If you attended our recent virtual Empower event you may have seen the extensive session on mergers and acquisitions. We’ve witnessed a large amount of M&A activity within the MSP space over the past few years as a result of the managed services business model becoming attractive for private equity investment.
According to 451 Research’s M&A KnowledgeBase, M&A activity was at an all-time low in 2020, except within the technology sector. Last year, tech and telecom transactions topped $600 billion, and as Linda Rose, M&A adviser with RoseBiz, told Channel Pro magazine in a recent article, MSPs made up the lion’s share of those deals.
Despite reports that a lot of money was set to be invested in our sector at the start of 2020, many private equity funds locked their cash away when the pandemic began. This proved to be a sound move with the MSP market contracting slightly in late March/early April. However, by July, the media suggested there were signs that revenue was rebounding, which seemed to give investors and negotiators the confidence to resume discussions and due diligence, and begin completing deals.
What’s driving investment?
What have been the key drivers behind this rush of investments? Many MSPs are acquiring or merging with other firms to service clients whose companies are distributed globally. They’re also looking to consolidate their position within different vertical markets, to onboard new offerings and expand the services they provide, or to grow the value of their businesses.
Why the sudden change? We’ve seen our industry mature over the past 5-10 years, moving away from break/fix and project-based work to a new level of operational maturity with high-value, monthly recuring revenues (MRR), as well as growing degrees of operational efficiency. In the past, MSPs were not viewed as interesting from a private equity perspective due to the existing business models. However, the growth of MRR-based models means they seem much more attractive.
This, combined with the fact that businesses of all sizes are being forced to focus on cloud services and more agile IT and SaaS applications, helps explain why there is a something of a land grab going on in the MSP sector right now.
A lot of this concerns having one eye on the future. The next move for the sector is all about innovation—delivering and supporting strategies around areas like cloud, data, security, and artificial intelligence. For smaller MSPs—those with less than 50 employees—it’s going to be hard to make the necessary investment to transition into this new world without financial support.
How to grow the way you want
So, what are we doing to help? When onboarding new customers, a key part of our discussions focuses on exit plans. We feel it’s important to know how they are looking to build their business, so we can know how to best support them.
We really want our partners to understand the way the market is changing and be positioned to structure their businesses in a way that enables them to grow how they want. M&A is a highly specialized area and there is a lot to understand—from whether to focus on business growth or increasing EBITDA to understanding the different ways deals can be structured. The reality is you need professional help to know exactly how to get the best value for your business and to understand the opportunities available to you.
To help our partners manage this landscape, we’ve drawn together a range of M&A partners with varying perspectives on the mergers and acquisitions space.
Over the coming weeks and months, we’ll be working with those partners to produce assets and content that will help you understand how to negotiate your way through M&A and get the right results for your business.
David Weeks is senior director of partner experience at N-able