Private Equity 101 for MSPs: Part 2 – Add-Ons

As mentioned in Part 1, FOCUS’ MSP Team has been extremely active helping MSPs transform into “New Platforms” for private equity groups (PEGs).

While new platforms are very important to PEGs, not every MSP is large enough to attract such interest.  For the other MSPs still looking to exit, partner, or take some chips off the table – you can consider being a strategic “add-on” to complement an existing platform MSP.

Adding to the Platform

PEGs buying a MSP as an add-on are much more focused on the strategic and financial benefits of adding acquisitions to an existing portfolio company.  The strategic side is more clearly defined because the add-on is serving a more specific purpose (e.g., geographic expansion, new products, complementary customer base, economies of scale, etc.). Thus, the add-on can be narrower in focus and growth potential.

For add-on acquisitions, PEGs frequently lean on the expertise of its relevant portfolio company's management to determine the fit, synergies and strategic benefits of a transaction.  Over time PEGs are becoming more selective in regard to which MSPs fit with their business today and fit with the business they are trying to build and sell in the future.  For the most part, gone are the times where any MSP recurring revenue is good revenue. Currently the business needs to fit much more closely.

As part of this process, private equity groups are hiring 3rd party investment banks (like FOCUS’ MSP Team) to help them identify, engage, and pitch MSPs on becoming add-ons for their existing portfolio companies.  These efforts are typically segmented by geography, customer industry, and customer size.  The process is competitive both ways: PEGs are more selective in what they are interested in buying and the best MSPs are selective in who they even consider entertaining dialogue with.

The Most Successful PE-backed MSP Platforms – Inside Baseball on Their Approach

We observe that successful PEGs show up for important first calls with their portfolio companies to make a solid first impression. This is especially important when offers involve MSP owner rolling equity, because it is all about positioning why your firm/company is a better home for sellers. The dollars typically get remarkably close from multiple bidders in these situations….so price is only one consideration.

Network Support Co., Logically, and RiversideFor example when FOCUS’ MSP Team represented Network Support Co on the sell side, Mike Williams, who is Logically’s Chief Strategy Officer was on the first call, as were four members of the Riverside team.  Logically then proceeded to offer references from other sellers who were delighted with their outcome. Before long it was clear that was a great cultural, strategic, geographic and financial fit among the parties.

Akuity Technology, ICS, ClearLight Partners LLCSimilarly, when FOCUS’ MSP Team represented AKUITY Technologies on the sell side, Kevin Blake, who is ICS’ Founder/CEO was on the first call, as were three members of ClearLight Partners (Private Equity firm invested in ICS).  As due diligence progressed, I watched as the management teams became more-and-more passionate about joining together, which was incredible to have been a part of.

For add-on acquisitions, PEGs ask questions such as:

  1. How does this acquisition support the platform company?
  2. Does this make the two businesses more valuable together than separate and what are the tangible synergies?
  3. How will this increase the overall return to investors and is this an acceptable return on capital?

MSP owners need to be aware of these differences in perspectives because they have a significant impact on how PEGs will view your business and what they are willing to pay.  If you're an add-on, you probably offer the PEG some synergies. If you are a new platform, you probably need to prove your growth story more. 

Interested in learning more?

Consider joining a peer group (IT Nation Evolve Peer Groups by ConnectWise), connect with FOCUS’ MSP Team Leader, Abe Garver (abe.garver@focusbankers.com) or read about FOCUS’ MSP Team’s recent transactions.