MSP, IT Service Provider Acquisition Wave Is Just Starting
Dozens of MSPs and strategic IT service providers have been acquired in recent weeks — including Presidio’s big buyout of Cisco partner Netech. I’m not suggesting that the entire channel is ready to participate in M&A (merger and acquisition) activity. But some very simple data suggests M&A deals will continue to accelerate from now through about 2022. That’s right. Seven more years of accelerating mergers and acquisitions before the market tapers off a bit.
How can I make such a claim? First, let’s look at the overall small business market. During normal years, approximately 250,000 private businesses in the United States change hands each year, according to Business Renewal Solutions. But, the firm adds:
“As the Baby Boomer generation approaches retirement age, this number will more than double to more than 500,000 businesses per year. In total, more than 7.7 million business owners will be looking to exit their businesses over the next 10-15 years. Some estimate that these businesses represent over $10 trillion in wealth.”
The words are impressive. But to really understand the meaning of the words check out the graphic below, also from Business Renewal Solutions. The chart essentially tracks the age of U.S. business owners to predict potential M&A activity:
Thanks to aging baby boomers (red line) the overall M&A activity (yellow line) should continue to rise at least through 2022 or so before beginning to cool off dramatically around 2025 or so.
Too Many Sellers, Not Enough Buyers?
At first glance, all of that M&A activity could be great news for strategic IT services providers. Instead of simply closing up shop or handing the business off to a relative, the IT channel will be full of veterans who understand the M&A process.
But take a closer look and the news isn’t all good. With so many companies looking to potentially sell, there could be (A) too few buyers or (B) reduced valuations based on an “excess inventory” of companies for sale.
Potential Good News For You
I suspect the reality will be two extremes: Best of Breed companies — the top strategic IT services providers — buying each other up. And the industry laggards limping along — not necessarily going out of business, but certainly not fetching a premium for their very average businesses.
That’s why an exit strategy is so darn important. Even if you’re not ready to sell your business, you still need to build the business with a maximum valuation in mind. Because you never know when a surprise bidder will come knocking on your door.
Historically speaking, Service Leadership Inc. has suggested that well-run IT service providers can sell for about 5 to 7 times annual EBITDA (earnings before interest, taxes, depreciation and amortization). Top performers that are growing fast (say, more than 20 percent annually) and generating high margins (say, 25 to 30 percent) can earn higher valuations.
Long Before Exit
While we cover M&A aggressively on ChannelE2E, we’re far more concerned about the overall journey from entrepreneur to exit (E2E). For some companies, the E2E journey will be decades. For others, it’s a few short years.
Regardless of the journey’s length, TruMethods says you’ll need to focus on five key areas to be a world class MSP or truly strategic IT services provider. Those five areas are:
- Business planning
- Sales focus
- Packaging and pricing
Why We Care
For my business partner (Amy Katz) and me, launching ChannelE2E was an extremely personal decision. Amy was an entrepreneur long before she and I co-launched a business together in 2008 and again in 2014. She and I both have grandfathers who were entrepreneurs. Her husband is an entrepreneur. And my dad is an entrepreneur.
Many of those businesses put our respective relatives through college or helped to fund retirement savings. But some of those businesses didn’t survive beyond the first generation of ownership.
I guess the point is this: Even if you’re building a lifestyle business, you can build it in a way that creates lasting value and pays you — or your heirs — a really nice dividend at the end of your journey.
Seller’s or Buyer’s Market? It Doesn’t Matter
Around 2011 or so, it was a seller’s market for MSPs and top IT service providers. Some valuations topped 10X EBITDA — which gave entrepreneurs frothy returns on the businesses they built.
These days, I think the market is pretty much balanced between buyers and sellers. But by 2017 or so, I think it will increasingly be a buyer’s market — with more and more IT services providers trying to retire heading up to 2022 or so.
Again, that doesn’t mean valuations will fall for the best MSPs and strategic IT services providers. Buyers will always pay a premium for high-quality goods — including your company.
Walk Away Wealthy
During 2015, Amy and I debated a range of potential media sites to launch. We kept coming back to the ChannelE2E concept because we have lived the journey from entrepreneur to exit. And we’re back to live it again (with no plans to exit anytime soon).
A few days before ChannelE2E’s launch, I was browsing a bookstore at an airport. In it, I spotted the book, “Walk Away Wealthy: The Entrepreneur’s Exit-Planning Playbook.”
It’s required reading. Even if you have absolutely no plans to sell your business anytime soon, the book describes why it’s so darn important to think about your profit margins, valuation, potential suitors and exit strategy long before your intended exit day arrives.
You never know when opportunity will come knocking. Even worse, the knock may never come if you’re running a lousy business.