If you own an MSP, it’s important to plan an exit strategy. When the time comes, do you want to sell your business and walk away? If you sell your business, do you want to still play an active role in it? Or do you want to merge with another company?
Whichever path you take, you must make your business attractive to a potential buyer. That said, the time to prepare your business for an acquisition or merger isn’t just before you sell— it’s years in advance. By laying the groundwork now, you can maximize your equity when the time comes to exit.
Robin Robins sat down with representatives from New Charter Technologies and Anatomy IT to discuss what they look for when considering a potential MSP acquisition or merger.
New Charter only invests in businesses where the entrepreneur reinvests and then stays on as an active partner in the business. “It’s a true partnership,” said Dan Ruhl, a partner at Oval Partners. “It’s like a merger, where entrepreneurs are partnering with individuals who have experience building a much larger company. Together, we build a business that has more value. This allows the business owner to continue to run their business while separating their investment from their operating activities and their career for the first time.”
New Charter has partnered with 17 MSP businesses (which still operate under their original business names), and they have two letters of intent out. The average revenue of their 17 MSPs is $8 million a year.
Anatomy IT focuses mainly, but not exclusively, on MSPs with health care clients. Unlike New Charter, they rebrand the businesses they acquire under the Anatomy IT brand name.
Since Atlantic Street’s initial investment in December 2020, Anatomy IT has acquired four MSPs and currently has two letters of intent signed. “Our goal is to grow to over $100 million in revenue over the next 3–5 years,” said Matt Bergin, vice president of Atlantic Street Capital. “We’re growth-oriented and looking for businesses run by strong operators and entrepreneurs who are looking to partner with our platform to build the largest healthcare focused MSP in North America.”
Here’s What Private Equity Firms Are Looking For
Owners Who Like What They Do And Want The Best For Their Employees
Both New Charter and Anatomy IT are looking for MSP owners who still have the fire for the industry. “The owner also wants to offer opportunities to their employees,” Dan said. “Many of the employees are system engineers and technical people who want to collaborate with other really smart people from across the platform.”
Owners Willing To Re-Invest
New Charter looks for people who will roll up to 30% of the transaction proceeds. “The reinvestment provides a great deal of financial opportunity, and this ‘second bite’ is a big reason companies have joined New Charter.”
Solid Numbers
The New Charter group average is 18%–20% EBITDA, and that MRR growth has been 20% each of the past two years. The ideal candidate has 10%–15% growth, has 50% or more in recurring revenue, and has double-digit EBITDA %.
Anatomy IT looks for at least $2 million in revenue and/or $500K of EBITDA and 60%–70%-plus recurring revenue. Their ideal MSP target is a business that generates over 50% of its revenue from health care verticals. “We are looking for strong customer retention,” Matt said. “Anything above 10% is a high churn rate.”
Customer Concentration
“If one client is over 10% of revenue, we tend to dig a little deeper to understand the nature of the client relationship,” Mitch said.
Compatible Professional Services Automation (PSA) System —
Integrating with a business that uses the same PSA makes everything go smoother. “A proprietary in-house PSA can complicate things when it comes to integration,” Matt said. “We make exceptions, but ideally, the businesses we’re acquiring are on ConnectWise.”
Other Factors
The company location, how quickly the area is growing, and what verticals the business is in also contribute to whether a company is a good fit. For Anatomy IT, strength in cybersecurity and HIPAA compliance are also big factors. “Given the fact that the MSPs we’re investing in deal with sensitive patient data, security and compliance are paramount,” Matt said.
Now Let’s Look At What You Should Look For In A Buyer
Cultural Alignment
Thirty percent of all integrations fail because of different company cultures, according to the Culture Management and Mergers and Acquisitions case study by the Society for Human Resource Management. The cultures around decision-making, leadership style, how people work together, and the willingness to implement new strategies must align.
Excellent References
Ask for the names of other MSP owners who have been previously acquired and talk to them about their experience. “When I was doing my due diligence, I asked for a list of MSP owners who had sold, had re-invested, and were still working in the company,” said Brent Whitfield, CEO of DCG Technical Solutions (that became a New Charter company two years ago). “In every case, they would give me one name, maybe two names; New Charter gave me 17.”
Provides The Right Answers To Your Questions
Brent found that many MSP owners looking to sell their business start by asking, “What multiple will you guys pay?” “That should not be the first question,” Brent said. “The first questions should be, ‘What is your plan moving forward?’ and ‘How would I and my employees fit into that plan?’”
The Right Type Of Stock
If you re-invest, make sure the stock you receive is the same class of stock the owners own. “We’re investing our own money alongside the entrepreneur, and by doing so, we don’t play by the private equity rules,” Dan said. “Because of that, the entrepreneur is in the same class of stock that we own.”
The Opportunity They Offer You
MSP owners benefit by becoming part of a business that is actively building out its capabilities. These include things that most individual companies may not choose to invest in, such as new hardware, software, cloud services, and future services like AI (artificial intelligence) and IoT (Internet of Things). “It’s a unique opportunity to be able to sit at the table and develop the strategy together with a group of their peers while continuing to run their business on a day-to-day basis,” Dan said.
A lot of factors go into determining the price someone is willing to pay for your MSP business. Two MSPs doing the same yearly revenue can have two completely different values in the eyes of investors. As a rule of thumb, an MSP doing $5 million in revenue is worth 5–6 times EBITDA; $10 million in revenue, 7–8 times EBITDA; and $15–$20 million in revenue (or more), 10 times EBITDA.
Whether or not you’re planning to sell your company anytime soon, if your company is falling short in any of the above applicable areas, now is the time to act so when the time does come, you can maximize both your exit and peace of mind.
