Do You Need A Broker ?
While there are broker services that help smaller MSPs , neither Henson nor Bosacoma , both of whom are negotiating further deals , use one . They prefer to rely on their market knowledge to find matches . Having both made purchases in the past , neither is seeing much of a change in pricing , although Bosacoma sees that “ multiples aren ’ t what they used to be .”
Something to remember , he cautions , is interest rates are higher . So if you ’ re going to take out a loan , that may affect the overall cost of acquisition .
If you don ’ t want to go through a broker but would still like some help , you may be able to take advantage of a free offering like the Kaseya M & A Concierge Program that helps to match buyers and sellers . The program also helps with post-sale integration and migration services .
How To Vet Your Target
Small MSPs typically lack the resources of their larger counterparts . If a big MSP makes one bad acquisition in a string of purchases , it isn ’ t likely to break the company . But smaller companies travel on a narrower lane , so they must choose targets carefully .
Due diligence is a must . Acquirers should learn everything they can about potential targets . Review vendor agreements , client contracts , customer fees , office leases , and other operational expenses — and , of course , the technology stack .
Customer fees are especially relevant because they are tied directly to profitability . Bosacoma warns against taking on a company that charges too little . He says that a substantial discrepancy between the acquirer ’ s billing rates and those of the target company is a deal-breaker .
Culture fit also looms large , he says . That ’ s why he and an HR consultant he hired talked to employees at the target company before completing the deal . The goal was to understand the company ’ s communication and working style to determine if they would mesh with those of CIO Landing .
Should You Buy An Unprofitable Business ?
What if the target company is unprofitable ? It doesn ’ t have to be a deal-breaker , says Bosacoma . “ Let ’ s say they have some manufacturing firms as customers , and just do basic things for them . It could be that those types of manufacturing companies can be upsold [ but ] they weren ’ t upsold because the existing MSP just didn ’ t have the capabilities to do that .”
On the other hand , if the client roster consists of two- or three-person firms , upselling will be harder . “ Small firms are very price-conscious ,” Bosacoma says .
Bill Campbell , CEO of Balancelogic , a managed IT support provider in Waldorf , Maryland , doesn ’ t see unprofitability as a deal-breaker either . Perhaps there are inconsistencies that can be fixed . “ Or if our processes and procedures would make the services profitable , then there might be an opportunity for the acquisition ,” he notes . “ Also , if we are able to transition them and use our stack , and we can eliminate their existing stack — which would make it profitable — then that would make sense as well .”
Balancelogic is working on its third acquisition . The target has a limited MRR business , focusing instead on project revenue . “ But their services align with ours and they use the same tech stack . This wouldn ’ t give us any diversification , but other advantages would be gaining talent , market expansion , and immediate additional revenue , which we could potentially turn into MRR in the long term ,” Campbell says .
The Tech Stack Question
Tech stack can make a big difference . If the companies ’ platforms and tools are too different , migration could be lengthy and complex — and perhaps not even worth it . So tread carefully , says Bosacoma . Too much migration friction and you might end up aggravating clients who had no say in the sale of their IT provider .
Expecting customers to change how they interact with the provider after it becomes part of another company can be problematic , Henson says . Customers may resist changes if , for instance , filing a help-desk ticket requires a completely different process .
If an acquisition brings tech duplication , Henson recommends renegotiating vendor contracts . Kaseya and Technology Marketing Toolkit have flexible spending accommodations that allowed him to repurpose his fees for additional services .
Also , he says , ask the target company for a vendor trend report showing how it pays its vendors . Most MSPs don ’ t track these numbers regularly , he says , but it ’ s easy enough to run a report . “ It gives you [ an ] idea of the expenses that you ’ re going to be taking on . And for a small MSP , every dollar matters .”
Why Size Doesn ’ t Matter
Every dollar does matter for smaller MSPs . But size should not keep anyone out of the M & A game . Growth by acquisition is a strategy MSPs of all sizes can benefit from .
Don ’ t miss the next MSP Success issue where we ’ ll explore the ins and outs of rolling up your business or selling it to another small to medium-sized MSP !
Pedro Pereira is a writer in New Hampshire who has covered the IT channel for two decades . Pedro has worked for a variety of media companies , including Ziff Davis , CMP Media , The Nielsen Company , and daily newspapers .
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