Blog by Ben Greenberg, VP of Corporate Development at IT Solutions
If you’re considering M&A initiatives or navigating the challenges of growing your MSP, we invite you to explore our M&A resources.
For businesses that are growing via acquisitions, a common question arises: “When is the integration over?”
While there are clear milestones such as system & tool migration, collective branding, and the combined organizational structure, the more pressing question should be, “How do we know if the integration is successful?”
The original deal thesis should guide this evaluation, but there are specific metrics that managed service providers (MSPs) should track to assess integration success.
At IT Solutions, we’ve distilled integration success into four essential metrics:
You can reference Net Managed Recurring Revenue (MRR) Retention — otherwise known as Net Revenue Retention (NRR) — to measure how effectively you are keeping clients who were part of the acquired entity before the acquisition. Retaining these clients post-close is critical to the integration’s success, as it indicates stability and continuity of service.
The keys to achieving a high Net MRR Retention are:
The goal should be a net MRR retention rate of at least 102%, which signifies that not only are you retaining clients, but you’re also upselling or cross-selling additional services that enhance value for the client.
While retaining existing clients is the foundation of your revenue stream, growing the client base in the newly integrated region is equally important. This is measured by the new logo MRR growth.
A strategy of growth through M&A loses its value if it cannot support organic growth post-acquisition. For dramatic effect, I’ll repeat that: An acquisitive strategy loses its value if it cannot support organic growth post-acquisition.
The goal here should be to achieve at least 1.5x the current market growth rates. This benchmark demonstrates that the integration has not only preserved the existing client relationships but has also enhanced the company’s ability to attract new clients. Effective integrated marketing, a robust sales strategy, and attractive offerings that resolve market needs are critical to achieving robust new logo MRR growth.
Gross margin refers to the percentage of revenue that a company retains after subtracting direct expenses. For MSPs, expanding the overall gross margins (specifically service-oriented gross margins) indicates a successful integration. This metric should focus on achieving a minimum services gross margin (GM) of 45% and an overall gross margin of at least 40%.
As systems and teams are integrated, there should be a natural progression towards improved efficiency and cost-effectiveness (or economies of scale), leading to expanded margins over the first six to twelve months. This improvement is a sign that the integration is yielding the intended synergies, such as streamlined operations and increased service capabilities.
Last (but not least), monitoring employee churn is vital. While some employee turnover is expected post-acquisition, significant undesired churn is a red flag that indicates potential issues within the integration process. In a relationship- and service-oriented business, high employee churn can lead to significant client churn, hampering overall integration success.
The aim should be to keep employee churn below market rates. This involves nurturing an organic and positive organizational culture, providing clear and consistent communication, and ensuring that employees feel valued, supported, and a sense of belonging throughout the integration process. Retaining key talent is crucial to maintaining operational continuity and delivering high-quality service to clients.
Measuring integration success is not a matter of checking off completed tasks—instead, it’s about evaluating the impact of the integration on key business metrics. If you plan to undertake an inorganic strategy, one of the best ways to ensure success is by making sure your organization is invested in absorbing another business and having an integration plan that is built prior to “day 1.”
If you are thinking about selling your company, it’s important to ask potential buyers these questions:
Unlocking growth through M&A comes with unique opportunities and challenges. Whether planning your next acquisition or considering selling your business, we’re here to help your MSP thrive.
We’ve got answers — fast, clear, and tailored to your needs. Let’s talk tech.
