To Rollup or Not to Rollup? That is the Question for MSPs

Looks like private equity may be gearing up to start buying again.

Following a miserable 2023 in which high interest rates and low exit rates sent deal volumes into reverse hockey stick territory, a little over half of U.S. PE firms see strength in the M&A market, up from 38% last year, according to January data from Citizens Financial Group. 46% expect deal volumes to rise in 2024, moreover, thanks to improving—or at least more stable—economic conditions and the nearly $2.6 trillion of uninvested “dry powder” at their disposal as of New Year’s Day.

Good news for potential acquisition targets? Depends on who you ask. Some 72% of U.S. SMBs are open to accepting private equity funding, according to a separate Citizens Financial study out this week.

Managed service providers watching the rise of PE-powered rollups in recent years, however, tend to be warier. “Some of the early platforms, I think, just were cautionary tales for a lot of us” marked by customer attrition and employee turnover, says Peter Melby (pictured). Indeed, he continues, MSPs often react to word of a friend’s acquisition by private equity with a thought they keep to themselves.

“You say congratulations and then you start to get excited that the clients and employees are going to be looking for a new home,” jokes Melby, a veteran IT provider who recently became CEO of New Charter Technologies, a collection of over 20 MSPs in more than 30 cities.

Melby is one of three people I’ve spoken with lately, however, who have me thinking that the issue MSPs looking to scale or exit really should be focused on isn’t private equity yes-or-no so much as standardization yes-or-no.

How comfortable are you with an outside buyer—of any kind—applying an unfamiliar cookie cutter to your services, culture, and processes? Approach a sale with that question in mind and the picture gets both more accurate and more complicated. Because as several of my posts have shown in the last year, the range of acquirers you can sell to is surprisingly diverse these days. And as this week’s post reveals, some of the least standardized options are backed by private equity and one of the most standardized has nothing to do with PE.

The 20: Get rich or be king?

That last, heavily standardized example I just alluded to is The 20, which has purchased 30 MSPs in the last 19 months (with another three coming in May) using two sources of funding, neither of which involves private equity.

“One is cash flow,” says Tim Conkle (pictured), the company’s CEO. “The other is just regular commercial banking.”

Banks are an unusual and notoriously difficult place for MSPs to raise money, Conkle notes. But The 20 is an interesting industry outlier in other ways too. Strictly speaking, it’s two organizations in one. The first is a kind of MSP accelerator/coop that gives growth-hungry members access to peer knowledge-sharing, proven workflows, a 24/7 help desk and SOC, and shared tools (that are affordably priced as well thanks to bulk purchasing).

Embrace the system fully and six months after joining, provided you’re over $1 million in revenue, you become eligible to be acquired by The 20’s other main component, an MSP with locations in 34 cities.

“That to me is a real platform,” Conkle says. “A group of MSPs over here kind of getting ready, then you cherry pick the ones you want and you buy them.”

Anyone who’s ever been part of an MSP acquisition can appreciate the advantages of The 20’s unconventional model. Post-purchase onboarding normally lasts a year or more. “You have to integrate your tools. You have to integrate the culture,” Conkle notes, “and in any phase of that, it can blow up.” The 20 gets all of that work out of the way before the sale, so its onboarding process is practically over before it begins.

“It takes us 30 to 60 days to go completely from start to finish,” Conkle says.

And yes, he adds, you give up your brand and most of your autonomy during that process, but that’s only a problem if you’re on the wrong side of this essential decision: Do you want to be rich or a king?

“It’s a really important question,” Conkle says. “If you want to be a king, you’re not worth buying, because you have an ego problem.”

If you want to be rich by contrast, he continues, signing on with The 20 and its standardized everything will get you a solid multiple immediately and a piece of the action later when The 20 itself eventually gets acquired.

“Unlike a PE firm, I will let them invest back into the larger thing, which means they’ll get a second bit of the apple that will be more than what they got the first time most likely,” Conkle says.

New Charter: A peer group on steroids

New Charter is similarly generous with its apple.

“We acquire the entire business, and then there’s a reinvestment component that’s more significant than really any other private equity platform that we’ve been aware of,” Melby says.

In most other respects, however, New Charter is toward the opposite end of the spectrum from The 20.

“You leave your local brand in place,” Melby notes. “The local leader is still driving the personnel decisions, the client experience decisions, the things that really matter most to the end customer.” And to your employees, because acquired providers can keep many of their non-standard tools too.

“Our mantra is that we integrate for value not for vanity,” Melby says. “We don’t integrate just to check the box and say we have the same thing. We integrate and centralize where we’re going to find value, and where the customers and employees are going to find value.” That’s chiefly in areas MSPs don’t much enjoy anyway, he adds, like marketing, accounting, and HR.

Plus, Melby emphasizes, you can collaborate, strategize, and trade insights with a collection of owners savvy enough to have been at $5 million in revenue and $1 million in EBITDA minimum when they joined.

“We have this room of 40-plus individuals with decades of experience each in how to do this,” Melby says. “It’s a peer group on steroids, because we’re all shareholders.”

And entrepreneurs as well, he adds. New Charter recruits MSPs eager to build rather than retire. “You’ve got to want to be part of what we’re doing, not just come find a parking spot for your business so that you can take the money off the table,” Melby says.

The money underwriting the entire venture comes from Oval Partners, a private equity firm that Melby calls an ideal funder for a room full of experienced entrepreneurs.

“There’s two types of investors in the MSP space,” he says. “The investors that don’t know how to run MSPs and the investors that know they don’t know how to run MSPs.” Oval, being squarely in the latter group, limits its involvement in New Charter to providing management and business growth advice.

Blue Alliance: By operators for operators

The third acquisition option to come on my radar recently, named Blue Alliance, lies somewhere in the middle on the standardized/non-standardized spectrum.

“Typically, when you’re working with a platform, they can only do one or the other,” says Nick Recker (pictured), the company’s CEO and a former MSP. “They can either welcome you as a full partner where your logo and your brand stay or they’re fully integrated. We can do both.”

And a lot in between. Blue Alliance, which Recker calls “a platform by operators for operators,” prizes flexibility.

“Rather than come into some business and say, ‘we have a one size fits all,’ I want to hear what their goals are, what their personal aspirations are,” Recker says. “We have a lot of tools in our toolbox to help match those goals.”

Member MSPs tend to fall into one of four very different personas, he continues, all of which are welcome. “Ambitious Abe,” in Conkle’s terms, wants to be king. “Maximizer Mike,” also in Conkle’s terms, wants to be rich. “Burnout Ben” mostly wants to get out of managed services. And “Legacy Larissa” wants to leave behind the defining qualities of an often family-run business.

All of them will find suitable options in Blue Alliance’s Freedom to Grow playbook, Recker says. “It’s our best practices for all the MSPs in our portfolio that they can pick and choose from.”

As at New Charter, members retain their brand and share centralized marketing, finance, and HR departments. “If they have a sales team they can keep it, but the strategy now comes from one centralized CRO,” Recker says. There are centrally-delivered service offerings in areas like compliance that they can sell on their own paper too.

Blue Alliance, which self-funded its first seven acquisitions, joined forces with private equity firm Prairie Capital several weeks ago. Much like Oval Partners, Prairie will supply guidance, money, and very little else. Recker searched carefully for a partner comfortable with that kind of hands-off role.

“I went through a process to try to find the anti-PE, meaning I wanted somebody that was going to bet on a market and bet on an entrepreneur and then just otherwise kind of let things go,” he says.

Which doesn’t much fit common stereotypes of private equity. But if Blue Alliance, New Charter, Meriplex, Evergreen Services Group, and others teach us anything, it’s that we should all probably resist stereotyping private equity.

“Just like MSPs, there are good PE partners and there are bad PE partners,” Recker observes.

A marketing resource for MSPs without time for marketing

One reason to join a rollup, according to Conkle at least, is that you’re going to have an increasingly hard time winning deals if you don’t. Big MSPs have big resources (like The 20’s 24/7 help desk and SOC) yet lower prices thanks to economies of scale.

“Smaller MSP can’t compete. They just can’t,” Conkle says.

Pete Busam (pictured), president and CEO of MSP advisory firm Equilibrium Consulting, isn’t so sure. “The giant PE-backed [MSP] creates a very nice space for the smaller, more boutique [MSP],” he says. “As these guys grow and they scale, they find it harder to actually service the smaller accounts because they’ve moved upstream and their processes and procedures are much more geared to that.”

Great topic for a future column. For now, let’s stipulate that there will still be small MSPs in the world for some time to come. Busam thinks they’re going to need help with marketing.

“At a small MSP, one to five people, the owner is selling, the owner is the relationship driver,” he says. “They’re running the accounting side. They’re running the administrative side. They’re trying to do the project management and the client interface, and it just becomes too much.”

Too much certainly to leave time for lead gen, which as I noted earlier isn’t something they enjoy much anyway. Hence the thinking behind MarkITechs, an online marketing collateral library Busam launched last month.

“Marketing is an age-old problem for MSPs, and for many businesses, because it’s viewed as an overhead item,” he says. “What this aims to do is give them an easier way to get their brand out.”

The target user is that fledgling, overworked MSP with at most a handful of employees. “The owner wants to market, but they really don’t have time,” Busam says. “This is an easy way for them to get the assets and the resources and start.”

Core subscriptions to the MarkITVault, the online repository for the MarkITechs MarkITing Hub, go for $100 a month, and you can layer on additional services from there. A collection of security-specific materials, for example, costs $50 a month, and there will be more such add-ons coming.

A growing range of one-time marketing projects will be available too, like the $1,500 custom website users can buy right now in place of a generic, template-driven alternative.

“The difference between us and a competitor is they roll out a website and they all look the same,” Busam says. “Our websites are truly going to be custom packaged at a price that give [MSPs] the ability to get their own look and feel.”

You’ll know exactly what that and anything else from MarkITechs is going to cost you right upfront too, he adds. “We’re the only company that publishes our products and our prices online.”

Subscribers also get access to free or discounted marketing tools from an expanding set of third parties that currently includes Constant Contact, HubSpot, and SocialPilot. Other vendors popular with MSPs, which Busam declines to name for now, will soon let partners funnel MDF dollars directly into MarkITVault fees.

A salute to marketing excellence

As I’ve said twice already now, most MSPs don’t care much for marketing. But there are plenty of people in the channel who not only love marketing but excel at it, and they often labor in the shadows of an industry that tends to celebrate CEOs, channel chiefs, and product leaders above folks who build brands and fill pipelines.

Kudos, then, to the Channel Marketing Association (which we told you about last summer) for pouring a lot of time and effort into preparing its inaugural Channel Marketing Excellence List, which recognizes more than 300 “Icons, Visionaries, and Rising Stars” across the IT and telco ecosystems for their talent, effort, and success.

The whole list is here. The association will honor the marketers who made the cut at its Marketing Summit event later this month near Dallas.

Also worth noting

Functionality that Nerdio previewed at its partner event in February has gone GA. It includes AI assistants, and I’ll have more on that from Nerdio’s CEO next week.

GoTo has introduced Miradore Premium+, a new subscription tier for its Miradore MDM service that adds integration with Entra ID and the vendor’s own GoTo Resolve RMM solution.

In its latest but not first instance of using alliances to build new capabilities into its portfolio, Sophos is partnering with Tenable to offer a managed vulnerability and attack surface management service.

Speaking of managed security, Adlumin has rolled out a new managed ransomware prevention service, plus a ransomware simulation tool that shows you exactly how exposed clients are to an attack.

There are surprisingly few SaaS-specific security vendors out there. One of them, Spin.AI, has launched a partner program for MSPs, MSSPs, and VARs.

Moovila’s MSP project management solution now integrates with HaloPSA.

SaaS data protection vendor Keepit is now on Ingram Micro’s line card.

Granite Telecommunications has shipped TechExpress, a new platform for running field service teams.

Nearly 100% of IT pros are using at least one AI or machine learning tool to improve efficiency. You’ll find that and other insights in Auvik’s new IT Trends 2024: Industry Report.