04 Oct MSP Acquisition Trends
The $200 billion IT managed service provider (MSP) market continues to see high levels of M&A activity. This is supported by a recent IT Glue survey that reported 69% of MSPs are considering being acquired and 19% are considering acquiring other MSPs. Some analysts predict that 20% of MSPs will account for 80% of managed services revenue in the U.S. by 2020. In this article we’ll look at what is driving this activity, what it means for your MSP business, and what you can do to get ready for M&A if you choose to go down that path.
Drivers of M&A Activity in the MSP Channel
- One-stop shopping – IT service vendors want to be attractive to customers who want one-stop shopping for their IT services, from basic IT maintenance and support, to cloud solutions, cyber security, and application integration. It’s not surprising that managed security service providers (MSSPs are specialized MSPs that monitor and manage security devices and systems) are currently some of the most desirable targets for M&A.
- Bigger is better – Managed service providers want to augment their organic growth by acquiring other MSPs in order to scale their business faster and increase their valuation. This is a strategy that some MSPs are executing to bulk up and then sell after they have reached critical mass.
- Retirement of baby boomers – thousands of owners are in their late fifties, sixties or older and are thinking of transitioning out and capturing the value they have built in their companies.
- Geographic expansion – Similar to #3, some MSPs are attempting to grow and dominate in a metro area or region or expand into a new geographic region.
- Acquihire – Some MSPs are acquiring other companies to gain their people. This “acquisition” brings in new skills that their customers are asking for, such as application integration, Internet of Things (IoT), big data, machine learning, etc.
- Vertical market strategy – One of the time-honored ways to grow a service company is to focus on one or a few types of customers and dominate that vertical market. Without an in-depth understanding of their customers’ business, it is harder to add value. Some MSPs are shortening this time by merging with or acquiring MSPs that have this expertise.
- Bolstering ‘business’ skills – Weaknesses in areas such as process and methodology, compliance or even sales and marketing could be remedied by merging with or acquiring an MSP with complementary skills.
- Desirable segment for investment – Buyers and investors are interested in MSPs and MSSPs due to their steady growth, sticky customer relationships, recurring revenue, and ability to scale. These factors combined with the relatively low cost of capital are leading to competition for good MSPs by strategic buyers and financial investors that are pursuing roll-up strategies.
What Does It Mean for MSP Owners?
Despite the high level of M&A activity, Arnie Bellini, the CEO of ConnectWise, doesn’t expect a complete consolidation of the industry. He uses public accounting as an analogy, in which there are national CPA firms, regional firms, and lots of successful local practices. An MSP owner that wishes to remain successful can’t ignore the technology trends and new services expected by customers. They can choose to develop new skills in-house, partner with other providers, or participate in the M&A market as a buyer or seller.
Preparing Your MSP for Merger or Acquisition
M&A activity is likely to remain strong for several years, although valuation multiples may start to trend down. We think an owner should stay informed about the market and understand their options as they build and manage their business. The MSPs that we work with are all dealing with industry trends such as the move to cloud computing, cyber security threats, and a shortage of skilled employees. Smaller MSPs may lack the scale and resources to manage these challenges, or the owner may be ready to retire or transition out of their business. That leaves three options for traditional MSPs looking to grow and thrive: Keep investing in new technologies and differentiating your company or get into the M&A game by acquiring another company or positioning your business to be acquired.
If you decide to acquire or merge with another company to build these capabilities, there are several things to do to maximize your success. Start with a growth strategy that makes sense for your company and define the rationale and goals for acquiring another company, including the parameters for an acquisition (size, geography, customer demographics). You also need to be sure that your company is ready. Specifically, do you have the skills and depth of personnel that you need, are your processes and systems strong enough to integrate another company, and do you have access to the financing that you will need? You can read more about the buying process and how to mitigate the risks by clicking here.
If you decide to position your business to be acquired, there are several things to do. One is to learn about the different types of buyers and what they are looking for, including insiders (people you already know), strategic buyers, and financial buyers. Most MSP buyers are looking for recurring revenue, healthy earnings, mature processes and systems, reliable management and employees, and defensible customers and markets. You can read more about that in our “Building Value” series of posts .
Austin Dale Group has been working with MSPs and other IT companies for many years to position them for successful mergers and acquisitions. Contact us if you would like to discuss your unique requirements and get a candid assessment of the available options.