7 Risk Factors MSPs Should Consider Before Rushing Into Regulated Verticals

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The Allure Of Regulated Industries

It’s no secret that venturing into regulated verticals can be a significant growth opportunity for MSPs. The promise of higher valuations, increased client retention, and the chance to carve out a unique market niche is hard to ignore. However, before you jump in, there are a few critical factors to consider. I’ve seen a few MSPs learn this the hard way, as they found themselves in over their head due to a lack of preparation and understanding of what the heck they are signing up for in the first place. This isn’t good for the MSP or the customer, which is why it’s important to evaluate these decisions with care.

Before we get into the risks associated with these regulated industries, let’s acknowledge why these opportunities are so attractive to begin with: 

Mandatory Adoption

In regulated industries, certain IT and security practices aren’t optional—they’re in fact mandatory. This creates a consistent demand for the services your MSP can offer, with very little pushback compared to other industries. When regulations require specific compliance measures, clients have no choice but to adopt, positioning your MSP as a mission critical partner in their operations. This mandatory adoption not only stabilizes your income but also strengthens your client relationships, as they rely heavily on your expertise to meet their ongoing regulatory obligations.

Increased Client Retention

Clients in regulated verticals can often be more loyal due to the complexities and risks associated with switching providers. The last thing your customer wants to do is change MSPs to save a few bucks, only to find out that their new provider is not as “compliant” as they said they were. Once you’ve established trust and proven that you aren’t one of “those MSPs”, they’re far more likely to stick with you for the long term. This loyalty translates into higher renewal / lower churn rates and more predictable income for your MSP. The cyclical nature of these compliance and security needs also leads to longer contract terms, making your revenue streams even more reliable in the process.

Market Differentiation

Specializing in one or a few regulated verticals can set your MSP apart from the competition in a significant way. When you develop deep expertise in compliance and the industry-specific challenges that go with it, it makes it that much easier to win new business and allows you to put a premium on your pricing. For MSPs in smaller markets where the price-per-seat is below average, this can really help to make up for low margin customers in other industries. It also helps to clarify your marketing and messaging, as you know exactly who you are speaking to and why they need your services. 

Higher Valuation Multiples

One thing I have learned from our recent valuation workshops with Hannah Paige of Worklyn Partners, is that MSPs operating in regulated verticals often command higher valuation multiples. Private Equity investors and acquirers recognize the stability and growth potential inherent in these industries, which makes your business more attractive when it’s time to sell or seek investment. The predictability of revenue from long-term, compliance-driven contracts adds to your business’s appeal, pushing your valuation higher. This means that your business could likely be worth more than another company with the exact same revenue and EBITDA margin, simply due to the types of customers that you have.

Key Risk Factors To Consider 

If all of these benefits seem too good to be true, that’s because actually executing on this strategy is not as easy as it sounds. Let’s explore what you need to weigh carefully before making the leap into these highly regulated waters.

Compliance and Regulations 

Compliance is the cornerstone of operating in regulated verticals. It’s not just about knowing the rules; it’s about implementing them effectively across your entire service delivery model. Missteps here can lead to hefty fines, legal trouble, and damage to your reputation, which can be difficult to recover from. To succeed, your MSP must stay well ahead of regulatory changes and ensure that all client systems remain compliant at all times. This often means investing in specialized compliance tools and possibly even hiring dedicated compliance personnel to keep your team informed and your services up to date.

Technical Expertise 

Regulated industries demand a higher level of technical expertise, and clients in these sectors expect more than just basic “off-the-shelf” IT support that you can get anywhere. They need robust cybersecurity measures, data protection solutions, and compliance-driven IT frameworks that can stand up to the scrutiny of regulators. If your team lacks these skills, you’ll need to invest in extensive training and certifications, such as CISSP or CISM, to bring them up to speed or hire internal or external experts who are already qualified. This can be an expensive endeavor, but you can argue that the cost of taking these opportunities while not having these qualifications at your disposal can be massive if things go sideways. 

Technology Stack 

Your technology stack is the backbone of your service offerings, especially in regulated verticals. It must be capable of handling the specific challenges and requirements of these industries, which might involve upgrading your existing tools / vendor contracts or adopting new ones tailored to the customers needs. This could include things such as advanced encryption, secure data storage, and comprehensive monitoring capabilities. Considering the licensing and costs of deployment this can be a significant investment, but it’s one that can pay dividends in terms of client satisfaction, retention, and increased rates.

Industry Knowledge

Clients in regulated verticals expect their MSP to be more than just a service provider; they want a partner who understands their industry inside and out. This means that you really have to do your homework to develop a deep understanding of these industry-specific challenges, compliance needs, ancillary solutions (SaaS), and business practices. Building this level of expertise can be time-consuming, but it’s essential for gaining the trust of clients and delivering the value they expect. Consider partnering with industry experts or hiring staff with direct experience in the vertical you’re targeting. This not only boosts your credibility but also offers a shortcut to positioning your MSP as a leader in the field, which can create more of these opportunities.

Client Education

Unfortunately, sometimes customers in these verticals don’t value compliance themselves, nor do they take the time to learn about it. One of the most valuable services you can offer is educating them about the importance of compliance, regulatory changes that occur, and how your MSP adapts to help them stay above board. This builds trust and positions you as a true thought leader in their industry (not just your own). Regular communication with your clients about regulatory changes and their implications is crucial. Educated clients are more likely to see the value in what you offer, leading to long term relationships that are worth all of this investment. 

Legal Liability

Operating in these regulated verticals significantly increases your legal liability compared to non-regulated verticals. If a client’s data is compromised or if they fall out of compliance due to a failure on your part, you could be held legally responsible. In fact, you could make the case that this transfer of risk is partly what they pay you for. To mitigate this risk, it’s essential to have strong legal agreements in place and consider investing in comprehensive cyber liability insurance coverage. Building a culture of compliance and security throughout your organization also helps minimize the chances of an incident occurring. By proactively managing these risks, you not only protect your business but also reassure clients that you are capable of handling the unique challenges of their industry.

Competition

The competition in regulated verticals can be fierce. While there are fewer players compared to generalist MSPs, those that do operate in these spaces tend to be highly specialized and well-established. Breaking into the market requires a clear value proposition and a strategy for differentiating yourself from these incumbents. Focus on building a reputation as an IT compliance expert and business develop with other vendors, consultants, and experts who sell into these industries. The more opportunities you can find to showcase your expertise, the easier it will be to stand out. However, be prepared to continuously adapt, as competitors in these sectors are often quick to respond to new regulatory demands.

Conclusion

Entering regulated verticals is a strategic move that can pay off significantly if done right. The benefits—such as higher valuations, increased client retention, and market differentiation—are pretty compelling. However, the risks are equally real. By carefully considering the factors outlined above, you can better prepare your MSP to succeed in these demanding yet rewarding industries. Remember, the key to thriving in regulated verticals isn’t just about compliance—it’s about becoming a trusted partner who’s willing to go the extra mile to understand and address the unique challenges your clients face.