Organic MSP growth can be frustratingly slow and inconsistent, pushing many MSP business owners to consider growing their business by acquiring another MSP. If you are struggling to grow organically, or you are dissatisfied with the speed at which you have been able to add new business, you’re not alone. Many MSPs are growing quickly through acquisitions, but few MSPs have the experience necessary to successfully navigate a profitable transaction. If you’re one of the many MSP owners considering this option, here are some things to consider before writing that letter of intent.
Does the company you’re considering acquiring sign their clients to multi-year contracts or go month-to-month with their clients? Are they primarily a project or break-fix shop? Are their contracts transferrable if they sell? Without transferable long-term contracts your potential target is worth significantly less, but is also less valuable to you. You can easily end up with a lot of new overhead with clients that don’t choose to stay post-transaction and have no obligation to do so. Understanding the business model of the MSP you’d like to acquire is an essential first step.
Do You Want to Purchase A Business or A Book Of Business?
Before you consider purchasing a business, you’ll need to decide if you want to acquire the business name, their intellectual property and their staff; or if you just want to buy their client base. Are you willing to take on the risk of any outstanding liabilities? Make sure before you get too deep into a discussion around buying another MSP that you and the seller are interested in the same type of transaction. A share purchase is more favorable to the seller, as it eliminates their risks post-transaction and may allow for the transaction to be counted towards a capital gains exemption. An asset purchase is more favorable for the buyer, as it limits exposure while immediately increasing revenue. If you want one, and the seller wants the other, the odds of completing a successful transaction are very limited. Finding out early will prevent you from completing a lot of unnecessary paperwork.
There are many reasons that a company might choose to opt for a share purchase. For example:
- The target asset has a better name, URL and marketing presence
- The acquisition target has significant cash flow and reserves
- The target company has certifications that would benefit you (technical, SBA designation, or other)
- The technical assets and skills of the target company employees are superior to yours or necessary for you to support the client roster you’ll be acquiring.
Is There Potential Negative Business Impact?
Buying a distressed MSP may seem like a bargain at the time, but beware of the hidden costs of acquisition. Blending a business in to yours is not a small task – whether it’s a one-man shop with a handful of clients or a larger company, you will need to spend a substantial amount of money and time on this initiative. Adding a ton of noisy clients to your stable roster can cause your own clients to churn while you struggle to retain the new book. The price tag is not the actual price tag, so make sure your budget for acquisition has some additional buffer for post-acquisition surprises.
Talk To Your Peers
If you think you’re ready to begin looking for your first acquisition target, start by speaking with peers who have acquired other businesses already. What do they wish they had known before transacting? Most MSP business owners are generous with advice in markets they are not competing in. Talk to your vendors if you need introductions to other business owners and you don’t belong to a peer group. Often they can point you in the right direction. Reddit and other MSP forums are a great place to research anonymously if you’re not ready to talk about your plans yet.
Too Good To Be True?
All is fair in love and war and M&A. The adage “If it sounds too good to be true, it probably is,” is extremely accurate when it comes to mergers and acquisitions. In a perfect world, all business owners would be extremely honest and transparent. The burden of due diligence is on the buyer, and any seller will want the best possible outcome for them. Don’t approach any acquisition–whether you’ve known the seller for 20 years or 20 days–at face value. You’ll need the help of legal and financial professionals. Don’t skip steps to transact quickly, and don’t skimp on the professional services. Your first transaction will be the most difficult, but you can make it significantly easier on yourself by surrounding yourself with competent professionals.