Shopping sprees in the managed services world aren’t just for private equity (PE) investors or enterprise-size “Super MSPs.” Small and medium-sized MSPs want a piece of the action too. By buying other similarly sized MSPs and rolling them up, it opens faster paths to growth.
If you’ve been solely focused on growing organically, you may be missing an opportunity. But buyer beware. It’s important to shop wisely so you don’t end up with a purchase you’re stuck with and can’t return. Here are some tips for avoiding buyer’s remorse.
Following The “Super MSP” Playbook
This year, M&A activity in the MSP space will grow 50%, according to Canalys research. While private investors drive much of this activity, small to medium-size MSPs are using acquisitions to acquire technical expertise, gain new customers, add new services, or expand geographically. If executed successfully, an acquisition can boost monthly recurring revenue (MRR), margins, and economies of scale. It’s a playbook many of today’s Super MSPs have followed.
For Juan Carlos Bosacoma, CEO of CIO Landing, an MSP with offices in Chicago and Miami, scale was the primary motivator when his company acquired BSSi2 in 2023. “The more seats you have, the lower your per-unit cost is, so that is one reason,” he says. “The other reasons are to acquire clients and acquire talent.”
Tennessee-based Nashville Computer gained additional staff with its two acquisitions, says CEO Charles Henson. One purchase brought Nashville Computer a much-needed Level 3 engineer. The other acquisition delivered marketing and bookkeeping personnel in addition to junior-level technical expertise.
“I was able to fill some open positions I had within my organization. At the time, I did not have a marketing person and I was looking for a junior-level tech. It was beneficial for me to acquire this business because I gained access to additional resources,” Henson says.
The purchases also boosted MRR and profit margins, he adds.
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.
RELATED: Seal The Deal: How To Successfully Integrate Teams And Tech After An MSP Rollup
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 TMT 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.
