The traditional roll up strategy as practiced by many wall street types involves buying a lot of companies within an industry in order to achieve some economies of scale, thereby producing a profit. Simple enough to understand but a bit harder to actually implement. But when you deal with other people’s money, why not? The problem with the roll up theory is that while it may look good on paper it almost never works in managed services. Here’s why.
The roll up concept, assumes and relies on a few factors.
1. That scalability and efficiency will be produced in the end.
2. That the products or services being delivered are somewhat homogeneous.
3. That each of the purchased or “rolled up” companies, can be bought at a level that will allow the sum to be greater than the individual components.
While the fact that there has never been a successful roll up in managed services ought to serve as a warning for any investor trying to pull something like this off, we still hear many rumors about investment groups and even some MSPs themselves thinking about such a M&A growth strategy. For those that need a little more evidence, let’s examine the specifics of why nobody has ever successfully done a roll up in managed services.
In order for roll ups to work you need to be dealing with commodity type businesses. In order to achieve the economies of scale necessary for roll ups to succeed, you need to acquire and easily integrate all the businesses in an efficient manner. Integrating two MSP organizations can be challenging, much less doing it during a roll up with many MSPs. MSP businesses just don’t easily conform like the investors think they do. Careful planning and execution need to take place, not just arriving at a price acceptable to the seller. Even if you force the integration, you’re likely to see a lot of negative side effects like loss of clients, employees, and brand damage.
Lastly, roll ups are power moves on a mass scale. It really only takes money to do a roll up. Throw enough cash at enough companies and you’re likely to end up with a few of them taking the bait. There is no strategy or particular finesse when it comes to executing a roll up strategy. What roll ups neglect to consider is the purpose behind M&A for a lot of MSPs today. MSPs who look at M&A properly see deals in terms of acquiring something they don’t have; new markets, technology, resources, expertise, etc. Getting big for the sake of getting big is not necessarily a virtue.
Good M&A deals focus on buying into something you don’t currently have, not just getting bigger. Getting bigger is a “roll up” mentality. You can get big by expanding your service offerings, entering new markets, achieving new capabilities via M&A. This is how you get big in managed services. To just buy MSP companies for no other reason than to grow larger, rarely works.