An Abundant Resource

It is my opinion that there has never been a better time for acqui-hire opportunities in the MSP market than there is now. The set up for this is fairly simple. As Canalys has recently reported, there are now over 335,000 global providers of Managed Services, many of which have less than 8 technicians and average around $1 million in annual revenue. With this abundant pool of providers, many are losing momentum and hitting a growth ceiling in their local market, or are struggling to earn a healthy enough margin to compete. In these situations, an acqui-hire becomes an attractive stepping off point, for a variety of reasons which we will dive into later. 

When talking to Robin Ody, Principal Analyst at Canalys about this very set up, he tended to agree with this observation. He states “…that model is crystallizing as customer awareness of the MSP model drives demand. While we all know the MSP model, and we can think every customer knows it too, partners still report the majority of their customers need educating on the real job and value of deeper managed services.” Since markets always tend to correct themselves, this essentially means that more customer demand for Managed Services is in-turn leading to more suppliers of such services, making the acqui-hire pool as abundant as it has ever been. 

New “Middle-Class” Forms 

As these acqui-hires take place (many across multiple service areas), we are starting to see a more significant “middle class” of MSPs form with a complex mix of talent. Given their expanding skill set, many of these providers are choosing to focus on specialization rather than geography to define their customer profile and are able to find more runway into these verticals with every acqui-hire completed. While this middle class is below the scale that would typically be attractive to Private Equity investors, this is all starting to change as new money flows into the IT Channel. 

Zachary Miller, President and Co-Founder of Worklyn Partners explains, “We are already seeing Private Equity firms move down market to bid on smaller and smaller MSPs, and we see funds considering smaller firms as potential “platform” acquisitions. But there’s an interesting subtlety here. There is a large cohort of PE firms that are waiting eagerly to acquire an MSP “platform” with over $10M EBITDA, but there are very few of these MSPs “on the market” […]. These are not the PE funds that are moving down market. Rather, there’s been a huge uptick in capital raised and new funds formed to invest in lower market, founder-owned, businesses.” 

What this means is that a large cohort of MSPs are suddenly finding themselves a few strategic acqui-hires away from serious Private Equity interest. This was not always the case and it is unclear how long this window will be open. 

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Benefits of Acqui-hire

Now that we have a better understanding of what this market opportunity looks like from a macro standpoint, let’s dive a little deeper into the operational side of things. What I personally love about acqui-hires is that when done right, they tend to benefit both sides equally. While the acquired may once have had grand plans of growth in their own business, this should not be looked at as a failure, but rather a new chance at a much larger opportunity. 

To get a first-hand perspective on this, I talked to Bobby Lind, President of Limetree Labs, an MSP that is actively growing via acqui-hire. “For Limetree Labs we have found the acqui-hire model to be the best of both worlds. The best for the MSP being acquired-hired – as it allows the Owner and/or Employees to grow professionally and personally in a way that might not happen otherwise. Best for growth for the MSP doing the acquiring. More importantly, best for the customers. It is always about the customers at LTL. This model means the customer gets to keep the built up relationship. That matters.”

Bobby makes a great point in the sense that, while acqui-hires are traditionally a means of acquiring talent first and foremost, customer experience should still be at the forefront of these discussions. To set proper expectations, it helps to have a deep understanding of how the benefits weigh out for all parties. Here are a few of the most significant benefits from each side of the transaction: 

For The Acquired

Consolidating Tech Stacks – There is a minimum viable tech stack that an MSP must carry, regardless of their size. Since vendors often price these services based on the economy of scale, consolidating the tech stack can often boost profitability immediately for the customer contracts that are being absorbed. While this is beneficial for the acquirer as well, it is often a huge relief for the acquired as the stress of these low-margin services no longer falls on their shoulders. 

Offloading Cyber Liability – In today’s environment, cyber liability is a big deal. Most MSPs should be carrying a hefty cyber liability policy that covers first, second, and third-party risk. In addition to this, they are also responsible for signing off on many of their customer’s security best practices via their insurers as well. For an MSP that specializes in tech outside of the scope of cybersecurity, acqui-hires are a great opportunity to offload this risk, while continuing to focus on the discipline that they love. 

Increased Backend Support – As Bobby mentioned above, customers of the acquired are often on the winning side of these deals (when done correctly). This is because the acquired company now has an entirely new back-end support team to help them service the contract, whereas this might not have been the case prior. While these customers require some hand holding in terms of adapting to new methods of support, they eventually realize that they are far better off and still have the security blanket of their former MSP, likely in a vCIO role. 

For The Acquirer

Technical & Vertical Specialization – The primary driver for acqui-hiring is often to bring in new talent that fills a need. Sometimes this is technology specific (such as cybersecurity, cloud, AI, etc.) or it is based on experience within a specific industry vertical. Since these talented MSPs are actively practicing on their own, it is often the case that these individuals require very little training and hand-holding compared to outright hires. They can also level-up existing staff by bringing new technical solutions that were otherwise not known to the organization. 

New MRR Opportunities – In addition to the talent, acqui-hires have the added bonus of bringing new customers on-board at the time of hire. While these may or may not immediately cover the expense of the new employee / partner, it is far easier on the wallet than an outright hire that brings nothing but a new payroll expense. I have also found that since MSPs often practice their craft differently, the acquiring company may pick up new MRR opportunities that can be cross-sold to the existing customer base. 

Service Area Expansion – When looking to expand into a new service area that is slightly out of reach of your HQ, an acqui-hire is a great play. The acquirer will get boots on the ground, as well as a customer base that can act as a seed to help penetrate the new market. The increased back-end support that I mentioned above can take a lot of the pressure off of the acquired, so that they can now focus entirely on growth and high-level consulting to build out that service area. 

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Finding Acqui-hire Opportunities 

If you are looking to find such opportunities for you or your business, our industry has a lot of great resources that can help. Here are a few sources which have proven to produce successful outcomes for MSPs looking to acqui-hire: 

Prospective Customers – Sometimes acqui-hire opportunities present themselves in surprising places. For example, when I was an MSPs, we found several sales opportunities where there was an existing IT consultant servicing the customer, but they were overwhelmed by the size of the opportunity, or simply understaffed. Rather than completely displacing them, we found that an acqui-hire would suit everyone involved. 

Peer Groups / Events – Regardless of which side they are on, the more familiar that the MSPs are with each other prior to the acqui-hire, the more successful it will be. This is why peer groups or other in-person meetups can be an ideal source for such opportunities. 

Online Communities – Posting your requirements on web-based communities such as r/MSP and The Tech Tribe will typically yield at least a few responses. For example, the Business Talk > Mergers and Acquisitions channel in The Tech Tribe has occasional activity, most of which seems to be buyers looking to strategically acquire based on service area. 

Advisors / Brokers –  Depending on the size of your MSP, a traditional broker might be able to help you, as there are several that deal specifically with MSPs and know the industry well. The only downside to this is that if you are not looking for a capital intensive transaction, then these brokers may not be that incentivized to help. This is because they often take a finder’s fee as a percentage of the deal. 

MSP Growth Hacks – We are always trying to help MSPs grow both personally and professionally, and in many cases that is simply in the form of introductions. I personally know several MSPs that are actively looking to acqui-hire, as well as those that may be looking for a fresh start at a new company. Feel free to reach out to me on LinkedIn and I will do my best to help you find an opportunity that fits what you are looking for.

Conclusion

The good news is, if you are reading this, chances are you are already in the right place at the right time. What I mean by that is, this industry has been exploding with activity over the last few years and it has not gone unnoticed. There is a reason why there is still money flowing in, even at a time when venture and equity investing is experiencing a “squeeze.” In my opinion, this is because MSPs represent a “safe bet” with their recurring revenue model and rate of retention, while still having exposure to exponential technology trends such as cybersecurity, cloud, and AI. Regardless of what side of the agreement you are on, acqui-hires are a way to further solidify your seat at this table, so you can hopefully enjoy the harvest.

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