Why Managed Services M&A Deals Go Bad

Too many brokers (and buyers) view a successful M&A transaction as just getting to the closing. Getting to the closing is actually fairly easy to do. The tough part happens after closing when the integration of the two entities needs to occur. Many M&A parties will close a deal and then sit around wondering what to do next.

This is the most important phase of the deal...what happens after the close!

No transition plan

When buying a MSP (regardless of who the buyers is) you must always have an integration plan in place. This is true whether the buyer is or isn't a MSP. I have seen deals where two MSPs combine and the deal falls apart after the closing. I have also witnessed a non-MSP purchase a MSP practice and the true value of the MSP business is never realized. In both scenarios, the parties failed to have an integration plan. As a result, the principals develop resentment, the service capabilities begin to suffer, and ultimately, the customers begin to leave.

Developing an integration strategy is crucial for the success of any MSP M&A deal.

M&A is not a substitute for bad sales

A lot of MSP businesses view M&A as a growth strategy. I have never understood this policy and do not believe it works, either in managed services or in other industries. Wanting to accelerate revenue through a M&A strategy is short sighted, often full of risk, and almost never works beyond 1-2 years (meaning, the short term revenue gains almost always give way to longer term customer attrition and revenue loss).

I advocate MSPs to employ M&A after a successful organic revenue track record has been established. A failing organic revenue strategy (i.e., you can't sell the managed services you're delivering) will never improve simply because you acquire another MSP business. In fact, in these situations, whatever the underlying problem is will eventually become worse when another MSP is added to the mixture.

Here is a simple rule of thumb: if you have declining or stagnant sales for the last 12 months or more, you shouldn't be in the M&A market.

Conclusions

Despite the obvious risks mentioned above, there are many cases where M&A can be helpful to a company. Geographic expansion, adding new service capabilities, entering new market verticals, combining true efficiencies of scalability, these are natural areas where M&A can be not just helpful but often the best solution.

If you find yourself wanting to undergo a M&A transaction, go through the above list and make sure you are protected. Sometimes, the best M&A deals are the ones you don't do!