Acquisitions are a big topic in the MSP market. Large companies are more frequently acquiring MSPs in order to accelerate their growth into managed IT services. Additionally, MSPs have even begun to acquire each other to gain access to new markets and new clientele.
As an MSP business owner, being acquired can be exciting! It’s where your years of hard work pay off. However, there are many things you must do now in order to set yourself up for success in the future, even if an acquisition is 3, 4 or 5 years away.
Anatomy of an Acquisition
Acquisitions are not a simple transaction. There’s a lot of paperwork, analysis and planning that go into them. If you’re interested in some of the steps towards an acquisition, I suggest you register for our upcoming webinar with Growth Achievement Partners (GAP): Improving the Performance & Value of Your Business: A Practical Discussion, November 5th from 1-2 pm ET.
As I mentioned above, there are some important things you can start doing now in order to set yourself up for a higher valuation and a more profitable acquisition.
Start Building Monthly Recurring Revenue
Monthly Recurring Revenue (MRR) is extremely attractive to potential acquirers because it shows predictability and stability. MRR is a key component of managed IT services. Of course, if you have the chance to make a hardware sale or do a one-time installation, those typically don’t hurt your business. But you should be building the base of your revenues in monthly recurring revenue.
Acquirers will pay higher premiums and higher multipliers for a company with monthly recurring revenue versus a company with unpredictable revenues. Selling clients on contracts can take time but contracts translate to CMRR (Committed Monthly Recurring Revenue), so start building it today and as it continues to increase, you’ll become more and more attractive as an acquisition target.
Understand your Company’s Business Metrics
Large Companies want to buy companies that are successful, and have a good grasp on their business. Part of doing this starts with a strong foundation of understanding your current business metrics and a plan of how you are addressing any gaps.
You should be measuring KPIs like Customer Satisfaction, COGS, Average Revenue Per Client, Average Response Time, Employee to Device or Revenue Ratio.
All these add up to the blue print of how your company is doing. You can then take this data and begin to create a playbook of how you tweak these measurements to become even more successful.
Put an Assignment Clause in Your Service Contracts
As you start building your CMRR and selling recurring revenue contracts, make sure that you have an Assignment Clause present. An Assignment Clause allows you to assign that revenue to another party, which is the case if you were to be acquired.
If you don’t have that clause in your contracts, your clients can refuse to have their services transferred to your acquirer, and this happens more often than you think. Your clients may have concerns about another company taking over their IT services, and if you don’t have the right to assign that revenue to the acquiring company, that client can simply leave.
Including an Assignment Clause off the bat makes a potential acquiring company feel more secure and also avoids an awkward conversation with your clients down the road.
Again, this is another important activity you should be doing now to set yourself up for success in the future. Don’t be afraid to seek the help of a lawyer or business consultant. If this person can help increase your valuation by $1 million in the future, they will most likely pay for themselves.
Seek An Outside Investment
Many MSPs don’t take advantage of the opportunity to receive financing. Managed IT services are an industry with high potential growth, and there are many institutions and/or investors that will make an investment in an MSP. This could be in the form of a bank loan, venture capital fund or through angel investors.
By seeking and closing an investment, it helps show potential acquirers that other investors have faith in your services and your offering. And if you can effectively use that investment, it makes you even more attractive for an acquisition because it demonstrates that by investing more money into your business you can generate a greater profit. This demonstrates to potential acquirers that they will benefit from an acquisition because they can dump more money into your “system” and turn out a profit.
If you aren’t able to bootstrap your finances and don’t want a large outlay of cash, you should find vendors or partners that will align with a more forgiving model. Find a partner that does not require Cash-on-Delivery (COD) on every transaction but instead offers Net 30 or 60. This will allow you to stretch your initial investment or even allow you to Pay as you Go or Grow
Find Your Niche
Listen, you can’t be everything to everyone. Focusing on a niche will allow you to be a market leader and develop a deep expertise, which can much more valuable to a company than having a broad range of clients.
The reason for many acquisitions is to immediately acquire an expertise that a company doesn’t yet have. For example if Big Company ABC wants to move into healthcare IT services, but doesn’t yet have any clients or expertise there yet, they could spend time developing an in-house team for these services. However, this is costly and time consuming. Alternatively, they could look to acquire a company with that knowledge and with that clientele.
If you are an MSP with a broad range of clients, there is less of a chance that Big Company ABC will pay much attention to you. However, if you have a deep expertise helping healthcare companies keep their data safe, you will be a highly attractive acquisition target for that company.
Finding your niche and developing an expertise is a very good strategy if you’re looking to be acquired, and it can also help you grow your business much more effectively.
Setting yourself up for a successful acquisition takes time. There are many things you should be doing today that will help you become a more attractive acquisition target in the upcoming years. Understand what these key drivers are early will help you immensely in the long run.
Can you believe it's the last week of NOCtober??
By Gretchen Hoffman
By Gretchen Hoffman