As the M&A trend continues two MSPAlliance accredited MSPs joined forces this week as Virginia based mindSHIFT announced its acquisition of North Carolina based Alpheon.
While the deal makes strategic sense for mindSHIFT, expansion of its geographic presence, additional managed services revenue, as well as a deeper level of expertise in the health care vertical, this is notable in that this is the second accredited MSP with whom mindSHIFT has done a deal (mindSHIFT and Long Island based MSP Invision merged several years ago).
Terms of the deal were not disclosed but it is safe to say the pieces are being placed as key MSPs are now strengthening their positions to be key players in the managed services profession.
Dell announced today its intention to buy MSSP SecureWorks for an undisclosed amount of money. Apart from the M&A angle, another question is why is Dell doing this and what does it mean to the average MSP out there.
Dell is no stranger to acquisitions in the managed services arena. Most notably, they acquired SilverBack Technologies several years ago. While there are mixed feelings about that deal and how Dell has managed the MSP channel partners they inherited from that deal, the SecureWorks acquisition begs the question “are we going to see more of the same?”
Obviously, it’s too early to tell. The natural conclusion is Dell wants to be relevant in the managed security space and the SecureWorks deal definitely will accomplish that goal. If I was the average MSP on the street, I’d be asking myself if Dell will treat the SecureWorks acquisition similar to how they treated SilverBack. Many MSPs were not happy with the perceived threat of Dell going direct to end-users, circumventing the MSP partners. While things seem to have quited down since then, SecureWorks again raises key issues of channel behavior and competition.
If I had to guess, I’d say Dell simply wants to maintain its security credentials in order to sell to larger enterprise clients. Only time will tell if SecureWorks offerings start getting marketed and sold to SMB clients.
Many companies ask what the difference is between an asset sale and a stock sale. This is an important question that has many important implications for both the buyer and the seller. The following is a general list of characteristics for both deal types.
Asset deals:
- Buyers can pick only the assets they want and exclude liabilities they don’t want
- Can be less complicated to transact from a legal standpoint, particularly if there are any securities filing requirements
- There can be significant tax advantages to an asset purchase to the buyer
- Usually require less due diligence on the part of the buyer since liabilities can be excluded from the deal. These deals generally have less risk for the buyer
Stock deals:
- Allow certain assets to be transferred more easily to the buyer. This can be very important when dealing with technical certifications, service contracts, and other valuable assets
- Can have tax benefits to the parties, especially when they are states that impose asset transfer taxes
- Require more due diligence on the part of the buyer
As you can see, there is no right or wrong deal structure, only the perfect deal to suit both parties. If you are considering a M&A transaction and need some strategic advice, feel free to contact me.
One thing about our current economic situation is that it is forcing good people and good MSPs to have to make hard choices. Since late 2008, I’ve witnessed a lot of companies go through some difficult times; while the managed services industry continues to grow there are still hard times and choices ahead of us. While the decision to sell your company is aways an important one, having the right facts is critical to making the right decision at the right time. Here are some things everyone should be thinking about at this point in our economy.
Lenders aren’t Lending: whether it is the new financial regulation law or skittish banks, traditional lending sources are less inclined to make loans to businesses. Even healthy MSPs are reporting more difficulty getting loans. This is causing otherwise healthy MSPs to have to restrict their growth due to lacking resources.
Taxes are going up! Next year, unless congress acts, the so called Bush tax cuts will expire, allowing the marginal rate, capital gains, and a slew of other individual and corporate tax rates increase. It’s no secret that increased taxes on MSPs will only serve to stifle growth and prosperity in this industry.
Increased Regulation: regardless of whether you approve of the recent laws passed in Washington D.C. it is unmistakable that buried within these laws are regulations that will cause MSPs great hardship to comply with these often complex and difficult to understand rules.
As the healthcare, financial reform, and other laws come into effect, only then will we truly understand their true impact on businesses large and small. I am asked more frequently each day by MSPs about whether they should sell their business. Honestly, the answer for each person and company is different. What is true for everyone, however, is that each MSP must have a M&A strategy in place should they need it. Do you have a M&A strategy for your business?
I recently had a conversation with someone and the subject of M&A came up, specifically what the current valuation trends were. Having been in M&A for so long I have seen this particular area of business philosophy mature in many respects. Many MSP’s, during the negotiation process, would complain to me about why their businesses were being devalued by potential buyers. Obviously, that’s what a buyer is supposed to do; every buyer is looking for the best deal possible. However, in the last few years I’ve started to see a trend in valuation schemes that is showing signs of maturity and common sense.
Because M&A is the most likely liquidation (or cash out) event a business owner/investor is to experience these days (IPO’s, venture capital, and other deal transactions are less common) the valuation of a company is one of the best external indicators of how the managed services profession is faring. Here is a great example of how our profession has advanced in the last decade.
It used to be common practice to discount or assign a zero value to a MSP’s non-recurring revenue…zero! This means, any product, project, or any revenue of any kind that was not specifically tied to a contract would have been essentially tossed out of the negotiations. What ended up happening was recurring revenue (tied to a contract for all of you “we do business on a handshake” folks) was valued at a premium, with its own multiple, while the non-recurring revenue was assigned a zero or minimal valuation multiple. I actually got very upset and decided to quit the M&A industry because it was unfair to the MSP’s who worked hard on growing their business only to see important components of the business thrown away at the bargaining table.
Today, things are beginning to change. By going to a flat multiple scheme, MSP’s can achieve a more realistic and accurate model of their business valuation than under the previous model. For example, instead of taking all the different revenue sources and assigning each its own multiple, you would take the overall (top line) revenue and assigning it one multiple. Assuming that the revenue streams are all related to a managed services practice (i.e., you wouldn’t want to pay for a tanning salon along with the MSP business assets) this valuation model will yield a number more accurately reflecting all the various components that make up a successful and efficient managed services practice.
Our profession is maturing and for that I am thankful! What are your thoughts?
There are some industry pundits who ask the question, do you need a M&A advisor? That is a very good question and should be addressed. Since my background is in law, I will use that as an analogy.
How many lawyers do you see representing themselves in court, or in a legal proceeding? Not that many. Why not? The old adage “a lawyer who represents himself has a fool for a client” is particularly persuasive here. What this means is when it comes to sensitive issues, like a legal case, medicine, or selling your company, it is much better to have someone on the outside providing you with advice and counsel.
My grandfather once said he never managed his own money because he was just too emotionally involved and couldn’t make the right decisions…and he was an economist!!! The same is true of selling or buying a company. This can be a very emotional time for a company and an individual. Even if you are a good business person when it comes to this type of transaction, having someone who is not emotionally involved can provide you with critical input that you would not normally have.
Selling/buying a company isn’t like buying/selling a home. There are moving parts, there are people involved, there is a lot to consider. Add to that the complexity of managed services and you get into an entirely new ballgame.
In closing, you can absolutely represent yourself in the sale or acquisition of a Managed Services practice. The question is, does it make sense?
The ClearPointe acquisition of TecWatch earlier this year was a textbook example of how a M&A transaction should be done. The terms of the deal, although not disclosed, were such that both parties are happy nearly half a year post transaction.
From the very beginning, the process went smoothly and both parties were able to come together towards a meeting of the minds. From start to finish, the entire transaction took roughly 4-5 months. The ability to create happy M&A transactions is something I am very proud of and look forward to doing the same for my other clients.
I’ll be writing more about how well structured M&A deals should occur but for now, I’m happy to report that the deal is still going strong.
The subject of valuation models for MSPs is coming up in discussion more frequently and I see a lot of people with hugely different valuation multiples; so many that I though I’d clear the air. The first thing everyone must understand is there are valuation models that favor buyers and there are models that favor sellers. Because these models almost never yield the same number, we are forced to create a third model that more closely approximates the true value of a managed services practice (for those of you who want to skip to the end and see what that model is…come to the M&A Workshop on February 4).
One of the inconsistencies of a “buyer’s” model is that it relies heavily on EBITDA. I say this is a buyer’s model because it assumes a MSP has net income. When most small MSPs run their practice as close to breakeven as possible (to minimize tax exposure) this EBITDA number tends to be very small. Therefore, a buyer will generally have a lower price with a EBITDA multiple.
On the flip side, a seller tends to favor a top line revenue approach as this number will exclude profitability and focus on their ability to generate revenue. Naturally, this excludes some very important operational factors and will never produce a very accurate valuation number.
Therefore, I have created a blended approach that takes into account both top line revenue and EBITDA, as well as many other operational factors to produce a very accurate valuation for the MSP practice. In the end, no matter what people are saying the going multiple rate is in managed services, if a bank won’t finance it or an accountant can’t wrap their head around the valuation number, it probably isn’t a very good valuation model being used.
Yeah, buyers want to buy MSPs cheaply and sellers want a lot more than they are worth. Somewhere in the middle the truth can be found. Oh, and come to Dallas, TX on Feb 4., we’ll be going into a lot more detail about this model during the workshop.
