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 business, we invite you to explore additional M&A resources.
In today’s business landscape, buying another managed service provider (MSP) can seem like an easy path to fast growth and increased valuation. However, bolt-on acquisitions of other small MSPs often fail to deliver the expected benefits and, instead, create major integration challenges. This is because many MSPs fail to understand that M&A is a capability that requires careful development as part of a long-term strategy; it’s not a short-term or one-time fix.
If your current organization isn’t already operating effectively, you will end up multiplying the challenges. Strong MSPs look internally first to build a long-term solution to provide sustainable organic growth before investing in M&A.
There are several risks to these types of M&A deals:
Smaller MSPs often have small average client sizes and less mature operational practices. Integrating a less developed business will require substantial investments of time and money to overhaul systems and processes.
It also means bringing on small clients that are less mature, more price-sensitive and have higher churn. This mix often results in lower gross margins.
From a buyer’s perspective, when an MSP has performed a recent acquisition, it creates additional work to integrate. When mature integration processes are not in place, which is usually the case for smaller bolt-ons, it leaves wounds on both employees and clients, creating additional risk for a future buyer. In addition, a higher concentration of smaller/noisy clients is less attractive than a smaller business with better client dynamics. These factors can hurt the perceived valuation and attractiveness to the buyer. A better way to increase valuation is by focusing on key value drivers to drive growth and profitability.
The level of effort and investment required to properly integrate two businesses is immense, especially for small MSPs without dedicated M&A staff. The time commitment from leadership as well as costs for new hires and system overhauls are frequently underestimated. It’s also common to see higher churn with less new logo growth during the integration process due to the interruption.
Employees on both sides deal with uncertainty amid changing processes and systems, resulting in low employee engagement, turnover, and potential client issues.
Most small MSPs simply do not have the bandwidth or capital to successfully execute the integration. As a result, the combined entity ends up weaker rather than stronger from the acquisition.
Too often, M&A is seen as a quick fix to overcome existing problems within an MSP. For example, if an MSP has flat new logo trends because sales hiring and productivity are not meeting goals, acquiring another company will not resolve the core problem. Combining a mediocre sales engine with another does not create a great one.
In this case and many others, investing in organic growth first is a better path. Take a deep look at your offering & service delivery model, hire well-equipped salespeople, and improve sales systems rather than pursue a complex integration project hindered by underlying operational weaknesses.
The bottom line is M&A should never be viewed as a band-aid to patch internal performance problems. It will only exacerbate them over time.
Small MSPs that are considering M&A would be wise to look internally before pursuing externally. Some key questions to ask yourself:
If the answer to any of these is no, then acquiring and integrating another company will likely exacerbate operational pain points. Only the strongest organizations with disciplined processes poised for growth should consider M&A. Targets should be similarly high-performing entities, not struggling competitors.
Remember, inorganic expansion disrupts the status quo. It inserts an abrupt shock into the system, so leadership needs to be prepared to effectively harness that disruption as a catalyst for change.
These kinds of bolt-on deals fail often. However, there are success stories out there. Some common denominators among successful bolt-ons are:
MSPs targeting bolt-on acquisitions of other small MSPs will likely be disappointed in the results. Limited synergies coupled with substantial integration headaches can easily undermine the investment rationale. These deals often destroy value rather than create it.
The better path is often to look internally at how to bolster organic growth and profitability before considering absorbing another company.
Whether you’re looking to confidentially discuss exiting your business or strategies to foster growth from within, we invite you to connect with Ben Greenberg, VP of Corporate Development at IT Solutions.
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