Why MSPs Need to Plan for M&A

Mergers and acquisitions (M&A) have been a hot topic in the channel for a while now. Economic disruptions and uncertainties in 2020 might have stalled things a bit, but activity has risen during the past year and shows no signs of slowing down.

A growing number of MSP mergers and acquisitions reflects the interests of private equity in the channel. Managed services are good business. Those of us who work in the MSP world know this, and now we’re seeing larger organizations and investment firms take an interest. Especially during the pandemic, demand for IT services from remote work solutions to infrastructure to cybersecurity has soared.

Meanwhile, global IT spending—particularly in cloud computing—is only going up. By extension, MSPs and IT providers in general are sitting in a great spot with respect to long-term profitability. With increased competition and staffing challenges, MSPs themselves are taking a harder look at M&A as well, with more than 25% saying they’re looking to acquire other MSPs during the next few years.

No matter which way you slice it, M&A should be on your radar. Even if you’re not planning to buy or sell, having a potential exit strategy or a plan for when a potential buyer comes knocking is a good idea. Chances are high you’ll be hearing a lot more about MSP mergers and acquisitions in the near future.

Why Would an MSP Consider M&A?

Other than the benefit of just being good business planning, there are all kinds of reasons an MSP would consider a merger or acquisition. Regardless of whether you’re looking to take over another solution provider or managed services business tomorrow, potential M&A scenarios should still be a part of your playbook.

From a seller’s perspective, maybe you’re looking for a bigger company to help share financial burden, or maybe you want to use the profits of a sale for a new endeavour. Maybe you’re simply ready to get out of the business. Either way, the M&A market could offer an attractive option for allowing your business to live on—if stepping away is the path you choose to take.

If you’re on the buyer’s side of things, your motives are probably a bit different. Ultimately, you probably want to grow your business and generate more revenue; buying or merging with another MSP can help you achieve economies of scope and scale. To the same end, you might be looking to expand your portfolio. Acquiring another MSP that specializes in the services you want to add to your stack can be a faster route to achieving your goal, as opposed to hiring the necessary talent and building out the service internally.

Market saturation with increased competition is another reason MSPs consider an M&A strategy. Merger and acquisitions traditionally involve a certain level of risk. But in a market where it’s increasingly harder to differentiate yourself, customer acquisition costs are rising, and taking on that risk is less of a barrier. So, if you’re looking to consolidate market share or take on larger clients, merging with or acquiring another MSP could be your answer. Like they say, if you can’t beat ’em, join ’em.

What You’ll Need on Your M&A Journey

You can’t just stumble blindly into the M&A market unless you want a disaster on your hands. Buyers and sellers should have several key elements in order before they get into the process and on-hand throughout their M&A journey.

For buyers:

• Identify your needs and requirements: Why do you want to buy or merge with another MSP in the first place? What are you looking to gain from the transaction? What kind of products, solutions or services are you after? What type of clients? These are all questions you should answer before starting down the M&A path.
• Audit your prospects: As with any big purchase, you need to do your due diligence. Sure, you have to conduct a full financial audit of any company you might buy, but don’t leave any stone unturned. You should be looking at systems and tools to make sure the integration time and training costs don’t skyrocket. Internal processes and efficiency often go hand in hand. Are those documented and replicable? Are contracts with major clients in order? Are agreements with key vendors transferrable?
• Don’t forget about culture: A bad cultural fit between combining organizations can sink…