MSP M&A: Are you buying, selling, or waiting for the season?

Is it a good time to sell or buy managed service providers? As you might expect, the answer is that it depends. According to panelists at the ChannelCon session “Should you Sell or Grow?” it’s not about when to sell but how and why. Mergers, acquisitions, and exit strategies for MSPs” There have been more than 700 MSP mergers or acquisitions by 2022. With likely exponentially more M&A conversations happening every day, there will be more. A recent panel discussion at ChannelCon 2022 revealed that 63% of participants were considering selling their companies or wanted to sell. More than 40% of respondents said they are considering buying another company.
However, in the current economic turmoil, is it a good time to sell managed services providers or buy them? As you might expect, the answer is that it depends. The question is not about when to sell but how and why. This was the conclusion of a session by ChannelCon panelists titled “Should you Sell or Grow?” MSPs: Mergers, Acquisitions, and Exit Strategies
John Holland, managing director at Corporate Finance Associates in Laguna Hills, Calif., said that the headline news was scary. He spoke out about high interest rates and 9% inflation as well as signs of recession. However, M&A in the IT sector is still very hot. We just closed a deal for $55 million with a cybersecurity VAR. There were many interested acquirers. The demand for MSPs that generate recurring revenue continues to be strong. According to the Wall Street Journal, M&A is down in comparison to last year. To put this in perspective, last years M&A was extraordinary. It is returning to a normal rate of transactions rather than collapsing.”
What are you doing buying/selling?
President of Thrive CFO in Rolling Hills Estates (Calif.), Bill Moore cited four reasons MSPs might look to acquire other businesses.
Consolidation of In-Markets
Expanding the Market
Strategic Acquisition
The “Acqui-Hire”

“Strategic acquisitions bring new products and services to clients. Moore stated that security presents this opportunity now. “Acquiring qualified technicians is difficult when it comes to ‘Acqui-Hire. MSPs may be looking to acquire a company for its staff, not its customer base. They aren’t just looking at the owner; they are also interested in the people and their skillset.
According to Bill Campbell, CEO at Balancelogic, a Waldorf-based MSP, there are many reasons MSPs might want to sell their business or expand through acquisition. However, the most popular reason is that the company has reached a plateau. “Most people who started an MSP are skilled at what they do. They’re technicians.” He said that they cannot take the business to the next stage.
Patent stated that studies show that 70% of M&A transactions fail. Patent said that they don’t ask a lot about culture and sustainability. Patent stated that it is important to have a plan for all of those things.
MSPs have the good news that there are many equity and investment firms interested in buying into their business model.
“All of you are likely getting calls from private equity. They’re hungry. They have cash to spend. Holland stated that if they don’t deploy cash, they don’t make a return on their investors. Holland said that these conversations can help to plant a seed in your brain. These are private equity transactions. They don’t compete against other bidders. This could work in your favor. This could be the best offer you ever receive. However, the asset’s value is usually maximized when there is more than one bidder. If you receive a proprietary offer, you can test the market to see if there are any second offers.
What are you worth anyway?
Many MSPs find it difficult to calculate the value of their business to another company when implementing an M&A strategy. Many times, owners have an overinflated view of their own company due to years of emotional attachment. A framework of indicators that can be used to determine the value of an IT service firm’s IT services business may include:
Value Enhancing Indicators
Scale
Recurring Revenue
Margin with high EBITDA
Steady Sales Pipeline for Growth
Customer retention
Competitive Advantage
Strong Management Team
Reliable Accounting

Indicators that detract value
Project-by-Project