Episode 38: Egos Are Expensive

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Erick and Rich discuss why securing SaaS applications is harder than it ought to be and three techniques MSPs can use to up their cost tracking and management game. Then Rich is joined by Tim Conkle, CEO of The 20, for an insider’s take on the current M&A landscape in managed services, the pros and cons of selling to private equity, and what the future holds for smaller MSPs in an industry filled with bigger and bigger competitors. And finally, one last thing: Proof that mayonnaise makes everything better, including nuclear fusion.

Discussed in this episode:

It’s all about APIs for SaaS Alerts

The 20’s VISION ’24 event site

Tim Conkle’s email address: tconkle@rolandtech.com

 

Transcript:

[00:00:00]

Rich: talking with you about the services, strategies, and success tips you need to make it big and manage services. My name is Rich Freeman. I am the Chief Content Officer and Channel Analyst and Channel Master to the organization responsible for this show. I am joined side by side as I am every week. By your other co host, our chief strategist at Channel Mastered, Erick Simpson.

Erick, how goes it? It’s

Erick: going great, Rich. It’s great to be with you again on another exciting episode of the MSP Chat Podcast, virtually. I’m looking forward to the next time we get to do the MSP chat podcast in person, we’ve got some events coming up where we’ll be side by side together.

And that’s always fun because we get to pull people in that we wouldn’t normally have as easy access to scheduling and stuff because we’re all there at the same time. I love those. Absolutely.

Rich: And I’ll just drop this hint way in advance that we are in a conversation with the folks at Kaseya to get someone, we don’t know who, but one of their executives on the podcast with us for that kind of three way conversation during DattoCon at the end of October.

Hang on folks month and a half or so we should have something really good and interesting for you live from from DattoCon. Mystery guests. Mystery to us as well. But for now, let’s dive into our story of the week. This was inspired by news from SaaS alerts and full disclosure SaaS alerts is actually a client of Channel Master, the organization responsible for the show here.

The fact that I am gonna be talking about something that was inspired by this news from SaaS alerts has nothing to do with that engagement. There was no money change, changing hands here or promises made. It just happens that reporting on this news from my blog channel Holic really got me thinking about something that I, we may even have spoken about in the podcast before.

It’s a much, much bigger issue and it’s driving me absolutely nuts. And I’d to get into it a little bit this week. So I quickly what’s the news from Saas alerts. They do SaaS security. That’s what they are all about. And for years they’ve been collecting data directly from various SaaS apps and correlating it and looking for signs of trouble that you as an MSP wouldn’t be able to spot just looking at these apps individually.

Now for the first time they have integrated their platform with Microsoft Defender for Endpoint, a very popular EDR system. And so what that means for them and their partners is. In addition to the danger signals, the telemetry that they’re collecting, they’re getting all the telemetry that Microsoft is collecting, and they can correlate that Microsoft data with their own, more unified complete visibility into the end users threat landscape.

Great. Now I said, Defender for Endpoint is a very popular EDR tool. It is. But I learned in reporting on this news, 23 percent of SaaS alerts partners use Microsoft Defender for endpoint, 51 percent use Sentinel 1. So why are they getting started? And SaaS alerts, is very serious about listening to partners, prioritizing what partners want.

Logically, partners probably would have preferred to start with Sentinel 1 instead of Microsoft. Why are we starting with Microsoft? And I want to emphasize before I move on, Erick, everything I’m about to say from here forward is 100 percent Rick Freeman editorializing. I interviewed Jim Lippe of Sass Alerts.

He was extremely diplomatic about all of this. But my observation basically is in order for saas alerts to do what it does with any solution that it integrates with, it needs access to an API capable of delivering the data that they need to assess the security situation, to tell them what they need to know so they can correlate the right things to the data that they’re getting from somebody else.

So they need. An API that is let’s call it security enabled. Microsoft has that. Microsoft has apparently a very robust API for Defender. It gives saas Alerts what they need in order to do this integration. That’s why they did that. Again, Jim Lippe never said this, but by implication, they’re not getting, they don’t have that kind of API yet.

At least with Sentinel 1. Now they, they are in the works. Defender is not going to be the only EDR that they integrate with. Jim said, I think there are like five or six on their list that they want to work through. He didn’t name names, but I can assume Sentinel 1 is one of those companies.

But he was very careful about not committing on delivery dates or timing or anything about that because saas alerts can control the saas alerts [00:05:00] development part of this integration. They can’t control what their EDR partners. Do or don’t do, and therefore they really can’t control how quickly these integrations roll out.

And the vibe I certainly get is that there is not an immense set of urgency or a sense of urgency in the EDR world, or even quite honestly, in the saas world generally around security enabling APIs. You might remember that back in December, Erick saas alerts launched this petition drive.

Basically they, they asked MSPs to sign a petition pleading with saas vendors and now, EDR vendors to build the appropriate functionality into their APIs so that saas alerts and companies like it can secure these products. 550 MSP signed that petition before Saas alert closed it down, and they’re using that data now to try to get the attention of these companies.

But it’s going to be a process. It’s going to take time before you really start seeing the APIs that we need. And this is all taking me to the thing that drives me nuts here. It is a SaaS world, is it not? We know we’re not going back to the days of on prem. More and more of what matters, most of what matters already is happening in the cloud, in SaaS applications.

That is not changing. We know a security vendor called Thales did some research earlier in the year. saas applications are the number one target for attackers out there right now. 14 percent of the companies that Thales surveyed have been breached in the last year. I think it was 40 or 44 percent have been breached at some point in time.

This is a huge problem. And saas Alerts is one of the biggest problems. Very few companies out there that are really focused in on saas security, particularly in the managed services world. There is still an enormous amount of attention being directed at hardware, at endpoints. And so this is the thing, the frustration for me is that there is this enormous need.

We know that that the the technology landscape is built around saas. We know that’s where the security threat is with the MSPs out there need help with that particular use case. Why is it so hard to get more vendors focused on saas security and to get saas vendors more focused on collaborating, cooperating with the saas security vendors so that we can address what.

Is already the number one security threat that end users face.

Erick: Okay. Rich, there’s a lot in there. Yes. . Oh, so my visceral kind of observation is we’re, we are used to historically in, in the network monitoring management world, having the avail, the ability to monitor and manage things that are connected to a common network.

Something that MSPs typically have easy access to, if not complete control of. And so the vendors that have allowed us to monitor, manage, patch, update devices and endpoints on the network, share a commonality in terms of, it’s a language, right? We can communicate with these devices through us, through several protocols that are very standardized.

Now, we look at what’s happening here with technology and we’re seeing this migration to SaaS applications in the cloud. It is a stampede. We know that. It’s hard enough for MSPs to keep up with all of the applications that business owners and businesses and their users use internally.

But now we’re seeing this proliferation of these cloud applications, these SaaS applications. Where there is not that commonality of protocols. There is no standardization. So now the challenge becomes we have to petition each one of these SaaS application vendors to enable, create or optimize APIs to allow this communication to occur where, in, in an internal network, we already know what those protocols are, right?

There’s standardization that happens there that allows us some of this stuff. So it’s going to be a challenge to, to get everyone to say, yes, I’m going to, open up the kimono and work with you to provide that, even though we all feel it’s necessary, right? It’s just going to take time. And I think what you shared about your premonition about who’s on the shortlist for saas alert is probably based upon what their partners are using.

So So yeah, you’ve got some pretty good premonition there, I think. I think, yeah,

Rich: we can draw up the list of likely suspects for who they’re working with [00:10:00] and let’s just hope that the, these companies are as tuned into the need and the use case among MSPs as saas alerts is, and they can help us all accelerate this process because it is a huge challenge right now for MSPs and their end users.

And you’re, you’re right. It takes time. It takes money for a company like Sentinel One, for example, to retool their API. And they’ve got other priorities on a roadmap of their own. Totally get it, but but I would just love to feel like we’re really generating some momentum in, in saas security.

Erick: Maybe episodes like this will help get the word

Rich: out. Let’s hope in the meantime, let’s move on to your tip of the week, sir. We’ve been talking about saas security management in a matter of speaking. This week, I think you’re going to be talking about cost management.

Erick: On point, Rich.

So the tip of the week is taking a hard look as an MSP business owner at your internal costs. There, there are several ways to increase gross Profit at the end of the year, rich, one of those ways is to reduce costs and other ways to make sure that we’re pricing and positioning and selling our services at a profitable margin.

And the other third way is to make sure that we’re delivering those services efficient. So reduction of costs fits into that last one a little bit too, but I want to talk specifically about the internal expenses that an MSP organization should be mindful of and tracking and have a discipline around measuring.

On a regular cadence not too often but not often enough I the Goldilocks and three bears right not too little not too much, but just right so a couple of things Just tracking everything that we are paying for as an MSP. Sometimes, Rachel, we’ve got platforms or services or other things that we’ve been paying for that we don’t heed.

We don’t pay mind to Hey, we’ve been paying this for a long time and we just don’t think about reviewing it. So let’s do an assessment of all of our operational costs and everything that we’re paying for. So there could be. Some services that we’re paying for. There could be licensing, just like we’ve talked about on the program before, Rich, we’re helping clients mind their license usage and shadow it and things like that.

I know for a fact, that I’ve experienced this and my MSP and then other businesses, before and after where we’re paying for additional licensing that we expect our team to be using that go unutilized. I reduced some licensing last week on a couple of things for channel master, because I was like we don’t need that anymore.

How often are we taking heat of that? What about the services that we’re delivering to our end user, customers, clients, and things like that? How often. Are we evaluating that overall cost? Because Rich, as we’ve talked about on the program before, we’re battling vendor sprawl, we’re battling solution sprawl.

I know that there’s an argument, Rich there’s two sides of the fence here that says we could consolidate and save costs by moving to a vendor that does, all of these things are these eight things For our clients where we may be using three or four or five or eight different vendors, right?

There’s the one side of the fences as well. That’s a lot of eggs in that one basket, right? But there’s the other side that says it takes a lot more time, energy, and effort to manage all those vendor relationships. And we’re paying more costs if we’re not paying for a bundled set of solutions. So think about that.

Evaluate on a quarterly basis, maybe take a subset of your portfolio and evaluate what’s in it. And are there vendors out there today, as we know, rich new emerging vendors are, coming on the scene all the time and are upsetting and being disruptive with the way that they are integrating a lot of different solutions and benefits that we may never have thought of before in the past.

And then pricing them very competitively and disruptively. K365 comes to mind. Right when we think about that kind of stuff then finally rich third part of the of this weekly tip is just having some regular Financial reviews. So this isn’t a a once You know a quarter thing or once every six month thing or once a year thing, but are you?

Evaluating on a quarterly basis just right not monthly Not, you know yearly but quarterly and just looking at your expenses as compared to your revenue You And your gross profit, and just being mindful of areas of concern, a normalizing your PNL and your chart of accounts. So you actually understand your cost of goods sold for all of your different line items or service lines.

Sometimes Richie, I work with partners that, and I have this blended approach to, [00:15:00] revenue comes in, it’s all revenue. And what we pay out, it’s all blended. And so you could mask or hide underperforming services. When you’re doing that blended, look, and I think as we mature as MSPs and become a little bit more financially astute, you start understanding, the value of making sure we’re looking at things from, a cost of good soul perspective. So we know based upon service line and things like that, what things cost us and especially be mindful of labor costs, because that’s the hidden killer. Rich, we think that we’ve got these platforms, we know we’re paying for these platforms and all this, but.

How much additional labor is it taking for our teams? Even if we feel we’ve got the perfect solution, is it taking an inordinate amount of labor in order to deliver a service through that particular solution or managing a vendor relationship? And, in addition, the last extra cherry on top, Rich, are all of your vendor relationships benefiting you beyond the product, service, or solution and the support they give you?

And I’m talking about MDF. And sales support and things like that, helping you grow your business.

Rich: Yeah. And we’ve been talking about vendor consolidation and how vendors MFPs are participating in fewer partner programs. So vendors have to work harder for your loyalty and, MDF and.

Business growth assistance and so on is going to be very much part of that. I’ll just add one more reason. The logic of focusing more on cost management, as you say, is pretty apparent and self explanatory in a lot of ways. But here’s one more reason for MSPs in our audience to prioritize that.

You look at the benchmarking data collected on a regular basis by the service leadership unit at ConnectWise, and they just updated this. Last week actually and one of the things that they’ve been finding recently in their data is that MSPs owned by backed by private equity have higher EBITDA growth.

And a big piece of why, why private equity backed MSPs are more profitable is they understand private equity, they don’t get the technical side of the business, they are hands off on that, but they feel pretty good about their ability to help out on operations and that includes financial management.

So all this stuff that people talk about is financial engineering. This is the stuff where the the private equity companies come into these MSPs they acquire and get really efficient and smart and rigorous and disciplined about cost management in exactly the ways that you’re talking about.

And that’s what enables their holdings, their MSPs to outgrow everybody else. On the bottom line. And so if you want to remain competitive in this landscape where there are more and more of these bigger and bigger private equity owned MSPs out there, you need to get smart about cost management too.

Erick: Yeah. And I’ll tag in, in addition just an additional thought there you’re competing against not only a more rigorous, financial. Discipline here, but you’re also competing against the ability for these roll ups to cut costs because of the shared back office support that they enjoy, right?

So you’ve got, you’ve got shared HR, you’ve got shared, billing and payroll and things like that. So you really got to get lean and mean in order to compete effectively. But we’ve also seen reporting rich that indicates that. MSPs can compete and succeed against some of these larger entities as well.

So Absolutely.

Rich: Absolutely. Okay, so get on it people if you don’t have a CFO, at least start studying up on the kind of stuff that CFOs do. Folks, we are going to take a quick break. When Erick and I come back on the other side, we will be joined by Tim Conkle. He is the CEO of the20. He is part of one of these really big managed services roundups or rollups, excuse me, that we’re talking about here.

Erick. You’re going to find very few people outside the world of private equity who have a more direct view on the M& A landscape and managed services right now, he is also always a lot of fun to speak with. So looking forward to our conversation with Tim, which will begin in just A few moments.

And welcome back to part two of this episode of the MSP chat podcast, our spotlight interview segment. And we’re joined this week by somebody who can speak with more authority. On one of the most important topics to MSPs, what what topic is more top of mind for MSPs these days than the M& A landscape?

And who knows more about that than Tim Cockle, CEO of The 20. Tim, welcome to the show. Yeah, thanks for having me, Rich. Honored to be

Tim: here.

Rich: For folks who don’t know you and don’t know The 20, let’s just kick off there. Tell tell [00:20:00] our audience a little bit about yourself. So a thousand foot view.

Tim: The 20 is two pieces. There’s a group where we do best practices. We have a large help desk that all the members use and we all do things the same way. Why we don’t reinvent the wheel. So there’s a group side and that’s really built around the idea of creating an environment where smaller guys, 5 million and less can compete at parity with everybody else.

By having all the same pieces, nationwide footprint, blah, blah, blah, blah. Then the other side is our MSP, which we have acquired 35 companies in the last 23 months. Which is unheard of, but there’s definitely a method to the madness. With that being said, that’s the 20 from a thousand foot view.

Okay.

Rich: Let’s just start out here. Cause you’ve done 35 acquisitions. You are very much. Finger to the pulse on the M& A landscape and managed services right now. And that situation, that market is constantly fluctuating. Multiples are going up or going down, et cetera.

Give me your take on the M& A market for MSPs right now. What are the key trends? That you’re seeing. So I think it’s

Tim: perfect. I think the timing is perfect and it has been for a while. Why is that timing? Perfect? Because of the consolidation of our industry now that now there’s a really cool piece to this because P firms are really looking for platforms big and then they bolt on other MSPs.

If you’re a platform, you’re gonna pull a higher multiple than you are. If you’re just a straight up MSP, Like a bolt on and a lot of people have this misconception that bolt ons are 10 million or less But in our channel in our space there has just been an 80 million dollar msp Rolled up to a platform because they did not really have the pieces to be a platform’s important A lot of things going go into having a platform but as far as multiples They’re really good right now.

I think when they fall off, if you’re a sub 2 million company, you have a hard time selling. So there has to be something that sets you apart. Over 2 million, it starts to get easier. Under 2 million, you’re going to be bought by another MSP or somebody like that. Above that, you get to 5 million in revenue.

All of a sudden you’re starting to pick the interest of. Platforms in other words p firms that have bought big companies and you bolt on you’re gonna look at somewhere between the three to six x multiple at that bottom end If you’re two million and less you’re gonna get a three to six somewhere in there Above that, you know the multiples change, but it’s a great time and the multiples are good there’s not a lot of industries to get a 5x multiple for a little bitty company it’s a killer time for it.

It’s a killer time

Rich: And my understanding is that the private equity investors in particular are sitting on a lot of dry powder, as it’s called. They have money at their disposal and they’re just looking for good acquisition targets to, to invest that money in.

Tim: 100%. There’s more money than there is acquisition targets by far right now.

And that’s why your multiples are pretty nice. I think as this industry consolidates, we’re going to run into a problem. I call it the 80 percent problem. What is the 80 percent problem? 80 percent of MSPs are under a million dollars. So think about that for a minute. No PE firm is going to buy a 750, 000 MSP.

How do you take that company, one, market it. In other words, how do you get to where you can sell it. Second, how do you get to where you can, Have upside, even after you sell, but for me, M and a is all about not whether you want to sell or whether you want to buy it’s the stuff in the middle, the devil is in the details.

And so we’re going to have 80 percent or somewhere in there. Datto, I think said 82 percent last time they talked used to, it was 94%. So there’s been a little bit of expansion, but I think that’s mainly because of big platforms coming in, buying and then growing that, that base. But. What are we going to do with all those, that 80 percent that’s down at the bottom.

And I would say probably 40 percent of that’ll be 750, 000 better. So that’s 750, 000 to 1, 000, 000. You’re in what we like to call never land. What is never land? That’s the land nobody wants to be in. If you’re selling your company. And I think I have a solution for it. But it takes a little bit of work on the [00:25:00] MSP side.

But I promise you it’s worth the work. Six month preparation, you get a really good price for your MSP. And and move on.

Rich: You were I want to make sure people understand what really goes into determining the multiple that you get or get offered, you were talking about 2 million revenue, 5 million revenue. I hear a lot of the two variables I’m most often here in terms of what acquirers are looking at are EBITDA and percentage MRR, how much of your top line.

But that may or may not be correct or may not be up to date. What are the key sort of metrics or variables that acquiring companies are looking at? Number one, EBITDA.

Tim: EBITDA is that thing that you’re going to get the multiple on. That’s, I would call that the number one.

Number two, top line. Because top line is going to get you in front of the right people. If you’re a million dollar company, I don’t care what your EBITDA is because they don’t want to buy you. So even at first, top line second, and then we get into the middle of the P& L. What’s important in the middle of the P& L?

What costs can be scaled out? What where does labor sit? If labor is 70 percent of your cost, you’re in trouble. Your labor load is too high. I think in the middle is how you calculate what things cost you and all that stuff. In other words, how detailed is it? Because if that detail’s not there, that’s gonna, that’s gonna drop your multiple.

Why? Because increased risk. If your books have half your personal stuff in it and all the other stuff, you have to pull that out. And that begins to get problematic. Here’s a little one that a lot of people don’t think about. What tools are you on? Think about this for a minute.

If someone’s gonna buy you, it’s much more advantageous to them if you’re on the same tool set. Why? Why? Because they can pull that in and pretty much keep running. If it’s not the same tool set and you’re going to, and you’re going to transition them to your tool set, you’ve got to go to the end of the contracts.

How long are those contracts? All kinds of stuff. And then number of customers. And the percentage of revenue that each make up. I’ll give you a great example of this. I know companies out there where 50 percent of their revenue is two customers. That’s risky. So your multiple is going to almost be non existent, that’s where earnouts come from. Think about when a PE firm buys a, just a random IT company. The average in the industry is a 30 percent burn. In other words, 30 percent attrition. They think they’re going to lose 30 percent of their customers. Why is that? No connection between the buyer and the customer.

They have to resell every single one on their paper at contract renewal Are the contracts they have transferable if they’re not that’ll kill your multiple, length of contract I keep seeing in a lot of the social of contracts don’t matter You can still of course you can still set your account.

You’re just not going to get very much for it, Three year contracts is like the standard You And but if I was just stepping back and looking at a company as to whether we were going to buy it or not, biggest thing I want to know is top line. And EBITDA, and then the devils in the details, that’s all the things in between top and the bottom,

Rich: I want to definitely come back and get some thoughts from you on steps folks in our audience can take to get their multiple up, ready themselves for a sale, particularly if they’re at that low end of the market.

But you were talking about consolidation. We’re talking about the rise of these platforms, these multi location, enormous. MSPs out there that are even bigger ones on the horizon coming into being give us a, your sense your picture of what life is going to look like. For that, let’s just say sub 5 million MSP, two years from now, three years from now, if they don’t sell into one form or another, a platform, roll up, whatever, something bigger.

Tim: So let’s just use basic common sense to figure this out. So you’ve got a 5 MSP. They cannot afford to have a 24, seven, three 65 live answer. Can’t do it. They can’t afford to have multi location. So they’re going to be probably single location company, maybe two. And they’re going to be small, a 5 million company.

If you use a basic RRPE of 250 million per employee, RRPE is just revenue per employee. That means for every million, they should have four employees times five is 20 employees. Most 5 million companies have 30, [00:30:00] 35, and so I, I think they are going to literally be swallowed by the market itself.

So think about this. So 5 million company goes in to pitch a client versus a platform. So they start talking about. Just the things they have. The platform has a 24, 7, 365 day live answer help desk. Most platforms are not going to be us based RSS. So I’m going to use ours as an example. Yeah, we have a 24, 7, 365 help desk.

We have a national project team. We have expertise that by far outweighs everything that 5 million, they’re not going to be able to compete. If you really think about it, it’s why the 20 really in the beginning was created. was to make it to where small guys could compete. That’s still with the group.

That is the group’s mantra, basically. Because you get all of those things and it pulls you up to parity. But as we go along, in time, I don’t think they’re going to be able to exist. Remember when we were kids, Rich? I’m probably older than you, but let’s see if we both remember this. Back in the day, there was a TV repair shop in every corner.

I would imagine the newest generation of 25 year olds have never seen a repair shop in their entire life. Why? Technology has just ridded ourselves of it. And I think big, the big platforms are going to be able to out market you, out compete you, out spend you. Everything. Out service, out perform.

And I think that’s in the next 5 to 10 years. It’ll start getting harder and harder and harder to what compete. We already know the number one problem of every MSP that’s out there is what Legion getting the phone to ring and getting appointments. What happens when marketing completely just obliterate you?

Because look at the 20, we probably spend 3 5 million company. You’re lucky if they spend a hundred grand. And so competition is just going to eat them. And it’s ultimately going to. And this is not just IT space, this is all your service type companies your single doctor offices no longer exist, they’ve been gobbled up, your HVAC is happening there, your dentist that’s happening in there this is a movement where competition becomes very tough.

And and I always say this, we’re better together. So if you take 30 MSPs, even if they’re small, if they come together, they’re better off. Eagles have to go bye bye, i’m teaching a deal at vision Do you want to be rich or king and that’s from the founder’s dilemma? And it’s a question that all small businesses if you’re five ten million dollars in less You are going to have to answer that question And being King is going to become very expensive.

Being rich happens by M& A and then keeping a piece of it and fight it. But no, I think competition is going to change the whole dynamic of it. And it’s just common sense who would say yes to it, especially at the same pricing, who would say yes to a 20 person company versus a 500 person company. It’s what we preach forever.

Why do you not have two or three internal IT guys? Their expertise doesn’t, push out across everything. It’s the same dynamic, we preach the message. So what we preached is going to come back to haunt us maybe.

Rich: So there, there is a common objection or response to what you just said that I’m sure you hear all the time, which is SMBs want, a relationship. They want personal service. These big platforms can’t possibly deliver the kind of service and relationship that I do. Sometimes they’ll, somebody will say it’s one thing if you’re in Chicago or New York, but if you’re, located in a somewhat more rural or even suburban kind of environment that, you’re not going to be competing with the platforms.

Is there any kind of survival strategy that these smaller sub 5 million MSPs that wish to remain independent, beyond the next year or two can pursue?

Tim: I think they just have to relegate themselves to being a little bitty and taking the table scraps. And this idea of, oh, these big companies can’t serve.

That’s just a bunch of little companies talking trash. I’m just telling you, the true reality is it. You can’t have it both ways. A small IT company can’t say, we’re better than you having four people internally [00:35:00] because we’re bigger and we’ve got more expertise and more. And then say the three or four or five hundred person company, they’re no good, they can’t service you.

Of course they can. It’s not like that people here from the top, when we buy a company, we keep the employees. They’re getting the same thing that they’ve always got. I heard somebody say, Hey, Tim, I heard that when y’all buy a company, you get rid of all the employees. No, we’ve retained 98 percent of all the employees that, that we’ve gotten in our roll ups and it is part of our strategy.

Why? The customer knows them. They’ve got that personalized service. The only difference is it only gets better because now they don’t rely on that one guy that knows. And that’s the theory behind it. All companies want to know the guy every time. That doesn’t scale, for one. What if the guy’s sick?

What if he gets hurt? You gotta get somebody else. Now, you got somebody that don’t know what they’re doing, unless the guy kept impeccable notes. Big companies require that impeccableness of notes. We understand what it takes to deliver that service to that customer without reinventing the wheel every time there’s a new tech.

The idea that big companies, and they said, Oh, man, big companies lose customers all the time. No, they don’t. They lose just like little companies do. There’s bankruptcy, there’s people buys a company and they’ve got to, things like that. But big companies do not lose a lot of customer because of service.

Why? It’s probably the best thing we do. We have so many people, the service becomes really good. You get true account management, you get true project teams that only do projects, you get true fields. So you get This service that’s, you use the best tool every time. Why would you use a Crescent wrench on a bolt?

If you’ve got the right size wrench, you never would, because the Crescent wrench gets loose and it wears the edges off. No, the cool thing about big companies is they put the right thing to the tool, this idea, and people can say whatever they want to, but it’s not real. It’s not reality to say, Oh, wow, I’m a 10 min company and we service better, that’s foolishness.

You know that goes back to king or rich Egos kill you egos Eat businesses egos are the most expensive part of a business If you have an ego, it’s costly, so you gotta decide, and then the market will decide. Ultimately, if they don’t want the guys that decide to be kings, they’ll lynch ’em and we’ll go on , lynching them being, they’ll get, they’ll fire ’em as a company and they’ll keep going.

Cool the cool thing about a $5 million rolling up is all of a sudden you start getting a hundred thousand dollars a month customers. Why? Because you have all the pieces. Otherwise, you’re going to stick down their average customer size being 2, 500 a month. All the dynamics change.

So we sweep all of that customer base from 2, 500 people up to people that pay us 4 or 5 million a year, single customers, so no it’s a pipe dream to think that service is going to be big time difference. Remember, the service side is a commodity. You can get it on any corner. The difference between a 5 million and a hundred million dollar MSP.

It’s the business side. That’s where we set ourselves apart. Of course they can make computer stock to each other. But long term strategy? Customer base is going to go bye bye on them. It’s not because they’re bad people or bad companies. It’s the old adage, you’re either growing or dying.

And unfortunately, those companies will start dying. And it pains me because to build a 5 million company is such a cool deal for an MSP. They do what over 80 percent of people never can do. They’ve got great companies. They’ve just got to keep being, moving to the next stage, and being that way, you’re gonna get a lot more wealthy than trying to do it by yourself.

And let’s be honest, why are we building companies?

Rich: Let’s let’s dive into that a little bit more. We’ve spoken about some of the things that you get if you sell to a platform, to a roll up, to the 20, you get access to that 24 7, 365 help desk, and the national projects desk, and the lead generation mechanism, you have stronger competitive prospects than maybe you would.

There are, There is value that you’re getting. But there is something that you’re giving up as well. Theoretically. And this gets to the whole, do you want to be rich or do you want to be king? Is it about your ego saying what to set expectations for folks who are pondering their future on their own or inside of some sort of larger organization?

What does it mean to make the commitment that I’m not going to be king anymore? But I’m going to be rich. What are you giving up?

Tim: And I call this living your magic. [00:40:00] And let’s be honest, if you’re an MSP that’s got 4 or 5 employees, and you’re the owner, you’re the butcher, the baker, the candlestick maker.

You’re doing everything, you’re doing billing, you’re doing marketing, you’re doing all these things, right? Let’s be honest, there is no such thing as a Swiss Army knife human. And if there is, some of those blades are going to be dull, or it’s going to be missing the scissors, or it’s not going to have the cool corkscrew that you open a bottle of wine with, right?

It’s really getting to a place where you work your magic example midi. I have shareholders now I’m, not the i’m not this guy that can just make any decision He wants and do anything he wants with the money anymore. I’m a w 2 employee. What’s the difference? You quit using your company like a piggy bank.

That’s big difference Secondly as you fit into a big organization where you create the most You In other words, if your magic is technical, you should be in a technical only role. If it’s accounting, you should be in the accounting role. It’s no different than going to college. Why do they have different degrees?

Because different people have different levels of how well they do something. And it’s the same in a business. And I think a lot, and some of it depends on where you are. Like we bought some companies inside the 20 where the owner says, Hey, in six months I want to retire. So they’re at retirement age.

Yeah. So they’re looking for their future. And then you get younger guys that obviously they’re going to get a nice check at the closing table, but they want to keep working and what better way to work on what benefits you and continues to benefit you. Think about this for a minute. If you knew that all you had to do was change seats in your company and your value would go from one time to three times as valuable, what would you do?

If you don’t have an ego, you go to where, Hey, I own it, but My company’s gonna be worth three times the fact so I think there’s a big piece in this That you have to talk about and that is devil’s in the details again, right? I would not sell a company without owning Some level or buying equity back in depending on what it is, right?

You have to be smart with it I mean, I know a guy that sold his company and put the majority of it into the company That was buying him And it lost like 95 percent of its value that hurt bad, right? So a little double in the detail, but the reality is typically your money’s going to grow faster in the platform Then it’ll ever grow by itself, but you do and I think you hit on a really important thing You have to be able to be on a team and I tell people it’s if you watch the olympics this year You saw the sleds There’s eight rowers.

There’s a little guy on the back that hollers row. All the other people row. And if one gets out of sync, rower three, adjust. So he adjusts to the rhythm because everything runs smooth when everybody knows they’re in their magic seat. If you’re not in your magic seat, it’s just an illusion. The trick never works.

And so I think if you’re going to sell your company, you have to come to that place of, Hey, one, why am I doing it? I’m doing it to create wealth for my family. Take some at the table in cash and take the other a different way. I personally. Would not sell a company that had earned out in it. I just wouldn’t why because it’s based on your company 99 percent of the time And you’re probably gonna never get see that money.

There’s better ways to sell a company. So How much structure tax wise a lot of decisions have to go into it but the first decision every owner Has to come to is do I want to work inside the company or do I want to retire once you figure that out? Everything’s pretty easy after that. You shouldn’t lose any of your value if You’re working along and you’re like, I want to do something different.

Like I had a guy that wanted to only do investing when he was done. So he worked for a year and then he left, but he didn’t lose anything. When the 20 sales, he’ll get his piece of the pie, no matter how big that piece gets, cause he’s not there. So it’s a cool dynamic to sell your company, but it is a little bit psychological because you go from making every decision to making only decisions that you really are good at.

And I’ll be honest, I love it. Why? Because I’m a visionary. I have no business doing a lot of, I could, if I had to run the daily operations of this thing. Rich, me and you wouldn’t be talking right now. I’d be a little bitty. So you’ve got [00:45:00] to, you’ve got to trust people to get on the boat with you and everybody say, okay, if we row really hard and fast, we’re going to win, period.

And that’s what it’s about really, especially here, so I hope that didn’t confuse you. Let me tell you, I can answer your question in 13 parts. So keep me between the go post.

Rich: I, I want to point something out before I, I get to this next question here, which is just that you’ve done a lot of acquisitions at the 20, you built something pretty large.

You, you are not private equity backed that, it’s a very rare thing. Actually to achieve the scale you guys have achieved without private equity being involved. So with that, let’s say bias in mind, I do want to ask you about. Private equity buyers because a couple of different things.

I I want to get your take on the pros and the cons from an MSP perspective of selling into. A private equity backed platform, and also just acknowledge that there is no one private equity backed. There, there are PE backed options out there where you retain your brand and some of your autonomy.

There are others where you give all of that up. So just what, you, as you look at the PE. Funded options out there. What do you want MSPs to know about? What’s good? What’s worth maybe being concerned about? So so

Tim: let me answer the first question first or the statement because it boils around out there that the 20 is owned by Kaseya or the 20 has got a P but the 20 has zero P backing And zero outside money that took equity.

That’s an easy way of saying it. We don’t have any individual investors that are outside of our group. The only people that have equity in the 20 is the people that have rolled up. They’re the only people that even have gotten the option at this point. We are different. So that means we had to get our money a different way.

And so hardest money to get, but the best money to get is commercial banking. Interest rates, you know what they’re going to be. You don’t have to give up equity and that’s the route we went now Let’s flip to PE firms. If you’re going to get the most money for your company You’re going to sell to somebody that’s gotten big like us or PE.

PE is where the money is You’re not going to get it from another MSP. Why? They don’t have the money a guy was asking me At the last M& A thing I was at he come up to me afterwards and he says Tim, why don’t I just do what you’re doing? And I said, okay to move your multiple You’re gonna have to spend $30 million.

So the first thing you need to do, if that’s your thought process, is, okay, where am I get $30 million? If you’re a $5 million company, no PE firm is gonna give you $30 million to play. $30 million buys your whole company five times . So if you’re a $5 million company and you wanna do that, now think about this too, and let’s just use a million because it’s an easy number to play with.

If you’re a million dollar company and your strategy is, I’m gonna m and a, so I’m gonna buy another m a million dollar company. That, that company is the same multiple that you are, which means when you buy them, you just bought a dying asset because there’s no difference, but, and you haven’t moved your multiple.

So to move your first multiple, you’ve got to really be at 5 million EBITDA. 5 million EBITDA at 20 percent means you’ve got to spend 25 million to buy. If they’re at 20%, they’re not going to be at that, but I’m just using easy numbers. So M& A strategy is not for small companies. It’s just not the 20 was able to do it the way we were because already had a big company.

And then with our strategy, commercial banking said, no problem. We’ll do it all day long. 99 percent of people in this space, platform standalone MSPs of any size are going to be bought by PE. So then you got to step back and you got to say, okay, who do I want to sell to? Two things that you wanna look at.

Culture. In other words, can you live in the culture that, that you’re being bought into? ’cause that’s big. How does this PE firm look at me? Are they gonna, are they gonna put me to the side and I’m not gonna make any decisions? And they don’t really care? That’s a culture I wouldn’t wanna go in.

Second is detail. There’s some companies out there that do 33, 33, 33. I know there’s a 1% off. I’m just not giving you the 33 and a third, 33 and a third. So they break it into three pieces. 33 percent at the closing table, 33 percent invest back into the organization and 33 percent on out, you just risk [00:50:00] 66 percent of your funds on things you have no control over something to think about devils in the details, if you’re going to keep your own brand, your earn out is probably going to be based on your company, which means you have to not only maintain, but grow, or you don’t get the earn out.

Crazy, right? Devils in details. We, in the beginning of the 20, we thought all these brands won’t be a big deal, but the reality is it confuses the customer. And that’s really what spurred up the rollup faster than what we wanted to be. I say fashion. We want it to be, I think we’re actually moving a little slow at 35 and two years but so culture’s big.

And then the devil’s in details. Can I invest back in, if you truly believe in what you’re selling to, You should invest back in for a second, third, fourth, maybe fifth bite of that apple. Real wealth is created by each time it sells, taking some off the table, leaving some in, taking some off the table, leaving some in, especially these hack because this is all high growth platforms.

So there’s the idea of if you’re a decent sized company I’m not selling to a PE firm. You’re probably not selling your company because that’s where all the money is. The 20 is an anomaly. I’m telling you, it’s an anomaly. But at some point in the future, the 20 you’ll sell, I’m sure. And it’s going to be a PE farm that buys us because they’re going to come with the money.

It’s economics. So all PE farms are not horrible. We sold the first company I sold a PE farm in San Francisco. Best PE farm I’ve ever seen. As far as culture and what they thought about the company and how they let it grow and all the other stuff. Most likely, if you have a decent sized company, you’re going to sell to a PE firm.

Another MSP is never going to be able to raise the kind of money to do the kind of roll ups that we are or big PE firms are doing. And so you have to give something up. Other details inside of a roll up, when you’re doing it, PE firm or not, is what it costs for the legal side of it. Let’s say you have a million dollar company, 20 percent cap gains.

Now you’re at 800, 000. If you spend a hundred grand on selling it legal, now you’re at 700, 000, and this is not a sales thing for the 20, but in the 20, we alleviate all that, not the cap gains. We do not eliminate all the same, but the way we structure and everything. So yeah, most likely. And the question really was about PE firms.

If you’re adverse to PE firms, you’re probably never going to sell your company because that’s really where the big buyers are. You can come across a man. There’s so many, there’s so many different ways people are doing it out there. You got to be careful. You got to be, here’s another one.

And it depends on what kind of company you are. If you’re a franchise, I just looked at a franchise that wanted to, wanted a franchisee that wanted to sell to us. The problem was if he leaves the franchise owns everything. Owns a customer list, owns the phone numbers, they own the relates.

What in the hell was he doing? So he’s built this nice 5 billion company that he can’t sell in the marketplace. He has to sell it inside the franchise, which means he’s going to get the lowest return on his work that he ever worked for.

Again, I always said this. It’s not about who buys you.

It’s about the detail. It’s the devil in the details. What happens when you sell? Is there an earn out that you have to wait two or three years for it? All kinds of things. You’re going to want to know the real strategies behind who’s buying you in less about, Oh, it’s a PE firm.

Oh God. I’ve heard everything. Who you hear all this crap about from about PE firms from little bitty MSPs that don’t think they can sell, don’t think they can grow. And everything else that goes with it. A real savvy business person. And this isn’t dogging MSPs. Even though, I’m not dogging them.

It’s ignorance. They don’t know any better. But they perpetrate this ignorance because they talk on subjects they know nothing about. Which means at the end of the day, they hurt themselves. But the real money is at a PE firm. Or something like the 20. There’s nothing else like the 20 out there right now.

You’ve got to pick your poison. But your poison is probably going to be a pe farm

Rich: and you know I’ll just quickly follow on to what you were saying though the devil’s in the details. Who you know, the pe firm You’re potentially selling to understands the details a lot better than you probably do I hope it’s an obvious point but you really there are a lot of great Consultants out there who work with msps on selling the bit.

You absolutely want to work with somebody You who is experienced in this area and [00:55:00] help you understand the details and the variables and evaluate offers and so on. Otherwise, somebody is going to eat your lunch basically. Yeah, I would wholeheartedly agree with you. Now earlier on in the conversation you mentioned you’re going to be doing a session on do you do you want to be rich or do you want to be king at vision?

But a lot of folks listening probably don’t know what vision is. So I am actually. Planning to attend next week. But just as we wrap up, tell folks about the 20 vision. So vision is

Tim: our yearly conference. It’s open to the public. It is, it’s really about rubbing shoulders with our community and really getting really good information.

If you’re thinking about selling your company, or if you’re thinking about growing your company really fast, any of that stuff, you should come to vision. Why because that’s what it is. It’s ultimately what it’s about and the cool part is and I always say this At vision I say it’s just us chickens.

So let’s be real and Yeah, if anybody listening in this anybody wants it if they’ll email me i’ll even send them a free code If there’s any left, I think we’re sold out. But yeah vision is really good. I easy way for me to say it. It’s not a conference like a typical vendor conference.

It’s really geared around MSPs and the problems that. That we have in, inside of our MSPs especially if you’re trying to grow, if you’re trying to learn how to sell it, if you’re trying to learn how to scale, that’s really what vision in the 20s is about. So cool stuff.

Rich: And left on mistaken, it takes place August 28th, 29th and 30th in Dallas.

Yeah. So you mentioned they can email you. Are you willing to share the email address? I am. I’m trying to think which

Tim: ones to share. It could blow my box up, right? Yeah. Just my regular email. Actually, mine is tkonkel at RowanTech. com and that’s R O L A N D T E C H. com. It’s just an email I’ve had for a long time. It’s an easy one for me to see all. If they send it to that one, I’ll see them all. So it’s easier than trying to send it to my 20 email. But if anybody’s on and they want a pre pass division, and they’re an MSP.

I’ll give you a free pass all day long. It’s important. It’s important for MSPs to be there.

Rich: And we will include a link to the website for Vision in the show notes for this episode, if people want to check things out that way as well. Tim, always always an education, always a pleasure to to have a chance to speak with you.

Thanks very much for joining us on the show. Hey, thanks for

Tim: having me. And here’s the thing. If any MSP is out there and they’re trying to sell and they just want advice. It’s free. You can get advice from me all day long. Reach out to me. I will tell you all the ins and outs of it and it comes pretty unfiltered and it comes from

Rich: a peer.

All right. Once again, thank you very much, Tim. Folks, we are going to take a quick break. When we come back out on the other side I will be rejoined by Erick Simpson. We’re going to chat a little bit about some of what Tim and I just discussed here. Have a little fun, wrap up the show, stick around.

We’ll be right back. And

welcome back to part three of this episode of the MSP chat podcast. Erick. I wish you could have joined us Tim and me. I that I understand there was a scheduling issue that came up and I got to fly solo with Tim, but I say that only because I know you would have really enjoyed this conversation.

You, you work directly. With a lot of MSPs who are contemplating short term, longer term sale of some kind, thinking their way through the M and A market, thinking their way through the pros and cons of private equity and so on. And Tim really knows that territory. And so this was just a really interesting conversation.

I’ll share two thoughts and maybe they’ll provoke or inspire a thought on your part as well. First of all, I want to reiterate the last thing I said just moments ago, as we were wrapping up the the interview is I was wrapping it up with with Tim, which is just precisely because as he said multiple times, the devil’s in the details, there are clauses and opportunities that can be made or missed, but if you.

Long story short, you do not want to go into the process of selling to anyone, whether it’s private equity or the 20 or, a merger with someone in your peer group. You really just don’t want to go into that process without having an expert alongside you. There are all sorts of great consultants out there who do that.

And by the way, the sooner you engage with them, the better because they might be able to point you in the direction of how to build your business, grow your business, optimize the balance sheet and so on to improve valuation. So you really do want to have [01:00:00] that relationship. And I guess beyond that, I have spoken, I’ve interviewed.

of folks who are in Tim’s position, I don’t know whether or not he considers the 20th platform, but certainly a roll up part of that organization is a roll up. And I’ve spoken to CEOs of other roll ups out there and gotten into the piece of the conversation about, what. Is there a viable future for that smaller MSP that just does not want to sell into something significantly bigger and and quite often these platform CEOs or leaders will say sure, there’s always going to be a market.

For the small business that really only wants to do business with other small businesses and wants an MSP who, as I think we’ve spoken about before, Erick, is going to drop by the office now and again with a box of donuts for no other reason than just to check in and see how things are going. It’s hard for a platform to skip.

So I, I’ve heard a lot of people affiliated with these much, much bigger MSPs saying There is a future for that smaller MSP out there. Tim is much more bearish on that outlook for the smaller MSP, and I am not saying he’s wrong. It, every time I have this conversation with them it’s sobering for me because at a minimum, it’s going to be challenging for that smaller company to compete and that business as usual probably won’t get that job done.

You’re going to have to think about specialization and some of these other things that we’ve discussed.

Erick: Yeah, rich. It’s, there’s a, I think there’s a mindset that every business owner has that dictates what their strategy is. So we, you and I both know lots and lots of MSPs that don’t want to grow, that are just content.

Having a lifestyle business and nothing wrong with that. I know, colleagues of mine, friends that run lifestyle business, MSPs, and that’s where they are in, in, in their mindset. And that may change. Sometimes it changes. Sometimes it doesn’t, there are other MSPs that want to grow quickly and want to grow through acquisition.

Right to build something larger that then provides more value for everyone and then exit, at some point in the future and take care of all the shareholders and stakeholders. And then there are other MSPs or other business owners that want to build something to a certain point whatever that milestone is, whether it’s revenue or time in or whatever, and want to be acquired.

And so there’s opportunity for all here. And I think that, as we move toward less infrastructure and less on premise support necessary or desired by the service provider to deliver and more toward the cloud and more toward hybrid workforce management and more toward cyber security and SaaS application management.

I don’t know how much additional value bringing in the box of donuts that you mentioned over time provides to small businesses. And I think that small businesses that MSP serve go through the same thought process. There are some small businesses, when I had my MSP, Rich. There were lifestyle businesses, did not want to grow much larger than a handful of staff or employees.

And then there were other ones that were on a growth path and others that were, growing too fast for us to support. And the best clients for our MSP rich were always the ones that were growing because the ones that aren’t growing, it’s tough to continue to add value when there’s no opportunity to show that value, hope that Business growth. So it’s interesting that Tim has tapped into this this opportunity for MSPs that have desired to grow by being acquired and be part of something larger, because, I’ve known MSP for I’ve known Tim for a long time, Tim, I did some work for Tim and the 20 a while ago.

And got to know his team and he shared some of this philosophy with me and he’s doing things a lot differently from what I understood than some of these other typical roll ups that we see out there, Rich. So what are your thoughts?

Rich: Yeah. Honestly, we probably don’t have. Time to go into all the different ways that the 20 is a, it’s its own beast.

It really is. It’s a fascinating thing. Tim was talking about how there are really two parts of the organization and there’s the 20 group and that’s for anyone, you still own the business. But you gather [01:05:00] together with other MSPs who are looking to grow and share resources and so on.

And then there’s the rollout. As Tim was saying, there, there is not a single private equity dollar involved in any of this 35 acquisitions and and counting no private equity, they borrow money from the bank. This is just not how it typically works in the industry, but it seems to be working for them.

And it’s just, it’s another option, it’s very easy to say. You’re either gonna have to figure out some way to go it alone. That’s a little probably different from what you’re doing now, or Become part of a rollout. There are a lot of, if you make the decision to be part of something bigger, there are just a lot of different options out there, a lot of different models, pluses and minuses, again, a good reason to be working with a consultant to understand the many different kinds of private equity acquirers out there and how do they compare to something like the 20 and it’s a complicated story.

Erick: Yeah. And I’ve done my share of work with MSPs in that area. And I will say that, it’s probably, it could be the largest sale of your life. So don’t go it alone. I think that’s sage advice. Get someone that can help guide you through.

Rich: Okay. And with that sage advice, we have time for just one last thing, And the question I will ask you, Erick, is there anything mayonnaise doesn’t make better?

And I asked you that before. You would probably, if you were drawing up a list of things that maybe mayonnaise doesn’t make better, nuclear fusion might be on that list. And yet you would be mistaken. As we learned recently, thanks to some scientists at Lehigh University who are working on nuclear fusion.

The challenge in fusion is you’ve got these hydrogen atoms that you’re trying to fuse. It takes a lot of energy to do that. There’s a technique that the people are coalescing around now is maybe the most promising that involves lasers. But the fusion doesn’t happen as smoothly and easily as theory might say it wouldn’t, and so scientists are trying to figure out where are the issues there?

How do we fix those? It’s actually explainable. expensive to experiment with the lasers and the hydrogen atoms and figure out what’s going on and how to improve it. But you can actually, the folks at Lehigh found make a lot of headway on that path using mayonnaise. And I will read this to you.

This is from one of the scientists who discovered this. We use mayonnaise because it behaves like a solid, but when subjected to a pressure gradient, it starts to flow. As with a traditional molten metal. If you put a stress on mayonnaise, it will start to deform. But if you remove the stress, it goes back to its original shape.

Mayonnaise, behave, under pressure, behaves a lot like hydrogen. atos. And this is enabling the folks at Lehigh University and anyone else who learns from their example to conduct some useful experiments in nuclear fusion with mayonnaise.

Erick: I can imagine the team that manages these types of, out of the box approaches could be like, the condiments team, right?

So I wonder what else they’ve tested. Relish, I’m thinking of all the things that I add. To my sandwiches, whether it’s tuna or cold cuts or whatever, but mayonnaise, who knew? Who knew? Who knew?

Rich: Everything’s better with mayonnaise, folks. And that is all the time we’ve got for you this week on this episode of the show.

We thank you so much for joining us. We’ll see you again in a week’s time with another episode. Until then, I will just remind you that this is both an audio and a video podcast. So if you’re watching us on YouTube but you’re into audio podcasts, wherever it is you get those, Spotify Amazon, you name it, you’re gonna find us there.

If you are listening to us on an audio platform, but curious to check us out on video, the place to go is YouTube. Look up MSP Chat, you’ll find us there. Wherever it is you do find us, please subscribe, rate, review. It’s going to help other folks like you find and enjoy the show. This program is produced by the great Russ Johns.

And you know what, Erick, I am going to rectify a mistake I’ve been making for 38 episodes now and point out, That Russ Johns produces the show, but your son, Riley Simpson edits it. They both do phenomenal work and they are both part of the team here at channel master that can help you with a podcast of your own.

We do all sorts of other great things for our clients, channel mastered. And you can learn all about that. www. channelmastered. com channel mastered has a sister company called MSP mastered. That’s Erick working directly with MSPs to help them grow and optimize their business to learn more about that.

Go to www.mspmaster.com. So once again, folks, we thank you so much for joining us here in the show. We’ll see you again in a week. Until then, please remember, [01:10:00] you can’t spell channel without MSP.