13 Sep Is an M&A crunch coming? Austin Dale featured in September 2016 issue of ChannelPro Magazine
Austin Dale Group was recently interviewed by ChannelPro Magazine. The ChannelPro Network provides targeted business and technology information for IT channel partners who serve small and midsize businesses (SMBs). ChannelPro wanted to discuss M&A trends in the industry and best practices for companies and their owners. This article is an extension of the topics discussed in the interview.
After a record number of mergers and acquisitions in 2015, deal activity cooled off a bit in the first half of 2016. We expect an increase in M&A activity for IT managed service providers (MSPs) in the second half of the year. We don’t characterize it as a wave, more like a continuation of the long trend of consolidation in the industry.
There are several factors contributing to this trend. Some are economic factors, such as the economies of scale that are possible as MSPs become larger. Also, valuations have been very attractive for small to medium MSPs that may have hit a wall in their own growth trajectory.
Another factor is demographic. There are many IT service company owners in their 60’s or older who bought or built MSPs and are thinking about slowing down, retiring, or doing something else. 10,000 baby boomers per day turn 65, and that will continue until 2030. That includes a lot of owners, many of whom will be thinking about transferring ownership of their business.
With all the rapid changes in the industry, there are some things that potential buyers and sellers need to be thinking about. Many owners understand that MSPs need to grow to a certain size and have a cloud strategy to be viable, or at least they need a defensible niche (vertical market, special expertise, etc.). This need to grow and reach scale, combined with the attractive recurring revenue model, have driven valuations to a high level which influences both sellers’ and buyers’ behavior. Valuations and deal activity go in cycles and we don’t think these high valuations will last forever.
There are a lot of issues for business owners to sort through to arrive at decisions that make sense for them. We assist some clients with strategic exit planning and there are three different factors or cycles that affect every business owner: 1) The industry – What’s going on in the industry? 2) The business – how is the business evolving and maturing? 3) The owner’s life and career – where is the owner in terms of their own life and where they want to be professionally? Savvy owners will consider where they are in all of these cycles to arrive at decisions about the best way to grow their business, whether to grow by acquisition, whether it’s time to sell or at least start planning to exit.
There are some common mistakes that we see companies in this space make, including:
- Not really understanding their financial information and what is really driving profit and value.
- Not working to make the founder/owner dispensable over a period of time, building a management team, and creating what we call “transferable value”.
- Not differentiating their company to stand out in the market.
Some best practices that we recommend for our clients include:
- Build a culture around consistent planning, budgeting, goal setting, and tracking progress vs. goals
- Tie compensation to performance and reaching goals
- Specialize and differentiate your company in order to grow and stand out in the market
You can read the ChannelPro article by clicking on this link: http://www.channelpronetwork.com/article/ma-crunch-coming