HOW TO GET ACQUIRED OR
MERGE WITH ANOTHER MSP

WHAT’S DRIVING M&AS IN THE IT INDUSTRY

The MSP industry has been growing at an impressive rate of 12.5 percent since the year 2014 due to increased demand for IT in various sectors.2 However, this has also led to the rise of emerging competitors in the industry. As a result, continued industry consolidation has been a trend over the last few years and is expected to continue even after the lockdown restrictions are lifted.

There are many other factors that drive M&As in the IT industry. Understanding these factors will help you make the right decisions when you are getting your MSP ready for acquisition.

• Evolving needs of IT clients — Clients in this digital age need something more than just basic IT maintenance and support. They need a one-stop shop that can take care of all their IT requirements rather than individual solutions for every single need. Large MSPs are adding new services like compliance, cybersecurity, cloud backup, etc., to their lineup by acquiring smaller MSPs that specialize in them.
• Expansion to other locations — Geographic expansion has always been a driver for acquisition. MSPs that already dominate in some regions are now looking for an easy way to venture into new markets. By merging with an existing player in a specific geo, MSPs not only get access to new technology, but also new customers with relative ease.
• Need to scale quickly — MSPs are attempting to grow quickly to increase their business valuation faster. Merging with another company is certainly a route to rapid growth but it is not without risk unless managed carefully.
• Acquiring new skills — Any weakness in certain skills can be remedied by acquiring a strong player that has expertise in those skills. Compliance, sales, marketing, etc., can be significantly strengthened through acquisition. It can also be a quick route to developing additional practices if you see a demand for support in areas where you currently have no skills.
• Acquiring skilled workforce — Some MSPs see consolidation as a quick route to adding proven skills to their organization. Hiring highly skilled people in the open market is difficult and an MSP with a strong workforce is always an attractive acquisition target.
• High investment in the industry — Revenue from the managed services market is expected to reach $300 billion by the year 2025.3 Even during this pandemic lockdown, the MSP industry fared relatively better than most other industries. As a result, both private equity funds as well as large MSPs are looking for new investment avenues in the industry. The funding from various investors has made it easy for large MSPs to acquire other players in the industry.

CHALLENGES TO MSP CONSOLIDATION

Although consolidation has become inevitable in the MSP industry, the current economic scenario has presented some unique challenges as far as M&As are concerned. Before you create an acquisition strategy, you need to understand the potential challenges you are likely to face in the consolidation process.

• Cash conservation — At the moment, cash conservation is the primary focus in various industries as businesses try to survive during this lockdown period and protect their assets. In this scenario, growth takes a backseat as survival becomes the primary focus for MSPs of all sizes.

• Lack of clear strategy and planning — In some cases, lack of proper strategy and planning can be a major challenge for MSP consolidation. If you are merging with another player, you need to plan what you intend to achieve through this merger – like what your monetary objectives are, what your role after the merger will be, etc. A well-defined strategy will help you find the right buyer or partner.
• Integration of technology stacks — Technology integration is a major challenge when two companies with unique tech preferences and processes merge. Sometimes it is difficult for companies to let go of a trusted vendor or adopt new technologies especially when their decision is driven by external forces out of their control. This may lead to some post-merger conflicts in the new organization, which can be avoided by educating your employees and partners about your vision and what you intend to achieve with the merger.
• Potential for internal disruption — In addition to technology integration, the overall alignment of two different companies might present further challenges during consolidation. Since you are dealing with two companies with unique corporate cultures, core competencies, technology needs, billing solutions, customer support capabilities, etc., some level of internal disruption must be expected at the initial stages. Plan for it accordingly and make sure it doesn’t spill over in the long term.

Only when these challenges are overcome can you position yourself as an attractive player in the market, ripe for acquisition. Besides, you also need to look for local regulations that focus on preserving working terms and conditions for the employees being acquired.

WHAT MAKES MSPS ATTRACTIVE TO POTENTIAL BUYERS

The needs of customers have also changed significantly over the years and will continue to evolve as we look into the future. Most customers no longer look for on-site services and interactions with technicians. Instead, they are now focusing on the service providers' ability to provide the most amount of services at the lowest possible price.

Hence, it is more likely that we are going to be seeing larger MSPs providing bundles of new services that create competitive advantages that cannot be matched by smaller providers. In this scenario, smaller MSPs need to excel in specific categories that distinguish them from other players.

Before you even think about the acquisition process, you need to understand the psyche of modern-day MSP investors to help you negotiate a better deal. Today, more than 70 percent of the B2B buying process happens before a buyer even gets in touch with a seller.4 In other words, most buyers spend a considerable time on research during the purchase process.

Most investors consider a range of factors during their research phase before narrowing in on their final decision. Some of the common things they look for in an MSP include:

• Recurring revenue and profit — Buyers care a lot about revenue mix and many will need recurring revenue in the coming months after the merger. Recurring revenue indicates that you are generating a fixed amount every month, and this sends a strong signal to your potential buyers.
• Growth — The next aspect that most buyers look for in an MSP is growth. If you are showing decent growth year-over-year, it is an indicator to a potential buyer that your MSP has the potential to earn higher future profits.
• Customer retention — Are you able to retain most of your existing customers? This is another major factor that investors take into consideration. Some level of churn is inevitable in any business. However, it shouldn’t be very high. High attrition sends negative signals to your buyers. Customer goodwill and loyalty is a very valuable asset for any business.
• Specialization in technologies — If you are offering valuable niche or specialist services, you have the potential to negotiate a better deal. Disruptive technologies drive spending from investors in the MSP industry.
• Operational maturity — Do you have standardized processes, consistent service quality, well-structured databases, robust controls and well-trained staff? If so, it certainly gives you the edge over other players in the industry who don’t have operational maturity.
• Scaling ability — Is your technology and processes solid enough to scale quickly? When large MSPs look for smaller MSPs, they ascertain whether you can handle a growing amount of workload based on market demands. MSPs that have the flexibility to handle additional market demands are always good prospects.
• Customer base — Your investors will also look into your customer base to find out whether you are catering to high-profile clients in the industry. Even if you are a small MSP, you can negotiate a better deal if you are providing IT service to many renowned clients or specializing in specific high-value verticals.
• Mobile capability — Another critical factor that has become a game-changer in recent years is your mobile capability. In addition to technological strength and financial fitness, MSP buyers now expect you to have a mobile strategy that allows you to provide service to your customers from anywhere, anytime. If the services you offer are mobile-capable, it will boost your value even further.

When you are trying to position yourself to a prospective buyer, you need to keep working on the factors mentioned above to boost your value as much as possible.

PREPARE TO GET ACQUISITION-READY

Now that you have understood the factors that potential buyers look for in an MSP, it is time to prepare yourself for a successful acquisition. These specific steps will serve as a guide to make an otherwise complex process smoother.

• Be clear with your goal — This is the first and most important step in getting yourself acquisition-ready. What do you expect to gain from the deal? How will this acquisition reshape your brand? Apart from monetary goals, you also need to have a clear vision about the type of buyer you want and what type of corporate culture you wish to merge into.

• Research your buyers — If you don’t have a buyer yet, you need to research the type of buyers looking for MSPs of your size and capabilities. You need to understand their preference, bid preference, future goals, etc. If you already have a buyer, spend some time researching your buyer’s corporate culture, values, competition, etc.
• Get your company in order — This is an important step in getting yourself acquisition-ready. In most cases, acquisitions are a long and complex process. If you are still fixing your financials or clearing out outstanding issues during the acquisition process, you will almost certainly add friction to the acquisition process. Make sure you get your company in order by filing the necessary taxes, sorting your financials, fixing outstanding issues, etc., before you proceed with the acquisition. This will ensure a smooth transition.
• Get help from experts — Depending on the size of your company and the acquisition deal, you may need help from one or multiple experts to ensure a hassle-free transaction. You will most likely need inputs from tax advisors, lawyers and investment bankers to successfully close a deal. Research these experts in advance and get help from the right ones.
• Secure commitment from clients — The last thing you want to happen is your major clients abandoning you while the deal is in progress. You also need to assure the acquirer that your clients will stay with the company even after the deal. To make this happen, you need to inform your key clients about the acquisition as soon as possible and assure them of consistent service following the deal. Since there is often confidentiality surrounding acquisitions, you may need to talk to clients under Non-Disclosure Agreement (NDA) conditions.
• Sort out employee issues — It is quite common to see employee issues arising during M&As. Your exit strategy should also include a plan for your employees. Does the acquirer plan on retaining your employees? If not, what kind of severance pay will you offer your employees? Other things like stock options, bonuses, incentives, etc., should also be determined beforehand when you proceed with the acquisition process. Some countries – especially in Europe – have legislation in place to protect employees’ rights during acquisitions, so make sure you fully understand any obligations you have, especially for overseas staff, and make sure these are incorporated into any negotiation.

As you can see, there are a lot of formalities that need to be carried out meticulously to ensure a smooth transaction of your acquisition. Most importantly, these steps are also essential in negotiating a better deal from the acquirer.

CLOSING THE DEAL

Once you have checked the pros and cons, negotiated the deal value and obtained necessary approvals from all stakeholders, it is time to close the deal. If the deal terms are properly laid out and all the necessary steps are correctly followed, you can avoid most of the last-minute glitches that affect an M&A.

Some of the key factors you need to consider during this stage of the deal include the period of escrow holdback, terms and conditions related to escrow, price adjustments (if previously negotiated), warranties and licenses for assets, exclusions to the deal, cost of obtaining approvals, treatment of pending litigations, provisions for employee options, unknown liabilities, etc.

Most importantly, you also need to know what constitutes the closure of the deal. This helps the stakeholders work towards the end goal and finalize the transaction quickly. Once the deal is closed, you need to draft a proper public relations story for your media and marketing teams to announce the deal to the public.

Conclusion

In most cases, M&As can be a lengthy process and it can be quite trying for all parties involved. You need to take extra care to ensure your MSP continues to perform well without any deterioration in service levels. If you fail to keep your eye on the ball, it could put your deal in jeopardy and force your company into an unwanted situation. Until the deal is closed, you need to properly monitor your company operations, financial performance, service quality, employee engagement, etc.

M&As can be tedious, especially if you are unfamiliar with how the entire process works. However, by following the right strategy, as discussed above, you can position yourself as a strong prospect and attract the right buyer who will benefit the most from your company.