The Right Way To Do a MSP Roll Up
If you can’t beat em, join em. This represents my feelings on the following matter of M&A roll up strategies for managed services and cloud computing. There has been a predictable increase in the number of MSPs (fueled no doubt by investors) looking to acquire other MSPs. This article is about how to go about achieving growth via M&A the intelligent way.
My previous thoughts on the topic of roll ups are well documented so allow me to summarize them for you now: M&A roll ups, as practiced within managed services, are dumb. They never work, and they inevitably waste a lot of money. But, if you are hell bent on wanting to pursue this path, let me be your tour guide.
Is M&A Bad?
First, all M&A isn’t bad. Roll ups are bad. What’s the difference? One off acquisitions or mergers are perfectly natural occurrences. In fact, they are quite necessary. They eliminate inefficiencies in the market and provide fuel for growth (when done properly).
Roll ups, on the other hand, are designed to achieve growth primarily through the accretive consolidation of a group of companies, brought together through M&A activity. Sounds good in theory. But, in practice, it almost never works out. More on that later.
M&A is a necessary and sometimes effective tool. How it is used determines whether it is effective for your purpose or a money pit.
M&A Roll Up Basics
Let’s look at how most people look at roll ups. I believe, based on countless discussions with MSP owners, executives, and investors, that roll ups are viewed as a quick and easy path towards market consolidation (my views on MSP consolidation are also well documented). Take a pile of money, find 10-50 MSP businesses, buy them, merge them, and voila, you have a MSP juggernaut. Yeah, right.
Here’s a quick summary of why those roll up strategies almost never work:
- Speed: too many deals too fast and no time to properly integrate
- Lack of integration plan: with no strategy to integrate 2 entities, customer and employee attrition is a high likelihood
- Lack of trust: sellers who care about their employees and customers are naturally fearful of M&A roll ups
- No Accretive Value: due to the speed of the deals and lack of integration strategy, roll ups often never produce accretive value to the company (meaning, each new acquisition does NOT necessarily add more value)
There are more items to this list, but I think you get the picture. Roll ups are risky, expensive, and historically challenging to pull off successfully. However, that does not mean that strategic M&A does not have a role to play in the growth of your MSP practice. Let’s take a closer look.
The MSPs with the fastest growth trajectories have relied not on roll ups but on strategic acquisitions and mergers in order to achieve significant results. This strategy is the exact opposite of a roll up as it relies on patience, organic growth, and a slick process for integration. Knowing what you want to buy and how you plan to use it is something most MSPs never consider (other than they want to grow).
Growth by acquisition is not a substitute for organic growth. Meaning, if you aren’t growing naturally, don’t think M&A is going to get you to the finish line any faster. Your lack of organic growth is likely an indicator that you have a leak someplace in your service process. Adding more fuel to the engine is just going to result in a faster leak.
The best M&A strategies emphasize the growth of a MSP into the following areas:
- Adding new service/market capabilities
- Expanding existing service/market verticals
Good deals are carefully constructed, artfully executed, and designed for maximum value. This means the buyer must use the M&A deal to achieve a significant result; this is in direct opposition to many small deals, which sounds easier but doesn’t cost less, take less time, or reduce your risk at all.
So, as we enter this latest phase of significant managed services growth, keep these ideas in mind as you create your growth strategy.