Episode 51: Two Pack a Day Habit

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Don’t worry, Rich hasn’t acquired a serious smoking habit recently. It just sounds like he has, because after five straight weeks on the road his voice has quit on him. That didn’t stop him and Erick from diving into how communities like TD SYNNEX CommunitySolv can accelerate go-to-market ecosystem growth, though, and why every MSP should fire their worst customers regularly. Then Rich is joined by John Holland of Corporate Finance Associates for a look at the M&A landscape for MSPs coming out of 2024 and heading into 2025. And finally, one last thing: A hard rock concert held over 8,000 feet underground, surrounded by in-real-life heavy metal.

Discussed in this episode:

John Holland on M&A: “Cybersecurity, Consolidation, IT Services Driving ‘Robust’ M&A in 2024”

Canadian rock band plays world’s deepest concert in a mine

Transcript:

Rich: [00:00:00] And three, two, one blast off ladies and gentlemen. Welcome to another episode of the MSP chat podcast, your weekly visit with two talking heads, talking with you about the services strategy and success tips you need make it big and manage services. My name is Rich Fleeman. I am the chief content officer and channel analyst at Channel Mastered, the organization responsible for this show.

I am also a co host of this program. I am joined as I am every week by our other co host, our chief strategist at Channel Mastered, Erick Simpson. Erick, how are you?

Erick: I’m doing really well, Rich. I’m done with travel, keeping fingers crossed for the rest of the year. But I want to toss that question back to you, Rich.

You are still traveling and I hear. It’s catching up with you. How many trips have you made this year to get you to where you are now? And now is when it starts to catch up with you

Rich: boy. That is a great question. I have not totaled up Trips this year. It’s a lot. It isn’t in any typical year. As we were discussing off the air I sound i’m guessing to regular listeners or viewers awful I do not feel awful.

What you’re hearing now is the after effect of a cold. So we were together last week at a conference. And I came home with some kind of bug from that. But was well enough to fly out to the TD Cinex event here in Fort Lauderdale, where I am right now. I have been running around like a maniac, as is my want, at events all day today.

Doing a lot of interviews, talking to a lot of people. And I guess my voice hasn’t recovered entirely from the cold. Which is why it’s starting to go on me right now. And I can’t think of the The celebrity who do I sound like right now Erick? I don’t sound like me. I sound like somebody who smokes a lot.

Erick: You’ve got, if you had the right inflection, you would, you almost have the timber of a Christopher Walken a raspy a little bit, it’s tough to replicate that that actor’s voice, but yeah you definitely need some rest, my friend. I’m just wishing that you get through the rest of the conference and get back home and are able to.

Just recover and and recuperate.

Rich: Thank you very much. I’m about 48 hours from getting home. This is my last trip of the year and I will have plenty of time to recuperate from then. But for now, before I lose my voice entirely, let’s plunge into our story of the week which comes to us from the TD Cinex event that I’m attending.

And in fact, it comes from one of the interviews. I did earlier today. And our mutual friend Jay McBain an analyst at Canalys he has spoken many times. He’s probably even spoken on the podcast before about the power of ecosystems for vendors going to market for solution providers, for hardware makers, for software makers, for MSPs.

Everybody does better when they are part of an ecosystem of technology partners going to market together because a typical customer is going to have seven or more needs that have to come together for a solution to be fulfilled. No one is going to be able to fill all of those needs. So everybody needs to come together into an ecosystem.

Now I was interviewing Christy Kirby this morning, she her new, brand new job is Senior Vice President of North American Communities at TD Cinex, and one of the things that she will be doing in this new job and that TD Cinex is looking to do Is really bringing the community members that TD Cinex has in its various community organizations together as an ecosystem and really do a great job of keeping partners in touch with partners so that they can go to market together putting partners in touch with various facets of TD Cinex so that they can take advantage of services, for example, TD Cinex offers and build those into solution.

So they really want to turn. A community into an ecosystem and help everybody do more business that way and make more money that way. But one of the things that I brought up in the conversation with her is, and you will know this well, Erick, historically, one of the things that has kept not just MSPs, but IT providers generally, has made them a little bit leery of partnering with other partners, is this idea that if I open the door even a little bit to my accounts, I might lose some of those customers to this other person that I’m partnering with.

And we were discussing the fact that a community being part of a community can help bring that barrier down. Because you’re not just. Going to market together with another partner, you’re going to market together with another partner who is a part of this community that you belong to, [00:05:00] who could be ostracized by that community if they take advantage of you or cheat you.

This is somebody who you’ve probably met at community events maybe had a drink with at an event like the one that I’m attending right now, there’s a personal relationship there. And so it really just opened my eyes to something that as we’re talking now, Erick, I imagine I will be writing about shortly for my blog channel Holic, which is that an ecosystem is a very powerful thing, but it gets to be even more powerful if you can merge it, if you can blend it with.

With a community of partners who can work together as an ecosystem, not something that’s necessarily easy for every partner, every vendor, every distributor to pull together, but community and ecosystem together can be a very powerful combination.

Erick: Yeah it’s a great initiative, Rich, and, I’ve, you, both of us have witnessed, attempts at this kind of thing over the many years that we’ve been in the channel, and we’ve seen some spectacular failures, but we’ve seen some tremendous successes as well, and I think some of the cornerstone non negotiables to get today’s MSPs who are, I find rich, much more mature and much more willing to share.

And in the spirit of the community, these communities. And the different communities that we’ve both been parts of over the years have been around for a while. And there’s value in those, but there’s typically some rules of engagement, right? There’s some understandings. If you’re going to do some teaming or any kind of sharing.

Think of it as, an exponentially gigantic kind of a peer group. Like when you join a peer group. You’re in a group of your peers and technology provider or MSPs, we all sign an agreement, rules of engagement, we, do no harm and be good to each other kind of a thing, right?

So I’m certain that there’s probably some of that thought, if not already in place, but will be part of this that says, Hey, to be a member of the community, you’ve got to behave in this manner and here’s the rules of engagement. And Hey, if you violate it, then you’re out a thing, right?

So it’s not just the members themselves, self policing themselves. In my opinion, there has to be some way to, to raise a hand. With whoever’s managing the community and say, Hey, there’s some stuff over here that I need to talk to you about and see if we can’t strain it out and have them take take some sort of an action that will build more confidence and trust.

And the community members, in my opinion,

Rich: and it’s interesting earlier today, I had an opportunity to do a an interview with Bob Stegner channel legend, Bob Stegner, who runs marketing for TD Cinex. He recently announced that he was going to be exiting the company after many years at TD Cinex and in the channel generally, so this is probably my last interview with him, but this topic we’re discussing came up.

And he very much said, and and this is a guy who is a huge believer in partner communities. And so he absolutely believes communities can facilitate those partner to partner relationships and partners who are community members can very successfully and effectively go to market together.

But he did say, even in that case. Where it’s a relationship that came into being via a community and a face to face meeting and a community get together. You want to have rules of engagement. There need to be rules in place about how you’re going to work together and what is or isn’t legitimate. So there are no misunderstandings.

So yeah. It’s not going to be quite enough to to partner with other partners on the basis of a handshake because you’re both a member of some TD Cinex, Ingram micro DNH kind of community but it is going to be easier basically I think for a lot of people to feel comfortable partnering with other partners, if it’s not someone that they were introduced to by a third party meta is somebody they feel like.

They have a personal relationship with, yeah and, the comments you made a minute ago, rich about being, being ostracized or shamed, in the community reminds me of a, a very specific scene in the game of thrones series, shame, they, nobody wants that.

Erick: So I, I support communities I participate in communities, I’ve benefited from communities. But again, there’s got to be some ground rules and as, as long as everybody agrees and plays nice with each other, then it can be tremendously powerful. And, there, there may be a bad apple here or there, but generally it tends to operate the way we expect it to, because like I said, now, when I started my practice, 15, 20 years ago, wherever it was.

There was a lot of fear, uncertainty, and doubts like, no, I’m not going to share any of my trade secrets. Was one of the, early MSPs that said, I’m going to share everything about what we do. And that’s how I, built all these relationships because the rising tide lifts [00:10:00] all boats.

Tips, right? And that’s what these communities are forced to support the members.

Rich: So if you partner with other partners and the other partner you go to market with does steal your customer you are going to fire that partner. And it’s time to move on to our tip of the week here, which has to do with another painful firing scenario.

Erick: That’s right. Rich, as we near the end of Q4, our thoughts start focusing on You won. And what does that mean? That means that it’s a new year partners are sitting there thinking about renewing agreements with clients. And my tip of the week is evaluate and assess those clients from an A, B, C, E F perspective, right?

We want to look at our lowest performing, most. Noisy, aggravating, least profitable clients, rich, and things at them. We want to build an organization that serves the types of clients that see the value in our strategic relationship, that trust us, that allow us responsibility. You support them and guide them in their business growth journey through our strategic consulting.

It’s not simply about, landing, desktops and things like that anymore, rich. We’re moving into a new era where hardware is, it is becoming less and less important in terms of what value we bring to our clients. As we move more toward the cloud, as we strengthen their cybersecurity postures, as we support.

Work from anywhere, remote offices, travel, home, all of these things, and as we’ve been talking about rich, the, the impending impact of AI and, business process optimization, and these more strategic services that we deliver to these clients that create much more much, much more longevity stickiness and growing client lifetime value.

We want to work with clients that are in growth mode. If they’re stagnant. That means we are basically just maintaining the status quo. And if they are stagnant and unprofitable, that’s even worse news. Rich, we’ve talked about it on the podcast before. In fact, if we’re serving one particularly poor customer and we exit them, we may be able to serve potentially to a clients without having to change staff or add more staff.

So there’s an efficiency. Argument to be had. There’s a staff satisfaction and morale improvement argument to be had. And there’s a profitability and a scalability argument to be had that supports us, our, as our good friend, Carl Palachuk says, pruning our garden weeding our garden.

And I like the analogy, Rich of, thinking of our clients as, you let’s say that we’re we’re a sports. Team owner, right? We want to get to the championship every year. Guess what? In any professional sport, pick your sport, right? Your players in this scenario are your clients, and you’ve got to make player trades in order to get the right players to get you to the championship.

And this happens every single season, rich. So that’s the analogy I want to share with everybody. Is look at your clients, you’re trying to make it to the championship, which means the highest level of profitability, scalability, at least amount of noise and pain and frustration and start. Making some player trades, trading out some of these C, D, and F customers so that you could bring on more A and B coin.

Rich: I’m going to give you another analogy that might be a little bit more relatable to folks in our audience who don’t own or run a professional sports franchise. And this is not my analogy once upon a time on a different podcast than I used to cause. I was interviewing Dawn Sizer.

She is a very smart, very successful MSP in Pennsylvania. And she likens the process you’re talking about, Erick. To going into your 401k and getting out of the investment vehicles that are not performing well for you and putting more money into the vehicles that are, or, shifting assets from underperforming funds to other funds that you think have reasonable evil perform better.

That, that’s investing in yourself and your future. The process you’re talking about is investing in your business in exactly the same way. And so it’s counterintuitive For a lot of MSPs, depending on where they are in their maturity to fire a customer. But those same people wouldn’t think twice about selling a stock, getting out of an ETF, getting out of a mutual fund that isn’t performing for them.

And you’ve got to get into that same mindset when it comes to your customers. If you want to maximize your return on [00:15:00] investment, you want to be as smart as possible as where you are investing from a business standpoint in terms of your customers.

Erick: I really like Don’s analogy there. It’s portfolio management, everybody.

That’s what we’re talking about.

Rich: Okay. So we are going to take a quick break here when we come back on the other side. It will just be me for the next segment here. Cause I’ve got an interview that I also recorded a little bit earlier today. So my voice is still going to sound crazy like it does right now, but I took advantage of the fact that.

That one of the speakers here at the TD Cinex show is John Holland. He is a sell side MNA advisor. He works with MSPs, but also it providers of various other kinds. I’ve interviewed him before for articles I’ve written in channel Hall, and so I seized the opportunity to sit down with him face to take a look at the MNA landscape for managed service providers.

Here towards the end of 2024 and then heading into 2025, what he foresees going forward. That conversation is coming up in just a few moments on the other side of the break. Stick around folks. We will be right back.

All right. And welcome back to part two of this episode of the MSP chat podcast or spotlight interview segment. And we are recording this just about a week before Thanksgiving, which is to say we are. Coming up fast on the end of the year, which is an excellent time to look back at at the mergers and acquisitions landscape and managed services in 2024.

And to look ahead to what we maybe can anticipate in 2025. And thankfully for me I’m here at the TD Cinex Community Solve conference with someone who is perfectly positioned To discuss both those topics with me, he is John Holland. He is the Managing Director of Corporate Finance Associates.

John, welcome to the show.

John: Thank you very much, Rich. It’s a pleasure to be here.

Rich: We have spoken before, but for folks in the audience who are meeting you for the first time, tell them a little bit about yourself and about CFA.

John: Okay. I started my career in the IT channel around 30 years ago at the distributor Ingram Micro.

I worked there for a few years and then went to a hardware manufacturer called Kingston Technology which makes memory for computers, USB drives, and all sorts of things. That company exploded, became about a 13 billion company, and I became the vice president in charge of European channels. I lived in Europe for 10 years.

And then I was in charge of the U. S. channel for another eight years or so. And so over that 20 year period or so, I developed friendships, relationships with the key executives throughout the U. S. and European IT channel. And about 10 years ago, I really wanted to climb a new mountain. And for me, that mountain was mergers and acquisitions.

I’ve been curious about MNA for a long time. And I became. I’m an M& A advisor and over the years, I’ve earned several kind of Boy Scout badges in the M& A space. I’m an investment banker, I’ve licensed with the federal government with an entity called FINRA, the Financial Industry Regulatory Authority.

And I’m with a firm called Corporate Finance Associates which is an investment banking firm founded in 1956. We have offices throughout the U S and the world. We’ve orchestrated around 4, 000 mergers and acquisitions since the founding of the company. We have about a dozen industry practice groups and from oil and gas manufacturing and so forth, and I’m in the information technology practice group.

So my colleagues and I focus on representing IT services businesses, and we help the owners of those companies. Sell their companies. So when I speak of it services businesses, it’s a full range of it solutions providers from managed service providers with recurring revenues to value added resellers that generally sell product hardware and software to everything in between systems integrators, it consultancies it professional service services firms and so forth.

And typically the companies. That acquire our clients, probably held businesses are private equity firms or strategic buyers. So private equity firms are the financial buyers that tend to acquire companies and add on and scale up and then sell those companies within a three to seven year period of time.

The strategic buyers are firm has sold companies to the likes of CDW. And E plus to a very large IT solutions providers in the North American market. But there are smaller strategic buyers and we’ve sold businesses to many of those as well. [00:20:00]

Rich: I mostly want to concentrate on the the MSP market with you, but I am curious because there’s certainly been a perception for a while.

That the acquisition. Target that a private equity firm or any other investor out there would be most interested in is an MSP. They love the MRR model it’s, so is that what you’re seeing that the companies that are most is going to have an easiest time selling and are maybe going to get the best valuation for the business are in that managed services space?

John: It’s very hot. It’s a hot space. MSPs have been in high demand in the M& A world for.

There are many private equity firms that are orchestrating roll ups in the U S and Europe and in other parts of the world, roll ups of managed service providers the MSP space is still very fragmented. There are some pretty substantial MSPs, but the vast majority of MSPs are small.

And then when I speak of small, less than 3 million in revenue, let’s say. Okay. There, there are many of these private equity firms that will buy the smaller MSPs at lower valuations. So and when I speak of evaluation lower multiple and a multiple on the earnings and the parallel there would be with real estate.

You might sell your house and dollars per square foot. And typically the language spoken when selling a business is. The EBITDA multiple, the earnings multiple. So typically a smaller MSP might sell for, let’s say a multiple of six or something like that. But the larger MSP might sell for a multiple of 12.

I was, so these private equity firms are busy going around and acquiring the smaller MSPs and trying to scale up the businesses as quickly as possible to get it to be a much larger entity. That will then be sold to another buyer for that higher multiple, and they arbitrage the difference basically, so that’s what goes on, and that’s what’s really driving M& A in the MSP space.

Rich: Now, as you say MSPs have been a hot commodity for a while. How, if at all, has the landscape for M& A and the managed services world changed over the course of the last year? Where are we at today versus where we were, say, a year ago?

John: Okay. That’s a great question. And before I come to that let me explain briefly.

Why acquirers are so attracted to MSPs. And I’ll draw a comparison to value added resellers. So the value added resellers, as I mentioned earlier, are generally defined to be these it solution providers that sell prod hardware and software. Most bars provide a little bit of service, but not much. There’s very little interest in the M& A world in VARs because VARs generally are viewed as commodity resellers that don’t have a deep, long standing relationship with the customer, and the customer can VAR very quickly and switch to another VAR.

In contrast, MSPs have sticky long term relationships with customers, they have the recurring revenues, and Some MSPs just have handshake agreements on the recurring revenues. Some have one year agreements, some have two year agreements. But any sort of recurring revenue, the longer the better, enhances the valuation, attracts more buyers and that’s why the MSP space is so hot in M& A right now.

Okay, coming to your question about what is the state of M& A today relative to a year ago I’ll frame it even, I’ll have to rewind even a little bit before. So before the pandemic, let’s say 2019 the IT services M& A space was pretty hot. There we observed a fairly large number of M& A transactions in 2019.

And then once the pandemic started and there was a chill momentarily, but then the governments from around the world quickly responded with fiscal stimulus. As well as aggressive monetary policies. So interest rates went negative or, below zero. And in M& A, low interest rates are like rocket fuel.

And so what happened around the world at all of the, all sorts of industries, but we especially saw it in IT services, was the, Volume of MNA transactions skyrocketed in 2021 2022. Absolutely skyrocketed, like record years. Worldwide, all sorts of industries and we, saw that especially in MSPs because of all the attractive characteristics that I just talked about.

But even VARs and systems integrators, everything. Demand was robust, private equity, money was flowing, capital is flowing, capital was cheap, and especially the private equity firms were just gobbling up companies left and right. Then in 2023, [00:25:00] governments around the world tried to calm the inflation by raising interest rates.

And as interest rates climb the higher rates serve as a break to M& A activity. And so we saw the volume of M& A transactions drop significantly in 2023 and year to date 2024. That’s not to say that the market is cold right now, it’s actually still robust. And if I compare the volume of M& A activity today, Our year to date with 2019 year to date, actually, there’s more transactions this year than before the pandemic.

So the M& A market is still very healthy and even more healthy in the I. T. space because I. T. offers growth potential that other industries don’t offer. If you look at a short term comparison and you just compare to 2023. Yeah, the volume is down significantly, but again, if you put it in more of a historic perspective, we’re still having a great year for M& A.

And I think the consensus on Wall Street is that 2025 will be an extraordinary year for M& A. Because the federal reserve has been reducing interest rates. I’m not certain, but it’s likely that the federal reserve will reduce interest rates in December. There’s a good chance that the federal reserve will continue to reduce interest rates next year.

And then there are countries around the world that are doing the same thing. So again, lower interest rates are rocket fuel for M& A. Then I think that there’s another element to this. And I don’t want to make a political statement and I’m not trying to make a political statement. But, um, the elections resolved uncertainty.

In the markets and the capital markets and uncertainty translates to risk as far as investors are concerned. So once the election was resolved especially without any dispute or, violence or anything like that the capital markets were relieved. You saw in the stock markets a lift and that could also be because.

Wall Street and Main Street believe that the Trump administration will reduce taxes and regulation which generally benefit business enhanced profitability of corporations in the country. The outlook for M& A for 2025 by Lake is really great. It could be a great year. It could even outpace.

2022, during the pandemic.

Rich: One of the things MSPs will always ask about with respect to the M& A market is, what, where are the multiples? Where were they a year ago? Where are they now? And if we’re bullish on 2025, where do you think they might be going forward?

John: Let me pull out my sheet here.

Bear with me here. Sure. Multiples. All right. Okay. I, we have real life data from aggregate transactions and bear with me here.

Okay.

So first of all, as I said, the volume of M& A transactions in 2022 skyrocketed valuations went up in 2022 intuitively as interest rates elevated in 2023. And remained elevated the first half of 24, 24, you would have thought that valuations of MSPs would have fallen. Theoretical perspective, that’s what should have happened.

We didn’t observe it. We conducted an M& A transaction of a, of an MSP in December and we were pleasantly surprised, the chart I have here shows. And I’m going to put an important footnote on this, first of all, the average MSP sells for a multiple of, let’s say, seven to eight or something like that.

But there’s a just enormous footnote that that needs to be considered and that is every business is unique and there are certain characteristics that tend to elevate multiples, attracting more buyers and scale is one very important aspect to that. So a large MSP might sell for a multiple of 13, but a small MSP might sell for a multiple of four, for example.

So when I speak of an average, I’m pulling all that together. So I wouldn’t want a viewer to hear me say that, oh, the average is 78. So my business should be worth a multiple of 78. That, that, that isn’t the case. We, We haven’t observed multiples falling and and I think it’s because just MSPs are defying gravity because they’re just so hot.

The recurring revenues are just so attractive for private equity firms. So private equity firms are [00:30:00] not just looking at MSPs they’re looking at All sorts of industries that offer the same phenomenon, that recurring revenue, the recession resistance. For example, there are roll ups in HVAC companies.

So the air conditioner, heating companies that have maintenance contracts, especially with commercial clients. Landscaping businesses, I mean the big landscaping businesses that service Public institutions, a public sector, corporations and so forth. There are roll ups in that space, just like in the MSP space.

And and so because

these businesses are so attractive private equity firms are just gravitating to these businesses. And that seems to be defying kind of the laws of economics that we would have expected the multiples to decline.

Rich: Have you seen, or are you seeing, do you anticipate seeing changes in the kind of company that buyers are most interested in buying in terms of EBITDA numbers MRR percentages, et cetera?

John: Each acquirer has a set of acquisition criteria and certain standards. So there are some acquirers that consider MSPs only if the recurring revenues exceed. 50 percent of total revenues or 70 percent of total revenues. I prefer not to define MSPs by the, by, by any such standard.

I would say that.

When a business goes to market, the acquirers, the prospective acquirers, judge the business based on the characteristics of the business based on the employee turnover, based on the customer churn, there’s all these various characteristics and the higher the percentage of recurring revenues out of the total, the More attractive that businesses to acquirers and the larger pool of acquirers that would make offers on such a business.

And that tends to raise the multiple. So interest rates are working their way down. We have more economic certainty than we did before. If you look ahead to 2025, are you anticipating more of a buyer’s market, more of a seller’s market? Is there still a lot of money chasing high quality MSPs right now?

Rich: What kind of dynamic are you anticipating there?

John: I, for MSPs, I would say 2025 should be, A great seller’s market, but I don’t think that 2025 will be a great seller’s market, or even maybe a seller’s market for certain other kinds of businesses. So for example, a business owner who has a small value added reseller, and by small, let’s say, I don’t even know, it’s a relative term, but let’s say 3 million of revenues or 5 million in revenues or something like that.

Even if you would consider it a seller’s market overall with low interest rates, I would say that business would be hard to sell because that small VAR has no recurring revenues is largely selling commodity and is too small to attract most acquirers. Most acquirers are looking for businesses that have a minimum of, let’s say, 1, 000, 000 of adjusted debit debt.

And I’ll draw a parallel with when someone searches for a house, they go on Zillow or realtor. com or whatever, and they put in their parameters. What’s the price range? And let’s say they put in, I don’t know, let’s say 700, 000 or whatever. They want to buy a house between 700, 000 and a million dollars, let’s say.

Once they put in those. Those parameters, they will not have an opportunity to look at anything smaller than 700. Most private equity firms have their parameters and it might be a million dollars a year. And above for justity, but and they won’t look at anything less. They can’t it’s forbidden in their companies.

That is it. And some private equity firms put it at 2 million. So put it at 3 million. And they’re very rigid about that. Strategic buyers. Bigger companies buying smaller companies, a little bit more flexible about that. So anyway, with the small bar, generating three to 5 million in revenue, and I don’t know, let’s say 300, 000 or 500, 000 in EBITDA.

It’s just too small to attract most buyers, and that, that business probably won’t find a buyer, actually. My advice to that business owner would be, keep going, scale that business up, get it above 10 million in revenue, get it above a million in adjusted EBITDA, and then there’s probably a buyer for that bar out there,

Rich: in terms of MSPs, there’s always a trade off basically. If you wait [00:35:00] to sell and the business is doing well, it’s going to be an even better business a year from now than it is now. You’ll get that much higher evaluation when you sell. On the other hand you’re one Catastrophic breach away from being worth nothing.

So there’s risk in waiting as well. There’s no one right answer here, but particularly given that 2025 does look to be even more maybe of a seller’s market than it is now. What kind of advice do you give that MSP who’s trying to decide, do I wait? Do I sell next year? Do I, how do you think your way through that?

John: Oh, that’s such a great question. So often people think that my profession really just involves numbers, it’s finance, it’s investment banking. We look at a lot of income statements. But at the end of the day our business involves helping humans sell a company. And the most important thing that we tell business owners is that They need to do soul searching.

Before selling a business owner really needs to do soul searching and really really decide, is this really what I want to do? Do I really want to sell my company now? Other people might not understand that. You could make 10 million, 20 million, 30 million, whatever it is. It’s a lot of money.

Sell sell, like Kramer says on TV. But it’s very difficult because a lot of business owners have their self identity from the business. And they’re self worth and they get excited going to work some days more excited than others. Some days have headaches. But it is their identity. And if they sell that business, then what?

They really need to consider that. They really need to do soul searching. Now, I don’t know. If they’re determined to sell the business then the next question is how do they want to exit that business? There are different ways to exit a business. So often business owners think the exit is sell 100 percent of the company, then retire and exit the business.

But that’s actually not what many buyers want the seller to do. So typically a strategic buyer, a bigger company buying a smaller company will have a transition period for the seller and then let that seller go retire and everybody’s happy with that. But private equity firms typically want the seller of the business, the founder of the business, To stay for longer than just a transition.

The whole deal structure and the business model of the private equity firm is to forge a partnership. With that seller. And they’re sincere about that word partnership. They want the seller of the business to roll over equity. Or another way of phrasing that is to retain an interest in the company for three to seven years until the private equity firm sells that business or takes it public or does whatever.

So often we see private equity transactions involve. The seller retaining the buyer, the private equity firm will buy, let’s say, 70 percent of the equity in the company, and the seller will retain, let’s say, 20 to 30 percent of the equity in the company. They’re partners and the private equity firm wants the seller to stay in the company as the CEO continue to drive that business forward.

Now, some business owners. Can’t tolerate that, sometimes it’s the strength in the kind of individual mannerisms of an entrepreneur. That got the business to be successful through all the tough times, but sometimes that kind of individualism doesn’t blend well in a larger entity with a new boss and so forth.

So that’s the soul searching. The business owner needs to decide Am I better off selling to a big company like the CDW and just retiring? Or do I have fire in my belly? Do I think I could work with a private equity firm and and try to grow this business? Now there’s something called the second bite of the apple for that business owner who retains an interest in the company.

And grows the business in partnership with that private equity firm over that three to seven year period of time to the private equity firms are very skilled at scaling businesses and imposing a kind of financial discipline on the company that that boosts the value of the business, but that might be a challenge or an annoyance.

Or the founder of the business who used to run the business as he or she preferred. And then the private equity firms are masterful at scaling businesses through acquisition. So let’s say they buy one company, a platform in Dallas. And then they will search for add ons [00:40:00] in Seattle, Los Angeles, New York, Chicago, Tampa, to build a national company with a national footprint, whether it’s in the IT industry or, some other construction industry or something like that.

And they’re scaling the business geographically but also in terms of revenue and most importantly, in terms of the earnings, the adjusted EBIT so that they can get that business to be vastly more profitable. and more attractive to a larger pool of buyers or the public capital markets. Then they’ll take the company public or they’ll sell it to a private equity firm for a much, much higher valuation.

So the founder of a business who sells to a private equity firm, retains an interest and then it’s the second bite of the apple can have a really handsome reward. But it’s a stressful ride. It could be two years. It could be seven years. And there’s a private equity firm that’s very interested in how the business is being run and that could cause tension and stress and unhappiness.

Oh, so that’s, again, when I said about soul searching, it’s really important to soul search now, as far as timing, should I sell my business in 2025 or should I wait until 2026? It’s really up to each individual. They just really need to search their heart and decide what’s in their heart, consult with their families their friends and, themselves.

It’s really, what do I want to do? Most of these business owners. Have enough money in the bank, they could probably retire, but but maybe they believe one more year will boost the valuation of the business if they see a lot of growth coming up. Now the risk is, as you say, you use the word risk, Rich, and that is, um, the future is unknown.

We don’t know if 2025 will involve a war with Iran or a war with Russia or serious conflict in the Middle East. We, we hope for peace in 2025 and 2026 but we don’t know. And that’s just one dimension of global risk. There’s also a risk of eventual recession. We’ve had a good run for many years.

We’ve. Then played with inflation. But other than that, the economy has been pretty robust. So we’re due for a recession. I think the consensus is that there’s no recession around the corner, within the next few years, there probably will be a recession. It’s much more difficult to sell a business in a recession.

Especially if that recession is tearing it at your revenues and your earnings so it’s better to sell the business when things are looking good. Sometimes business owners will keep a business and they see that they’ve got a nice pipeline for the next two years. They’ve got, they’re introducing new services, let’s say artificial intelligence, something or another.

So let’s just stay with it. Pedal to the metal, keep growing this business, and then maybe 2027 I’ll sell my business. 2028.

Acquirers are interested in a business that has growth potential. If you’ve tapped out all the growth potential in the business and you really don’t have kind of future ideas to grow the business or a pipeline, then the business will be far less attractive to acquirers. So I’d argue that it’s better to sell the business if you’ve got a great track record of growth for a few years, and you think the outlook is really positive for the next couple of years.

But again, it comes down to what’s in someone’s heart. I can’t give someone advice on when is the right time to sell a business. It’s really what’s the best for them, for their family and what what type of deal structure, what type of buyer seems to be more aligned with the objectives of that founder or seller of the business.

Rich: The other variable I want to get your take on and this, potentially goes applies to an MSP with an exit horizon that is beyond, 2025, 2026. But you were talking about how there are these buyers out there rolling up. MSPs and creating some very large MSPs in the process.

So for the smaller MSP out there, regardless of whether or not they’re looking to sell soon, do you have any advice, what to think about, as you’re going to find yourself competing with bigger and bigger MSPs. Each year going forward for now, how should that factor into an MSPs exit thinking for a smaller MSPs exit thinking?

John: The MSP space is still very fragmented in contrast to, let’s say the VAR space. The VAR space is much more consolidated. You have some enormous players in the VAR world. I’ll put. Although they probably wouldn’t like this title, I’ll put CDW in that category, CDW mostly sells product, but they do have a lot of services to billions of dollars of services.

I put insight in that category connection and so forth. So if you think about the top 10 [00:45:00] VARs in the United States they represent a pretty significant total share of the VAR market in the United States. Thanks. In contrast, I’d say the top 10 MSPs in the United States represent a pretty small total percentage of the MSP landscape.

So things are still fragmented. I think they’ll be fragmented for a while, although there is a land grab going on in the MSP world in terms of M& A. And the consolidation is happening fast and furious, and I think it will continue happening for the next five years or 10 years. It’ll happen for a while.

How that will impact an owner of a small MSP. There are different, again, different objectives, different owners have different things on their heart when it comes to the purpose of their business or the goal of the business. There are some MSP owners or IT services owners in general who.

Have fire in their belly and they want to keep growing and growing the business. In contrast, there are other owners of MSPs or other it services, businesses that are just comfortable and they’re running what is sometimes called a lifestyle business. And, um, that, that lifestyle business.

I’d say for someone who’s running a small MSP, who has a lifestyle business, who really has a tight relationship with the small and medium business customers, taking them to football games and baseball games and that sort of stuff like that, probably your friends with your clients, then I don’t think that there’s an immediate threat from a really mega MSP, a really big MSP but I think it is conceivable that down the road, as these roll ups continue and continue, there are some MSPs with well above 100 million of revenue right now.

And in theory, those MSPs are owned by private equity firms with very disciplined, operational and financial methods. Those businesses are running lean and mean, and they’re very efficient. And in theory, they could be very competitive against a smaller MSP on pricing. I don’t know if in fact they are yet as they try to gain market share but they could.

So I guess that would be the long term threat for the smaller MSP. But again, it comes down to what is the goal of that owner of the smaller MSP if it’s just a lifestyle business Probably okay, you know if it’s a smaller MSP that’s trying to grow. I think it’ll be harder First of all, our MST, MSP to grow and recruit new customers in competition against these mega MS, MSPs, because the mega MSPs will have a marketing treasure chest or war chest.

They’ll be spending money on bigger events and on online marketing, in person marketing and event marketing and so forth. And and I think that could be very effective.

Rich: John, great stuff. I really appreciate you making some time for us and letting us in on what you’re seeing out there right now for folks in the audience who might like to get in touch with you learn more about corporate finance associates, where should they go?

John: So our website is cfaw. com and my email address is the letter J followed by my last name, Holland, H O L A N D, that’s cfaw. com.

Rich: All right. Thank you very much. Folks, we are going to take a break. When we come back on the other side, I will be rejoined by Erick. He and I will share some thoughts about the conversation I just had with John here.

We’ll have a little fun, wrap up the show, stick around.

And welcome back to part three of this episode of the MSP Chat Podcast. I wish you could have been there for the conversation with Jon er. I know you would have enjoyed that a lot. I seized the seized the day when I had a chance to do this with him live here at the show. But I’m sure you got a lot out of out of that, listening to that.

And I certainly did. One thing in particular That kind of jumped out at me because I haven’t really heard anybody point this out before, which is just this idea that you want to sell the business when there is still some growth in front of it. It’s a sell side error I hadn’t really considered before, but the idea that you have succeeded, you’ve built something great, And you don’t really know where you’re going to take it next from here is probably not the time to sell you probably want to sell when there’s still some runway in front of you Because that’s going to be appealing to the person who’s buying a general theme I would say that john and I got into at various points into the conversation Is just how important and how difficult timing [00:50:00] is in the whole question You Of when to sell for somebody who’s contemplating an exit.

Erick: Yeah, I think that’s a really key a key item to consider when, before you get to be maxed out, because a buyer rich, one of the drivers is how they feel about just adding their three or four additional herbs and spices to the chicken recipe that can supercharge that growth. Sometimes, strategic buyers will look at an organization or an MSP practice and say, boy, oh boy, I see the two or three levers that we can adjust based on my experience or with my funding or whatever. And really, get this company outperforming prior historical revenue and profitability goals.

It’s definitely one of the things that you should consider when you’re looking to exit, because like you said, rich, if there’s no more potential growth and the buyer really doesn’t have any additional ways to exit. Increase revenue and profit, of course, reducing cost synergies of post merger integration.

Like we don’t need, to HR units. We don’t need financial units, things like that. You gain profitability by reducing overlap and things like that. But there’s gotta be a plan for growth. From a sales perspective, from a branding perspective. And if that buyer feels like, boy, oh boy, I’ve, I can take this company and double or triple it in three or four years or five years, because there’s potential for that, then that adds to the potential valuation and ultimate offer.

And attractiveness for that, for that seller.

Rich: Okay, good stuff. I totally agree and that leaves us with time for just one last thing folks and Erick I’ve got a heavy metal story for you, in a matter of speaking and it concerns a band from ontario canada called miners and sons they are from timmins ontario it is no coincidence that the reason they were in the news You is because they play a set 8, 086 feet, 11.

31 inches underground. In the Kid Mine in Timmins Ontario the Kid Mine is is apparently the deepest mine below sea level I believe in the world. They mine copper and zinc there. Pretty good heavy metals right there. And that is that is the new world’s record for the deepest underground rock concert ever played, surrounded by heavy metal.

So congratulations. To minors and sons of Timmins, Ontario.

Erick: Yep. And I think the icing on the cake or the cherry on top is, is a heavy metal and they play hard rock.

Rich: There you go. There you go. Heavy metal and hard rock. Absolutely. Perfect. That is all the time we’ve got for you on this episode of the MSP chat podcast.

We will be back in a week’s time with my voice. And an abbreviated Thanksgiving edition of the show. Won’t be a full length episode of the show, but Erick will have a show for you a week from this Friday when this episode reaches the airwaves out there. Until then, I will just remind you that MSP Chat is both a video and a podcast.

And an audio podcast. If you were listening to us, but you’d like to check us out on video, just go to YouTube, look up MSP chat, you’ll find us there if you’re watching us on YouTube, but you’re into audio podcasts, go to wherever it is, get your audio podcast, Apple, Google, Spotify, you name it, you’re going to find us there too.

However, wherever you find us, please subscribe. Great review. It’s going to help other people find the program just like you did and enjoy the program just like you do. This show is produced by the great Russ Johns. It is edited by the great Riley Simpson. They are part of the team with us at channel mastered.

They are ready, willing, and able to help you create a podcast of your own podcast folks are just a tiny little sliver of what we do at channel mastered to get the full picture of what we do for our clients. You want to go to. www.channelmaster.com. Channel Master has a sister organization called MSP Master.

That is Erick working directly with MSPs to optimize and grow their practice. You can learn more about that business at www.mspmastered.com. So one’s gonna be Thank you for joining us. We will see in a week’s time around the Thanksgiving holiday. Until then, please, folks do remember you can’t spell channel.

Without M. S. P.