Subscribe To Our Daily Enewsletter:

Will Small MSPs Go Extinct?

I’ve been in the MSP market long enough to see my fair share of mergers and acquisitions first hand. As a former employee of inhouseIT, I witnessed the changes that took place when the company purchased a competitor, Baseline. In the time since I left the company, inhouseIT has seen some other significant changes, including an acquisition by Cal Net. Most recently, Cal Net has also joined the ranks of an even bigger organization, NexusTek.

We have seen similar roll-ups around the country, which leads to the question, “Will small regional MSPs become a thing of the past as they get swallowed up by larger national organizations?”

Why are large MSPs purchasing smaller organizations?

Obviously, the No. 1 reason large MSPs are interested in taking over these smaller businesses is growth. As these national organizations look to establish themselves in new regions, the easiest way to get their foot in the door is to purchase an already established MSP. This gives them an automatic client base and reputation in the region.

There are so many small business MSPs in every region, the market is bound to pair itself down over time. When one MSP is ready to throw in the towel, you can believe there is another one ready to scoop it, and it’s clients, up. Sometimes it’s not just solely about growth, but about being able to provide a higher level of support to a smaller market.

Why are small MSPs selling?

Smaller MSPs are attracted to joining forces with a large national brand in order to take advantage of their vast resources. As a small business, growing pains can be difficult to manage. Finding that sweet spot of when to hire a new employee to cover the number of clients you have is hard. With the resources available through a large MSP, they can concentrate more on finding new clients without worrying if the staff will be able to handle the load.

Another reason some small MSPs are selling is that the owner is ready to get out of the game. Sometimes these owners have life goals that have nothing to do with supporting small business IT, and it is time for them to move on. The large brand provides them with an exit strategy, and they are ready to take that leap.

What small MSPs should watch out for

Having been part of a few mergers and acquisitions, I know it can be a little scary for employees. You are unsure if you will have a job tomorrow, and if you do still have a job, will your company be recognizable in the future? Company culture can certainly suffer during an M&A transaction. This is especially true when a small MSP is acquired by a larger or even national MSP. If you are the owner that is being acquired, helping employees through this transition can go a long way.

Although many new small MSPs are created regularly, will they be able to compete with these large national chains in the near future? It feels similar to when a large national chain like Walmart is built in an area with many local stores. Eventually, the smaller local stores lose business because it is easier to shop at Walmart.

In order to compete when a national brand establishes itself in your regional market, you will need to rely on your customer service and provide a personal approach to support. Clients can feel lost in the sea of clients at a large national MSP, and this is your opportunity to really show your strengths in the market. This would not be a time to rely on automation and efficiency. It might take a little bit longer to complete a task, but as long as it is done with amazing customer service, the clients will stick with you.

I think there is definitely space for both large national brands and smaller MSPs in any given market. The smaller guys might need to work a little bit harder when the large MSP rolls into town, but it is definitely doable. Small MSPs just need to ensure they have a unique enough selling proposition to compete.

Return Home

11 Comments

Comments

    Dustin Bolander:

    Anytime a large MSP acquires someone in our markets we celebrate (we’re a 25 person shop at this point), if you’re a premium provider the national guys cannot touch your business. The walmart analogy is sort of accurate, but imagine if walmart locked you into a long term contract with zero ability to get out of it, you could never talk to a manager with real power to make decisions, and checkout lines took a day to get through. Suddenly walmart would not really have any advantages…

    Nick Bock:

    It depends on what kind of “regional MSP” you are. There are a surprising number of companies that would call themselves MSP’s out there that that have not matured their offerings, and have really poor performance. Those may be the ones that gets squeezed.

    There are also a large number of small MSP’s that deliver a pretty good solution with personal touch and local customer service. Those may even see a positive effect from the rollups because from what I’ve witnessed the rollup typically results in a short term and usually long term decrease in service.

    Nick

    Joe Panettieri:

    My views are somewhat negative for MSPs on both sides of this table. I think the large, private equity-backed MSPs are going to hit some turbulence based on some of the anecdotes Dustin and Nick shared above. There’s still room in the market for the smaller, service-intensive MSPs. Heck, my own neighborhood still has an independent hardware store because the owners know everyone, and they always point you to the right widget in the correct aisle. I suppose the same will hold true from MSPs. But much like the US economy, I think “middleclass” MSPs are losing ground as the top 20% (perhaps 15%) of MSPs pull away from the pack…
    -jp

    Jason Nelson:

    Joe, interesting thoughts as always. Question: In the MSP world of today, what strata of MRR or headcount is “middle class”?

    Joe Panettieri:

    I believe middle to upper middle class MSPs are somewhere between $2.5M to $7.5M annual recurring revenue or so. Tough to find $10M and above MSPs with 20%+ EBITDA margins, so I would consider those folks the rare upper class.

    Ian Richardson:

    You know – I think that just like anything, service quality, reliability, and attention to detail will dictate how this plays out. Large scale MSPs certainly may have some buying power that can cause downward pressure on smaller regional MSPs, but there’s no reason to think that just because someone is “bigger” that they’re going to be eating up all of the available deals. Plenty of people will see a large name and say “Nope — not going to call the ‘Circuit City’ in town, my business is too small for them” but still may have plenty of buying power. Likewise — a local player can emphasize that community connection via charity work, visibility, and local investment in ways that a large PEG backed group likely will not.

    In business, its all “who you know” – it’s still relationship based 100% in the SMB world, and even beyond. If you get intentional principals in a MSP, they’ll do well as long as the decision making process is solid.

    Just my 2 cents.

    Joe Panettieri:

    Hi Ian,

    I agree that many local IT service businesses thrive based on relationships. But founders need a way to (A) clone their relation-centric DNA across all employees while (B) maximizing automation to (C) scale their businesses. Traditional relationships (i.e., owner personally knows customer) simply don’t scale.
    -jp

    Todd Hussey:

    I’ve been in the “MSP” business since 1995 (yikes!!) when we called them ASPs – notice the quotes around “MSP”? “Back in the day” an MSP was defined as a VAR etc that provides RMM and outsourced IT with and RMM platform. Now everyone calls themselves an MSP, where the vast % still get a large % of their revenue from projects, break/fix etc. And these “MSPs” sell to IT – I can think of only a handful of my MSP clients that know (let alone sell to) the Business Managers (non IT folks). Who is servicing them? Who is helping them achieve their desired business outcomes with cloud? Who is “un-confusing” them about cloud? The MSPs “cheese has moved” ie the Business Manager – can they find it? The Born in the Cloud CSPs know where the cheese is – that’s a threat to all MSPs.

      Joe Panettieri:

      From what I’m seeing most of those CSPs are actually IT consulting firms that do project work — migrations to AWS, Azure or Google Cloud Platform with very little recurring revenue for the company doing that project.

      Is that truly competition for MSPs? In some cases, absolutely yes — since the bulk of SMB partners have yet to monetize IaaS in a big way. But I think those same CSPs face their own set of challenges. The cloud migration boom ain’t gonna last forever. If I’m in that space and I don’t have IP, I’m positioning the business for sale to Accenture, Deloitte, Capgem, etc. Fast.
      -jp

        Todd Hussey:

        I’m talking about CSPs that are all about “bundling SaaS” (from Ingram Micro Cloud as an example and new players like Appsmart) with their OTR and MRR (support vCIO etc) services. I know many CSPs/have many as clients that are calling themselves RMM MSP killers. Displacing traditional RMM Managed Services with Managed Cloud Services.

          Joe Panettieri:

          Thanks for that additional background. Keep the trend updates coming.

          Best,
          -jp

Leave a Reply

Your email address will not be published. Required fields are marked *