I think Arlin realized I was lost. At least for the time being. But I hinted that I knew Amy and I would be back in some form. And I kept on saying whatever I pursued next… it would involve documenting “the journey.”  Yada, yada, yada. By 2016, Amy and I were back with ChannelE2E — tracking IT service providers from Entrepreneur to Exit. (By the way, there have been hundreds of MSP exits since our late 2015 launch…)

And what about Arlin and HTG? In many ways, they’ve evolved to lead “the journey” as well. No longer just a “peer group” organization (though that remains a high-value service), HTG now offers coaching, consulting, life planning and plenty more.

The HTG Way for 2017

During HTG’s recent Q1 gathering (in Phoenix, I think), most sessions focused on leadership planning. This year it was all about identifying gaps – both of the owner/founder in their own leadership – as well as the gaps in leadership of those who are part of the team they are depending on to help take them to the next level, Sorensen says.

“More and more of our members are connecting the dots that they have to build true leaders that can step up and drive the business in an area to help keep the company growing,” he adds. “This is part of our overarching focus on “the entrepreneur’s journey” which describes how most small businesses seem to evolve.  It begins with a founder who runs a company on gut feel and hard work just muscling their way through.  Once that becomes too much, they hit a wall unless they have discovered how to build leaders and delegate.”

michael drake

J. Michael Drake

Here again, everyone in the IT channel seems to be living parallel lives. We’re all on the entrepreneur’s journey. We automate a bit using software. We hit more walls. But we also have some awakenings. For some of us, the entrepreneur’s journey  evolves into a Hero’s Journey, as masterIT CEO J. Michael Drake explained to me back in 2015.

The smartest among us realize hard work is not the secret to success. Instead, effective strategy and execution delivers business success, Sorensen notes. That potentially frees us up to focus on more important priorities, such as our families. 

Closing the Valuation Gap

HTG’s members also are working hard to close the so-called valuation gap. In short, business owners think their companies are worth X. But potential buyers think the business valuation is far lower than X.

Paul Dippell

Paul Dippell

What’s the solution? Instead of pursuing revenue growth at all costs, HTG members focus heavily on EBITDA profit margin growth. Many IT service providers have single-digit EBITDA profit margins. But the best of them can push toward 30 percent EBITDA profit margins, Service Leadership Inc. CEO Paul Dippell has indicated. 

The upside: Effective EBITDA growth has a huge impact on MSP valuations. While many MSPs are worth only 5X to 6X annual EBTIDA, the absolute best-performing MSPs can be worth 10X annual EBITDA or more. Skeptical? Take a look at Presidio, which is pursuing an IPO valuation of 10.5X to 12X EBITDA, ChannelE2E estimates.

Admittedly, Presidio is far larger than the typical SMB-focused IT service provider. But even small companies can greatly benefit from effective EBITDA focus. A case in point: The typical MSP within HTG is growing its valuation 2.3 percent faster (year over year) than the overall market, according to Service Leadership.

If that sounds like tiny progress… you’re wrong. Think of it this way: How much bigger would your nest egg looked if your Wall Street investments grew 2.3 percent faster every year for the next 10 years?

Now, remove the HTG members from Service Leadership’s overall estimates on industry valuation. The result: HTG participants outpace non-participants on valuation growth even more dramatically, notes HTG President Scott Scrogin.

Do Money, Automation Buy Happiness?

Naysayers may wonder why a blog about your life’s journey focuses so much on profits, EBITDA and valuation. Money certainly doesn’t “buy” happiness. But I firmly believe that money, when managed wisely, buys freedom. The freedom to spend more time with your family. The freedom to pursue your next passion. And the freedom to really think about how each step in your entrepreneur’s journey must align with your personal journey.

That’s a wrap on HTG Q1. I look forward to hearing about the HTG Q2 Meetings later this year.

PS: Just to make things extra interesting, HTG hosted a “Shark Tank” type marketing challenge as part of its Q1 meetings. Eight finalists shared their marketing plan for 2017, and the organization gave away $50,00 in prizes to the top three. Over 30 companies applied for consideration. (Here’s a look at the highlights.)

“It was designed as an educational event with the judges offering ‘shark bites’ of wisdom around marketing as we went through each proposal,” Sorensen says.

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6 Comments

Comments

    Rick Murphy:

    While I very much agree that EBITDA and free cash flow performance are very important keys to getting the most value for your company. I must strongly disagree with using a company’s pre-IPO valuation estimate to justify the point that “the absolute best-performing MSPs can be worth 10X annual EBITDA or more” as this is not at all a realistic perspective for any privately-owned company to consider.

    Presidio wants to go public and is pursuing an IPO valuation of 10.5X to 12X EBITDA, per ChannelE2E estimates, and that is fairly accurate. However, they have not actually successfully completed the IPO, thus they have not yet sold any stock to the public at any price. In fact, news reports have them “raising $250 million to pay off a heavy debt load” with many analysts taking issue with this fact “as little of the money raised would actually be used to grow the company.” Thus, it would seem there is more downward valuation sentiment as a headwind regardless of the estimates. I wish them well; but they are not a “comp” to the private market in any way.

    Any private company being sold to a privately-owned buyer is worth what the parties can mutually determine is fair and reasonable for both sides (with a little help from their respective advisors ;-)). Looking for synergies, consolidation opportunity, integration benefits, cross-selling projections, and myriad other factors, all come in to play when crafting a workable purchase price. The seller’s version of “valuation” is simply not part of the buyers modeling, and is more usually a boat-anchor that restricts mutual success.

    If you get a 10x multiple on your EBITDA, it really means the Buyer has uncovered significant synergies that increase the EBITDA such that they can afford to pay the price offered with an internal break-even of 60 months or less (some will go a tad longer); as no buyer is actually going to wait 10 years to break-even on their investment. Simple truth.

      Joe Panettieri:

      Rick: I appreciate the healthy debate. If/when Presidio IPOs we’ll be sure to report back on opening day valuation, longer-term performance, etc.

      Best,
      -jp

    Joseph Aiello:

    As an entrepreneur of a 35 yr IT company, I have lived through all of the changes and “easy” in owning your own business is overrated. On e of my great blessings was to be introduced to Arlin about seven years ago during one of those challenging times (2009-2010).

    I joined HTG and it has forever changed my business, my life-work balance, created incredible synergies with like-minded entrepreneurs and as important changed me.

    Through HTG, my business didn’t just survive, it thrived as we learned and applied sound business practices while growing leadership skills. I am thankful that I can call on Arlin and others in HTG to help me in business or personal.

    The success of our involvement with HTG led to an acquision of our company last year (ahead of our goals at a fair price). Since, the combined company has grown 3x over the last 14 months with strong EBIDTA performance such that we are 10 months ahead of projections.

    The changes in our industry are coming at a pace that I have not seen in my career- using every tool on your tool belt is required to adapt and continue steady company growth. Organizations like HTG and others are significant keys to understanding these changes and getting your business in a ready pro-active state.

      Joe Panettieri:

      Hey Joseph: We’re on a similar journey in slightly different markets. Since I’m a journalist and media entrepreneur, I’ve never been an HTG “member.” But Arlin, Scott, Pete and team have kindly invited me to meetings — to hear what’s on the mind of MSPs. Those conversations have helped to shape our content here at ChannelE2E — and on sites that we previously launched/built/sold — for nearly a decade now.

      Among the biggest learnings? If you can’t automate it then don’t do it. My business partner (Amy Katz) and I juggled lots of manual processes in our previous business. But HTG and the MSP industry as a whole forced us to take a hard look in the mirror. We took some time off in 2014, and re-emerged with ChannelE2E in 2015. The site development check-list moved dozens of tasks from the “manual” column to the “automated” column.

      Connecting the dots back to your point: Without automation, we simply wouldn’t have time to track the industry changes in a timely manner. Special thanks to the HTG team for teaching us that before we launched ChannelE2E.
      -jp

    Arlin Sorensen:

    Joe

    As always, we’re grateful for your insightful posts about the entrepreneur and their journey. We are on parallel paths – lots of us in the small business world – all working hard to make a buck and create a legacy that will last into the future. It is dedicated servants like you and Amy that give us the information we need to stay the course and make correction as needed.

    The reality is that the changing marketplace is going to require a lot more, and faster corrections in the coming days. Keep up the good work as we rely on your steady perspective to help steer the ship and keep us on track.

    Thanks for the coverage and most of all friendship over the years.

    Arlin Sorensen
    Founder/CEO
    HTG Peer Groups

      Joe Panettieri:

      Arlin: You had me at, “Come out to the farm…”

      best,
      -jp

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