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Live Blog: MSP Mergers, Acquisitions & Valuations

Fred Voccola, CEO, Kaseya
Fred Voccola
Kaseya GM Jim Lippie

Dozens of MSPs have gathered today in Florida for an M&A Symposium hosted by Kaseya CEO Fred Voccola and GM Jim Lippie. ChannelE2E is on hand to share insights from the gathering, which includes executive guest speakers from Cogent Growth Partners, Onepath and Thrive Networks.

Kicking off the symposium, CEO Fred Voccola pointed out that the company is not necessarily advocating MSP M&A. Rather, the gathering is about sharing data points and observations with the industry -- so that MSPs can make more informed decisions about how to build and manage their businesses. "Talent, service delivery and M&A should be the top things MSPs are thinking about in my opinion," Voccola says.

Voccola described the history of the MSP market, tipping his hat to those who helped to pioneer the industry -- including Kaseya founder Gerald Blackie (he left the company a few years ago following a private equity sale) and ConnectWise CEO Arnie Bellini. Voccola conceded that Kaseya and ConnectWise aren't necessarily the best of friends, but ConnectWise deserves credit for helping to pioneer the market at a time when Dell and the Internet came along and squeezed traditional reseller product margins, Voccola says.

MSP Market Size, And M&A Drivers

Voccola expects the MSP market to nearly double in size from 2011 to 2021 -- growing from 85,000 MSPs to 167,000 MSPs. He hesitates to use the word "consolidation" amid such growth. But certainly, M&A is happening in the market.

Why? There are three drivers -- opportunities and challenges -- for MSPs that are triggering M&A:

  • Managed services are now standardized
  • SMBs are rapidly requiring advanced technologies
  • Large SMBs are looking to outsource critical systems

Dig a little deeper and additional M&A drivers emerge. They include...

  • Demand by SMB Tech is exploding
  • Innovation difficult to organically develop
  • Many companies are at an inflection point -- perhaps in terms of age of owner or technology expertise
  • Institutional money is in the market

There's a growing disparity between the strong MSPs and the weak ones -- and that's also driving M&A, he says. Other recent factors involve private equity firms coming into the market with big war chests, he notes. "A lot of private equity money has to be spent. After raising money, PE firms have to put the money out there and find the MSPs with good operators."

For MSPs, M&A gives you the ability to scale in terms of cash flow, access to credit, your margin for error and access to a larger network.

Stay tuned for more live updates.

Thrive Networks CEO Rob Stephenson

Thrive CEO Rob Stephenson

Thrive is one of the largest MSPs in the Northeast, backed by M/C Partners -- a private equity firm. The MSP in October 2017 acquired Precision IT in New York. Overall, Thrive has more than 500 customers, and the vast majority of employees are engineers. The company is exploring more acquisitions -- but that's all ChannelE2E can say about that...

Stephenson, like Lippie and Voccola, pointed to private equity moving hard into the MSP space over the past year. PE firms see a lot of IT spend shifting to Amazon Web Services and Microsoft Azure, and want to figure out a way to capture that revenue in some manner. MSPs are a means for PE firms to achieve that goal, he says.

What Thrive Looks for In Potential MSP Sellers...

Key questions Thrive wants MSP sellers to answer:

  • Why are you selling?
  • What's your succession plan?
  • What's your market reputation?
  • Do you have a sustainable go-to-market strategy?
  • Do you have positive momentum?
  • Do you have engineering expertise?
  • What's your cloud strategy?
  • What's your cybersecurity strategy?
  • What's your employee tenure?
  • What are your compensation rates?
  • What's the competitive landscape?
  • Do you have a logical explanation for issue, and did you proactively solve it?

"Every business has problems or issues," he says. "If there's a business issue you need to disclose it early in the M&A discussions then adjust expectations accordingly. Don't spring the problem on the buyer late in the discussions."

Monthly Recurring Revenue

Ideally, MRR should be greater than 50 percent of total revenue. Also, Long-term contracts should be at least one year with auto-renew. On the customer front, have fewer than 10 percent churn per year. Ask Stephenson for more MRR and business metrics here. He shared a ton.

More details coming.

Due Diligence

More thoughts from Stephenson: Most acquiring companies want to do an asset transaction -- not a stock transaction. Make sure your contracts are in order. Think about employee handbooks and employee agreements to ensure your HR house is in order.

Reporting KPIs

Stephenson pointed to a range of reports the buyer may pursue from the seller during due diligence. Examples include reports that track...

  • Sales funnels
  • Churn reports and why they churned
  • Booked but not billed reports
  • MMR historical revenue by product
  • One-time revenue profitability report
  • Gross margin analysis
  • Three-year budget forecast
  • Top 10 customer report
  • Customer concentration report
  • Profitability analysis, customer by customer
  • Employee churn reports and why
  • Engineer utilization reports
  • Identifying potential synergies

Overall, remove emotions from the M&A discussion process.

Rick Murphy, CEO and Managing Partner, Cogent Growth Partners

Rick Murphy

Next up is Murphy. Cogent is a buy-side MSP advisor that turns eight years old this week. The company has advised on 89 M&A deals to date.

While much of the M&A industry conversation involves valuation, Murphy prefers to focus on value -- the true value that MSPs build into their businesses.

M&A is not about top-line revenues. Rather it's about profit and gross margin -- and that true value rather than valuation. Careful of suffering from "top line" disease -- which means you chase revenue, hire too many employees, and potentially overpay tenured employees. And that, in turn, can lead to credit line addiction.

Sellers, he says, need to think like buyers -- and what your company is potentially worth to the buyer rather than what it's worth to the seller. Sellers should be obsessed with free cash flow to show their business value. "You exit strategy is daily liquidity and daily cash flow, and managing that," he asserts.

Murphy shared a bunch of "myth busters" to help MSPs reframe the M&A conversation. Ask him about those myths -- they're worth a lengthy conversation.

Cogent coined the term "opportunity-delta" to better represent the difference between the seller's and buyer's perspective of a purchase price. Also, keep in mind that the buyer wants to achieve a break-even point from the purchase within five or perhaps six years -- but closer to four years is more ideal for the buyer. That math has to figure into the seller's perspective.

Keep checking back for more updates and details.

Paul Cissel, VP of Business Development, Onepath

Paul C. Cissel

Cissel sold his company -- Internet & Telephone -- to Onepath, a PE-based IT services provider. He described his overall MSP journey to attendees -- including a range of M&A deals over his past 22 years in the market.

Paul's first suggestion: Read the books "Enterprise Value" and "Built to Sell."

His other suggestions:

  • Join a peer group to ascertain your company's business value, and to increase your enterprise value.
  • Put together a data room and keep up to date on a quarterly.
  • Speak with whomever calls.
  • Differentiate between those that have money and those that don't -- everyone from search funds to brokers, investment banks, PE firms and more. Tip to readers: Ask Paul for a list of financial sponsors -- it's comprehensive, and it describes the key traits of each prospective buyer/investor/financial sponsor.
  • Make sure you're aligned with your spouse at home and partner at work in terms of minimum offer you'll accept. And always imagine life after closing.
  • Find true experts -- attorneys, financial advisors, etc. -- that specialize in M&A. Don't use your all  purpose folks for this.
  • Form an advisory board -- people who have "Been there, done that" on the M&A front.
  • Beware of the "Retrade" -- a buyer who at the 11th hour cuts the offer price right when the deal was at the finish line. The buyer or investor may claim due diligence revealed a quality of earnings issue or something along those lines.

Additional Insights

Check this live blog every few minutes for insights from executives representing Cogent Growth Partners, Onepath and Thrive Networks.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.