The MSP M&A Challenge

Posted 12.4.2023

Are you a Managed Service Provider (MSP) contemplating a merger or acquisition? There is a lot of information out there on M&A topics, so I understand that it can be overwhelming. If you are part of the many MSPs considering M&A deals, I would like to offer some advice on how to approach and execute a successful M&A strategy. 

Tailored M&A Objectives 

Start with a well-defined plan. Your MSP business should already operate under a formalized and documented plan, and the same principle applies when engaging in M&A. Clearly outline your objectives and how M&A aligns with your goals. During M&A discussions, remain focused on these objectives to avoid being swayed away from well-laid plans. 

Revenue Shouldn’t Be the Sole Driver 

A crucial piece of advice is to avoid viewing your M&A strategy solely as a means for revenue growth. If revenue growth ranks among the top three reasons for pursuing M&A, it might be worth reassessing your strategy. While achieving revenue growth through M&A is a legitimate goal, it should be secondary to other objectives driving the deal. For instance, expanding your MSP practice from New York to California could be a valid reason for pursuing an M&A deal, with revenue growth being a byproduct. 

Embrace the “Go Big or Go Home” Mentality 

Consider the size of the deal. There is an adage in M&A that a $1 million deal is as risky as a $100 million deal, particularly when using someone else’s money. The logic is sound: regardless of the deal size, you will incur predictable expenses, such as target acquisition, due diligence, and integration costs. If you are willing to accept these costs and risks, make sure the deal is substantial. Doing small deals without clear strategic value can bring significant risk for minimal incremental value and revenue. Aim for deals that significantly impact your MSP practice. 

Steer Clear of Roll Ups 

While the idea of M&A roll-ups may seem appealing, especially in the MSP profession, exercise caution. Roll-ups can become indiscriminate, leading to a focus on closing deals rather than strategically achieving company goals. Prioritize strategic alignment over sheer deal volume. Few M&A roll up strategies ever focused on strategic company objectives beyond revenue.  

Consider the Cost of Money 

Given current high interest rates, the cost of borrowing money could impact your M&A plans. Be mindful of the financial landscape and adapt your strategy accordingly. When contemplating the risk, make your M&A plans strategic and meaningful, especially now that money is more expensive to borrow.  

Conclusion 

Successful M&A deals require meticulous planning and focus. Ensure you have a clear plan, understand your goals, and do not shy away from pursuing larger deals if they align with your objectives. Learn from both successful and failed M&A deals to refine your approach. 

Tags : mergers and acquisitions,private equity

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