Mergers and Acquisitions, Private equity

MSP Consolidation: A Look at Evergreen’s Decentralized Model

Consolidation within the MSP space is proceeding at a breakneck pace. Whether it’s private equity investors or other acquisition by and of managed services providers (MSPs), the number of M and A deals within the sector has not slowed down.

This trend, driven by the appeal of recurring revenue models and near-constant customer demand, has led to the creation of numerous platform MSPs. As ChannelE2E highlights in our ongoing series, these companies acquire businesses and roll them into their own, amplifying their services, geographic reach, talent pool, and earnings in one fell swoop.

While we are certainly in the age of the platform MSP, these companies do not necessarily operate the same way.

The 20 MSP created a model where MSPs can join “the group,” learning best practices from their fellow group members and sharing services amongst them. Once they reach around $1 million in revenue, they may be acquired by The 20 MSP and rolled into the company as a whole.

Similarly, Brightworks IT has created a network of MSPs that share resources, best practices, and expertise. The company is backed by private equity firm Cloud Equity Group.

On the other hand, Ntiva focuses on long-term investments, partnering with companies to support sustainable growth and development.

What each of these three M and A processes have in common is that the acquired businesses are all integrated into the larger organization. For The 20 and Ntiva, branding is updated and the companies re-named. For Brightworks IT, companies purchased maintain their name and logo, but they are newly adorned with the “Brightworks IT” brand.

Amidst this landscape of rapidly changing ownership and integration, Evergreen SG offers a novel approach to acquiring MSPs.

About Evergreen

Evergreen has emerged as a prominent player in the MSP sector, strategically acquiring MSPs for nearly seven years. The company's acquisition strategy is rooted in its commitment to providing a stable, permanent home for businesses. Over the years, Evergreen has expanded its reach significantly.

"We’ve been acquiring MSPs since the end of 2017,” Sydney Hockett, vice president of M and A at Evergreen, explained to ChannelE2E. “This journey has enabled us to expand our portfolio across North America, the UK, and more recently, Australia and New Zealand as well." 

This geographical expansion underscores Evergreen’s robust growth strategy and its ability to adapt and thrive in diverse markets.

Evergreen’s approach involves a decentralized operating model, allowing each MSP to retain its brand, team, and operational autonomy. This contrasts with traditional roll-up strategies, offering an alternative for MSP owners considering selling their businesses.

The Acquisition Process

Evergreen's acquisition process should be familiar to anyone who has bought or sold a business before. 

"It usually starts with a phone call. I think that call is a chance for both sides to get a better understanding (of one another)," said Hockett. "For me, I’m spending time introducing Evergreen but also learning a bit more about the business. At the end of the day, MSPs in particular have hundreds of emails in their inboxes from people like Evergreen, so I think it's important to tell the story of how we're different, determine if the business is a fit for us and vice versa.” 

Evergreen employs a variety of methods to identify potential MSP acquisitions, according to Hockett. 

"We've spent a lot of time building up our database and mapping the geographical markets where we operate, and for lack of a better word, list building," she said. This extensive database helps Evergreen target specific MSPs. The company also relies on referrals from its network and collaborates with brokers, bankers, and other intermediaries in the industry.

"There’s a lot of cold email, a lot of email outreach, and cold calling can be a bit hit or miss," Hockett explained. "I spend a lot of time figuring out if we have mutual connections through anyone we know in this space. There could be a connection through a vendor, or they might be in a peer group that we're presenting at, or we're going to a conference together and we meet in person."

Permanent Ownership

Evergreen is committed to a unique buy-and-hold strategy, ensuring that the businesses it acquires remain under its ownership indefinitely. 

"We are never selling the businesses that we buy. We were founded with the idea of wanting to be a permanent home for businesses," said Hockett. This approach is designed to provide long-term stability for the acquired companies, their employees, and their customers, according to Hockett.

Another distinctive aspect of Evergreen's strategy is its decentralized approach. 

Unlike many acquirers who merge and streamline operations, Evergreen allows each acquired MSP to retain its existing brand and team. 

"We don’t integrate and roll up our businesses. We retain the brands and teams," Hockett explained. This method ensures that the identity and operational autonomy of each business are preserved, which can be appealing to some MSP owners who value the legacy they have built, Hockett said.

Evergreen’s decentralized approach can have a significant impact on employee and customer retention.

"We very rarely see any employees leave because that is the model; their day-to-day is not changing," said Hockett. 

By maintaining the existing structure and culture of the acquired businesses, Hockett says that Evergreen provides continuity for employees, which helps to retain talent. This stability extends to customers as well, who continue to receive consistent service from familiar faces, contributing to high customer retention rates.

Operational Benefits

For MSPs, cybersecurity is a critical concern. Platform MSPs like Evergreen must ensure that the businesses they acquire maintain high standards of cybersecurity to protect client data and ensure business continuity. Evergreen addresses this need through its partnership with Lyra Technology Group.

"Lyra Technology Group acts as a centralized support team focusing on knowledge sharing and best practice sharing," said Hockett.

Lyra Technology Group manages cybersecurity standards across Evergreen’s portfolio. "We have a base level line of cybersecurity requirements. We’re not mandating solutions, tech stack, things like that," Hockett explained. Lyra works with each MSP to ensure they meet these baseline requirements while allowing them to choose specific solutions that best fit their needs.

In a video on Evergreen’s YouTube channel, Elliott Hyman, CEO of Lyra Technology Group, elaborated on their role. "Today, Lyra Technology Group is composed of 20 MSPs across the Northeast, Midwest, and Canada,” he said. “We've been building our group since the end of 2017 with the first MSP that Evergreen invested in, Wolf Consulting."

One of the benefits of Evergreen’s decentralized model is the mitigation of risk across its portfolio. "If one of our businesses, God forbid, does have something happen, it does not affect our entire portfolio," Hockett noted. This approach helps to contain and manage potential cybersecurity threats within individual MSPs without compromising the entire network.

The Diligence Process

During the diligence phase, Evergreen’s diligence process is thorough and methodical, designed to ensure that potential acquisitions align with their investment criteria. 

"We look at businesses that are roughly $3 million in revenue, half a million in adjusted EBITDA and above, and at least 50% recurring revenue," Hockett said. This focus includes both recurring services and products.

While any business buyer worth their salt would look at financial metrics, Evergreen is primarily focused on customer metrics during the diligence process, according to Hockett. 

"We spend a lot of time on customers and their retention," she explained. This involves evaluating the retention rates of existing customers, the potential for upselling, and any concentration risk—where a few customers make up a large portion of revenue.

The diligence process typically spans about 60 days, during which Evergreen delves deeply into these various aspects to understand the business before moving forward with a deal.

Expansion and Future Prospects

Evergreen has been steadily expanding its reach beyond North America as part of an overall growth strategy. 

"We expanded to Canada in 2021, UK last fall, and Australia and New Zealand as of the first of the year [2024]," Hockett said. This geographical expansion allows Evergreen to tap into new markets and diversify its portfolio, enhancing its global presence. 

According to Hockett, it is Evergreen's buy-and-hold model that will provide stability and growth. By maintaining ownership of the businesses it acquires, Evergreen hopes to ensure long-term investment in their development. This approach allows for sustainable growth, as it focuses on building and nurturing each business over an extended period, according to Hockett.

The buy-and-hold strategy mitigates the risks associated with frequent ownership changes and integration challenges, providing a stable environment for growth.

As technology continues to advance and the demand for managed services grows, Hockett believes that Evergreen is well-positioned to capitalize on these trends. The company’s focus on sustainable growth, coupled with its strategic expansions and solid operational foundations, ensures that it will remain a key player in the MSP industry, she said.