Looking to add a new specialization to your business or expand your customer reach? Or, on the flip side, are you hoping to cash out and retire in a few years? Either way, there are a number of things you need to know before pursuing M&A discussions ̶ to protect your interests, as well as those of any employees involved in the transaction. From negotiating the price and other sales terms to building a transition plan, the process can be complicated and expensive for providers and vendors (if you let it). That’s why experienced advice is so valuable…though it’s not so easy to come by.
That is, unless you made it to the ChannelCon 2016 discussion on mergers and acquisitions strategies. Moderated by Joe Panettieri, Content Czar of ChannelE2E, this session featured a panel of five IT industry executives who have been involved in buying or selling a business, or both.
The expert panelists included:
- Chris Wiser, MSP Channel Chief at Neverfail (formerly Artisan Infrastructure). The former CEO and founder of TechSquad IT sold his 12-year-old business to a Chicago area provider in 2015.
- Eric Dosal, Co-Founder and CEO of BrightGauge Software. In 2012, he oversaw the sale of his family’s Compuquip Technologies’ Managed IT Services Division to All Covered.
- Mark Kruger, CEO of Diverse Technology Solutions. Earlier this year, he guided his company through the acquisition of Voitual, a hosted Unified Communications provider.
- Colin Knox, CEO of Passportal. The sale of his managed services business, XCEL Professional Services happened this spring, allowing the security vendor executive to focus more time in the security space.
- Gani Zebersky, CEO of Wheelhouse IT. After completing several other acquisitions over the past few years, he announced yet another at ChannelCon; healthcare provider Untangled Solutions.
With so many knowledgeable M&A tech professionals on the panel, the session was packed full of great information for MSPs. All the executives shared experiences and lessons learned from their own business sale or acquisition, and Panettieri added a variety of industry proven best practices and research to the conversation. Each story and situation was fairly unique.
- “I was approached by a downtown Chicago provider who wanted to expand into Wisconsin,” said Wiser. I had no idea about the process at the time, but with some help, I felt my way through it.”
- “We needed to get our app to work properly on desktops, so we either needed to build or buy those capabilities,” emphasized Kruger. “We identified a target company and sat down and hammered out a deal. Our biggest mistake was taking a year to complete the deal when it should have been wrapped up in 6-8 months.”
- “All our acquisitions have been reactive,” said Zebersky. “We needed help with some projects for a healthcare client and started working with Untangled a couple years ago. That engagement developed into a relationship and the more we worked together, the more synergies we found. The deal just made sense, so we decided to move ahead and completed it a few weeks ago.”
One of the largest obstacles in M&A transactions is determining a fair price for both parties. Panettieri shared an interesting stat to kick off the discussion on value, “An MSP’s estimated valuation, according to Paul Dippell with Service Leadership, should be between 6-8 times EBTA.” He emphasized that metric may vary widely and is heavily dependent on factors such as profitability, company specializations, contracts, and other attributes a potential buyer may value.
- “Since day one, I had been building MRR in case I ever wanted to sell the business,” said Wiser. “Every process was built to scale. When I was first approached about selling the business, I told them their prices was too low. They came around after a while based on all the data I was able to provide them, including the long-term agreements I had in place and cash flow. My ability to step away from the business also helped, since everything was automated and documented as much as possible.”
- “I quickly gained an understanding about what my business was worth,” added Knox. “You need to be realistic about it. If not in the same ballpark (potential buyers and sellers), you need to be respectful of each other’s time. Leverage the available research and get a real idea of what the business is worth before getting too far down the road with a company that isn’t a fit.”
- “The price really depends on what an acquirer is looking for,” said Dosal. “In our case, they wanted a big office in south Florida, which increased our asking price. Ours was a family company, which lowered the value to them. Our profitability was below the industry standard, which reduced the price. The good thing was we wanted as much cash as soon as possible, and All Covered wanted a clean deal and appreciated our situation. My father, who had a lot of sweat equity in the business, thought it was worth ten times what we got for it, but we wanted to move quickly for our employees’ sake. That helped keep speculation to a minimum since I was worried about how a sale would affect them.”
- “All our acquisitions have been around $1 million,” stressed Zebersky. “We have the ability to review a lot of the financial stuff internally, and that makes it a lot easier to agree on pricing. The vertical market focus played a big role in our latest acquisition since it’s really hard to find the right talent, and that value is easier for me to recognize than EBTA and other financial factors.”
- Kruger concurred on the HR factor. “Our company was like a rock band. We have that level of talent. Of course, if you can’t turn the business around down the road it doesn’t matter.”
Other suggestions from the expert panel include being up front with employees and offering retention incentives when appropriate. Documentation for all key processes should be complete and easily transferable, ensuring that the MSP business can operate without you. That last point can be a big selling point for acquirers looking to expand their market presence, not their management team. Many buyers look for companies that can go on without the owner, not companies that ARE the owner.
Panelists also emphasized the need to find brokers who understand the industry, especially those who know the gatekeepers to potential acquirers. And while lawyers are crucial in the M&A process, to review documents and vet stipulations, remember they typically get paid by the hour. They may not care if the process lags on longer than it should while brokers, who often get paid at the end, may push things along at a brisk pace. As in any industry, expect to find experienced M&A professionals as well as the dabblers. The former may come at a premium price, but the ROI will surely make it worthwhile.
