As with any marriage, the courtship leading up to an M&A deal can reveal a lot about both parties. Ignore signs of trouble and you imperil the whole enterprise. Approach the prospective union with honesty and the chances of a match made in heaven multiply.
As those involved in MSP mergers and acquisitions can attest, these imperatives are critical to a successful union:
- Set the right expectations
- Have transparent communications
- Paint an accurate picture of your company
Anything less can derail a deal or result in a poor marriage, with buyers and sellers disagreeing on fundamental matters—customer service, work-life balance, and overall company philosophy.
It’s NOT All About The Benjamins
“I’ve seen a lot of acquisitions fail on culture more than anything else,” says Kathy Wagner, chief financial officer at Kaseya, who has plenty of M&A experience. Kaseya has an M&A Concierge Platform that facilitates target identification of MSP buyers and sellers and helps them with post-sale integration and migration services.
Products, services, and people should all complement each other, according to Wagner. “Different companies have different types of cultures,” she says, “and this is really a marriage.” One company may have a bare-bones staff working lots of overtime. Another may be more attuned to work-life balance or pampering employees with free goodies in the kitchen. “Those guys are always going to be bumping heads if the values aren’t the same,” Wagner notes.
A shared customer service orientation is essential, she adds, noting that “some companies think the customer is right; some companies think the customer is right within reason.”
Culture overshadows financial gain, says Neil Medwed, vice president of corporate development and M&A at Meriplex, a managed IT and cybersecurity provider with offices across the country. “Our CEO actually turned down what would have been one of our best financial deals,” Medwed says, “because the CEO of the company we were talking to was not someone who we wanted to work with daily.”
Medwed joined Meriplex after selling his MSP practice, Preferred Technology Solutions, to the company. Shortly thereafter, he became the company’s M&A lead. “In approximately three years, I was instrumental in purchasing 11 high-quality MSPs,” he says.
Joanna Mirov, senior advisor of M&A at Ntiva, an IT services company with offices across the United States, also stresses the importance of shared values between the buyer and seller. “If the values, culture, and priorities are aligned,” says Mirov, “everything goes smoothly, and you avoid the disruption of losing employees and clients.”
Be Clear About Your Involvement (Or Non-Involvement) For Post Sale
Setting expectations is critical in M&A deals, making it easier for both parties to plan ahead. Wagner encourages buyers and sellers to reach an understanding about what happens to the seller’s CEO post-sale. Sellers, she says, need to ask themselves these key questions: Do I want to stay on, and what does that look like? What does my day look like when I become an employee as opposed to the owner?
Mirov, who sold her MSP business after 17 years to her current employer, is living proof of the need to plan ahead. “I was so busy with making sure my clients and staff were taken care of that I forgot about myself,” she recalls. “Luckily, Ntiva worked with me on this process, but I should have thought this through way in advance. The acquisition process is very involved and takes time.”
Knowing the selling CEO’s role in advance can affect the terms of the sale too. A CEO planning to stay may agree to take less money up front in favor of an earnout based on business goals.
Avoid These Pitfalls
As when two people start dating, the desire to impress is strong. Early on, one company may be so enamored of the other that it will be tempted to overlook red flags.
This can be avoided with planning and transparency, says Wagner. Sellers should review all aspects of the business that could derail a deal. For instance, are customer and vendor contracts assignable? If not, a potential seller should change those terms before even starting the M&A process. Other areas to “clean up,” says Wagner, include separating items such as charities and vehicles from business accounts. And don’t forget payroll. Wagner has seen some unusual arrangements, including having a nanny on the payroll.
Sellers also need an accurate picture of the buyer. Mirov says her experience with Ntiva was positive for her and her staff. Says Mirov, “They had a playbook and walked me through the process.”
Early in the process, Mirov and Ntiva’s leadership did a joint presentation for the staff. “People were super excited about the new opportunities and joining a company that had a lot of potential for growth,” she says. Only two of her staff of 40 opted out.
Specific Red Flags To Watch For
Red flags to look for in a buyer include if leadership teams from previous acquisitions don’t stay on post-sale and turnover is high, says Mirov. Also watch how a potential acquirer treats the M&A process.
“Several CEOs would only have remote conversations or, even worse, call you from [their] car,” she says. “This is one of the biggest decisions of your life. You want the buyer to treat you with respect. It was important to me that the CEO of the company interested in buying my MSP would spend the time with me in person getting to know me, my company, and my goals.”
Medwed warns about potential buyers who send letters-of-intent to tie up a company. “Then, after the seller’s CEO has invested a great deal of effort and energy to close the deal,” he says, “the buyer lowers the offer significantly.”
At Meriplex, he says, this doesn’t happen because the company understands the importance of long-term relationships and keeping the staff happy. “We want the new teammates to be able to go home to their families on acquisition day excited,” Medwed says, “to be able to look deeply into their loved ones’ eyes and say, ‘This is good for me, good for our family, and [for] our future.’”
