70% of MSPs set to enter M&A activity
Business Management

70% of MSPs set to enter M&A activity

Managed service providers are gearing up for an era of ownership change as the channel edges towards an all-out M&A frenzy.

Specifically, 70 per cent of MSPs are expected to explore buying, selling and merging options within the next five years with industry consolidation on the horizon.

“If you look around the industry, most MSPs are planning to either buy or sell,” said Arlin Sorensen, vice president of peer groups at ConnectWise.

According to Sorensen, when speaking during IT Nation Connect in Orlando, most technology providers are reaching a crossroads in which business owners are assessing legacy strategies.

“Everybody will exit their company at some point but it’s important to know what that legacy looks like,” Sorensen advised. “You need to begin to execute and prepare for this because M&A is a key way to grow your business.”

Fresh from selling peer-to-peer group HTG to ConnectWise, Sorensen said MSPs must go through four key phases in taking a company from “start to finish”.

“When most start a company we don’t always have a great business plan or even understand exactly what we’re doing,” he added. “We start organisations because we see a need and we just begin to do business. Along the way we find people to come onside and pretty soon, we have a company.

“The problem with muscle and feel is that over time you run out of gas. You can only carry the company for so long.”

For Sorensen, the data verifies such an assessment of the channel, with only six per cent of companies growing beyond 10 employees, leaving 94 per cent of businesses unable to expand further.

“I can tell you that’s not because they don’t want to expand and grow, but they do it because they haven’t overcome muscle and feel,” Sorensen said. “To make that transition businesses have to make changes.

“Owners have to assess what good looks like. Most people don’t know what good looks like because they run their company in a bubble.

“Planning is what we have to do once we find out what good looks like, and this centres around four different plans - legacy; leadership; life and business.

“Start with legacy and understanding where it is you want your company to go, then create a leadership plan to become better and invest in your people. This also involves life planning and your focus outside of the organisation, alongside the necessary business plan.

“These four plans are critical in understanding what good looks like and how you can execute on that.”

Sorensen is the founder of HTG Peer Groups (HTG), a community of IT solution providers that includes more than 500 member companies throughout North America, Asia Pacific and EMEA.

The business acquired by ConnectWise in early 2018, leveraging a strategic alliance that spans more than 10 years.

“Even when we know what we should do, often we don’t do it,” Sorenson acknowledged. “Most people run businesses for one overriding reason, and that’s because they want to be their own boss.

“The problem with being your own boss is that you do what you want to do not what you need to do. There’s no accountability. Owners must move through muscle and feel and begin to understand what good looks like.”

M&A strategy

Calling on MSPs to “start with the end in mind”, Sorenson said the channel must move beyond the “short-term” to drive sustainable business growth, with M&A billed as key factor in future decision-making processes.

“For those running value-added reseller businesses, the transition is even harder to make,” Sorenson added. “We’re bringing together companies that want to buy with companies that want to sell.

Read more: ConnectWise pivots partners towards security services

“If you’re thinking about either buying or selling a company I’d encourage you to take the time to learn because success happens when you know what you’re doing.”

In response to increased market interest, ConnectWise is building out dedicated peer-to-peer groups focused on “maximising both experiences” for MSPs, whether through acquisition or sale.

“Doing the deal is the easy part, it’s the integration that’s really the challenge,” Sorenson cautioned. “And it’s really a challenge when you’re trying to integrate companies running on competitive platforms because you have to train other staff.

“If you acquire a company on a competitive platform, we will defer your billing for three months.

“And if you acquire a company on two competing tools, we’ll give you six months free because we want to help you overcome the challenge of getting the integration up and going.”

James Henderson travelled to IT Nation Connect as a guest of ConnectWise

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