GO BIG, or go on sale. That was how MSPs were advised to weather an expected onslaught of mergers and acquisitions before the pandemic. Buyers were mostly looking for MSPs bringing in at least $10 million in revenue. Once the pandemic hit in 2020, however, observers expected a mad dash to snatch up all sizes of MSPs on the brink.
The reality looks something like that, just more nuanced.
Overall, M&A activity was at an all-time low in 2020—except in the technology sector, says Linda Rose, M&A adviser with RoseBiz. Deal volume in North America dropped only slightly, partly because tech comprised almost 20% of all activities; MSPs made up the lion’s share of that, she says.
MSPs’ appetite for M&A did dampen briefly. IT Glue’s 2020 Global Benchmark Survey found that in February, 52% of MSPs were considering or open to acquiring or merging with another MSP. That number dropped to 37% by May. The number seeking or open to buyers also dipped 14% in that time period.
By the end of the year, though, the game was back on, says Michael France, managing partner with executive coaching firm Taylor Business Group.
Money to Burn
In 2021, private equity (PE) firms and larger MSPs are on the prowl, flush with cash and motivated by low interest rates.
Rose says PE firms collectively are still sitting on around $1.5 to $2 trillion of “”dry powder,”” or money they’re looking to invest. Even though bigger sellers have been harder to find, she’s been surprised to see PE buyers looking at firms making as little as $3 million. “”Acquisitions are expensive, from due diligence to attorney fees to quality of earnings reports, so the cost benefit is not there when looking into smaller deals,”” Rose explains.
France sees the action happening in the $5 million to $10 million range. He says many MSPs are acquiring or merging with smaller firms in order to serve clients whose companies are distributed through the United States.
Some are growing in hopes of being acquired by PE buyers looking for “”platform”” MSPs, who would then continue acquiring smaller ones. And MSP buyers are much more active now than they were even in 2019, at least partly empowered by an infusion of low-interest COVID relief funds, says France.
A Seller’s Market
Potential changes in capital gains tax laws will exert more pressure on M&A activity than the pandemic, says Rose. As a result, she notes, “”People who are thinking about selling are really rushing to get those transactions done.””
In addition, smaller MSPs that “”have been brain-fried by everything that‘s happened with COVID,”” may be more willing to sell, says France, adding that lots of MSPs as small as $5 million want to grow through acquisition, buying, or merging with smaller peers.
“”It would be almost easier for me to list who‘s not looking to do an acquisition: those owners who don‘t have any experience,”” says France. That’s because there’s a learning curve for growing SMBs to figure out whether they are more fit to acquire or to be acquired.
Buyers want most to see a successful recurring revenue model, Rose says. This was also true pre-pandemic, and should bring solace to would-be sellers who show lackluster performance in 2020. MSPs who jumped into cloud and security or transitioned from break-fix to recurring streams could still have a high valuation.
At the same time, potential buyers or partners have to bring more than just money when courting small MSPs. “”A lot of smaller MSPs are looking for greater opportunities, not only for themselves, but for their teammates,”” Rose says. If the team they’ve built gets a chance to expand its skills and experience alongside an influx of cash, that, to many MSP owners, would be the sweetest deal of all.
Image: iStock
