The M&A Market is Ice Cold, Except for MSPs

PitchBook’s latest assessment of private equity merger and acquisition activity, published late last month, suggests the downward trend in aggregate deal value that began late in 2021 rolls on unabated. In all, North American PE investors put $960 billion into M&A transactions across industries in the first half of 2023, an impressive-sounding sum that’s nonetheless a full 28.5% less than its equivalent in the first half of last year.

And the M&A market for managed service providers specifically? “It’s pretty hot,” says former ConnectWise executive Craig Fulton, who’s now an advisor at Evergreen Services Group, a PE-backed holding company for MSPs. Maybe not as hot as 2022, he continues, but the recurring revenue MSPs generate continues to make them tempting acquisition targets despite today’s higher interest rates.

“That’s a really low-risk investment if done right,” Fulton says.

Still, there have been changes in the market. For one thing, investors are much more cautious about which MSPs they buy these days. “There’s just a much higher level of scrutiny that’s happening on these firms to really make sure they can produce at the levels of profitability that they’re at today,” says Reed Warren (pictured), CEO and chief valuation analyst at M&A advisory firm iT Valuations. That’s at least partly due to who’s for sale at the moment, he adds.

“There are fewer healthy sellers in the market today than there were a year ago,” Warren says. “Top quartile, highly profitable companies have for the most part either sold, because people were willing to pay premiums for that, or they’ve chosen not to sell and they’re not on the market.”

Multiples have dipped as a result. $500,000 of EBITDA, which would have gotten you 6x on average last summer, according to Warren, gets you more like 4.5x to 5.0x now, and the same $1 million of EBITDA that paid up to 7.5x back then is attracting more like 6.5x today.

“Q3 of last year was really where I saw multiples peak,” he says.

So should you sell now or wait? That all depends on three variables:

How big you are. “If you’re over a million dollars in EBITDA, the multiples still continue to be really solid,” Warren says. “There’s a lot of interest and buyers.”

How big a rush you’re in. PE firms are sitting on a nearly all-time high $1.35 trillion of uninvested “dry powder,” according to PitchBook, and interest rates are widely expected to decline at least a little next year. “As they do, that’s going to decrease the cost of capital and it’s only going to increase the consolidation efforts that are taking place,” Warren says. “The acquisition marketplace is going to continue to be strong in the MSP channel for three to five years.”

How strong your stomach is. A well-run managed services business will almost always be worth more—and therefore sell for more—five years from now. “The big thing that you have to realize though is that means I have 100% of the risk for the next five years,” Warren notes. “If one of my clients or I get a ransomware attack or who knows what happens, suddenly I could be worth half that.” Selling now transfers that risk to someone else.

All of which is to say, sadly, there are no easy answers to one of the most important questions an MSP will ever have to answer.

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Who to sell to isn’t easy either

For all the often well-deserved abuse that private equity attracts, the exit landscape for MSPs would be a lot more bleak these days without it.

“Private equity is really kind of propping up the industry,” Warren says.

It’s not the only option for would-be sellers, though. PE-backed MSPs like Meriplex and Integris (number 299 on the just-published Inc. 5000 list for 2023, with 1,888% three-year cumulative revenue growth) are eagerly snapping up smaller peers.

So is Evergreen, Fulton’s new employer, which owns some 65 MSPs at present. And though it’s PE-backed, the firm has no intention of flipping those investments in the future. “We acquire companies with the intent to hold them forever, similar to Berkshire Hathaway,” Fulton (pictured) explains.

And it pretty much leaves those companies alone. Though its MSPs share best practices and leverage economies of scale together in vendor negotiations, they operate independently in pretty much the way they did before selling.

“It’s not the traditional PE model of coming in and putting a playbook in place and making changes,” Fulton says. “It’s keep the brand, keep your people, keep your customers, keep your systems and processes.”

But get paid for it all now, when it’s worth something, rather than after a costly security incident or macroeconomic disaster. “They get their cash, Fulton says. “It takes a lot of risk off the table.”

If you’re looking to scale your business versus sell it, meanwhile, there are further options still. Larger MSPs can borrow two to three times EBITDA on an interest-only basis for five years from a range of outside lenders, Warren notes. The rates will be much higher than a typical loan (think 10-13%), but you should have no trouble paying it if you spend the money on acquisitions of your own. Say you’re at $3 million in EBITDA and borrow $9 million against it, for example.

“If I’ve bought with that $9 million another $5 million in EBITDA, well, now at $8 million in EBITDA I’m getting a 12x multiple and I only have to pay back $9 million,” Warren says.

Unlike PE buyers, moreover, lenders don’t give orders. “As long as I’m paying the bills, they’re going to continue to give me the latitude to simply take care of my employees and customers,” Warren notes. “I still maintain all the control.”

Last but not least, don’t forget the often overlooked “M” part of M&A. Joining forces (and earnings) with trusted peers is often a smart intermediate step toward an eventual sale, Warren observes. “It’s going to be the fastest way to create value in the business, and it’s probably about the lowest risk option.”

Fulton, for his part, encourages MSPs to start thinking about some way to get big or get out of the industry before it’s dominated by coast-to-coast giants.

“A high percentage of them are very small and struggle with the day to day,” he notes of MSPs. “It’s just going to be harder for them to compete.”


TD SYNNEX held a conference dedicated to high-growth solution opportunities this week in Salt Lake City. Guess what topic produced the most buzz among presenters and attendees?

“I don’t think you can throw a stone and not accidentally hit the two letters ‘A’ and ‘I,’” jokes Stacy Nethercoat (pictured), the distributor’s executive vice president of advanced solutions. “There’s a lot of excitement, certainly a lot of buzz, probably a little bit of hype, but at the same time, with the speed at which this technology is growing there’s this sense that I don’t want to miss this opportunity.”

There is an opportunity in AI, moreover, and not just someday, as data from McKinsey earlier this month makes clear. Not even nine months after the introduction of ChatGPT, one-third of businesses surveyed by the consultancy have adopted generative AI and 40% plan to spend more on artificial intelligence because of generative AI.

The open question for most partners, however, is where and how to grab a piece of that spending. To help steer them toward answers, TD SYNNEX unveiled a new portal this week called Destination AI that aggregates enablement materials, demos, reference architectures for deployment-ready solutions, and other resources and provides access to subject matter experts, professional service offerings, and a recent addition to the company’s lineup of “practice builder” programs specific to AI.

According to Nethercoat, the hope is that visitors eager to get into AI without rebuilding their whole business around it will uncover synergies between AI use cases and their existing vertical industry and technical specializations. “We’re not asking you to take a left turn. We’re asking you to lean on us, leverage the folks that we have trained, and let us help you identify how to enhance the solutions that you’re already bringing to market to differentiate yourself,” she says.

The new site and all the attention on AI at this week’s conference mark the official addition of AI to the list of strategic, next-generation technologies the former Tech Data and SYNNEX were already pursuing before they joined forces as TD SYNNEX in 2021. A second portal introduced during the show aims to help partners capitalize on all of those markets. Called the Partner Health and Fitness tool, the site lets MSPs, VARs, and others weigh their current offerings in areas like cloud computing, cybersecurity, and IoT against benchmark data from peers.

“It also enables a partner to start to drill down and look at the specifics behind the particular score that they’re seeing,” Nethercoat notes, and then get preliminary advice on growing that number. “We’re really trying to assist them in using data to make decisions about where they’re going to invest.”

Available only in the U.S. at present, the site will roll out in Canada soon before arriving in Latin America and Europe as well within the next few quarters.

Also worth noting

The clock is ticking even more loudly for Microsoft cloud partners who have yet to switch from delegated admin privileges (DAP) to granular delegated admin privileges (GDAP).

UCaaS vendor BVoiP is the newest member of the Pax8 line card.

Managed services pioneer Amy Luby, recently of Acronis and CMIT, is now the first-ever VP of ecosystem and channel chief at Seceon.

LogicMonitor has introduced an all-new AIOps solution.

Addigy has added functionality to its Apple device management platform that lets users bring macOS hardware into compliance with CIS and NIST standards automatically with one click.

Epson shipped a line of compact business scanners for crowded desktops.

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