Navigating MSP Acquisitions: Insights from an Industry Insider

The Journey from MSP Owner to Acquirer

Adam Krian's journey in the managed service provider (MSP) industry is a fascinating tale of personal and professional transformation. Starting as a corporate IT professional, Adam founded his own IT services company in 2009 during the Great Recession. Over the next decade, he built the business to nearly $1 million in revenue with about $200,000 in EBITDA.

However, despite outward success, Adam found himself struggling:

"A lot of friends were jealous. They'd say 'Hey, Adam's got his own business, he's growing all this stuff.' But below the surface, I was really struggling. I was in a rough marriage, my health was very poor."

In 2018, Adam made the decision to sell his company to a larger local competitor, Intelligent Technical Solutions (ITS). This move proved transformational:

"I lost 80 pounds, got out of that bad marriage, got my nights and weekends back. I got into competitive powerlifting, had better money, and just really am a happier person. It was pretty transformational."

The Challenges of Running a Small MSP

Adam's experience highlights some common challenges faced by small MSP owners:

• Being the bottleneck for growth
• Struggling to delegate and build a management team
• Difficulty balancing work and personal life
• Feeling trapped despite outward success

As Adam put it:

"I was the cap of the business. It just could not grow past me. I had all the people reporting to me - all my technicians, all the staff - and I was just buried."

This situation is common for technical founders who struggle with the transition from "doing the work" to "running a company that does the work."

The Decision to Sell

For Adam, the decision to sell came down to recognizing his own limitations as a business owner:

"I was a limiting factor. In spite of investing well over $100,000 into myself, my coaching, and just everything else, something was just failing to click."

He identified key areas where he struggled:

• Building relationships
• Communication skills
• Overcoming fear and self-doubt

Adam realized he needed to make a change to overcome these challenges and improve his quality of life.

The Acquisition Process

Adam's company was acquired by a larger local competitor he had been collaborating with for a couple of years. Key details of the deal:

• Valuation: Approximately 1x EBITDA ($200,000)
• Structure: 3-year earnout
• Role: Adam joined the acquiring company in a senior position

While the valuation may seem low by some standards, Adam felt it was fair given his situation and desire for a quick exit. The deal also included ongoing employment, which provided additional value.

Transitioning from Owner to Employee

For Adam, the transition from business owner to employee of a larger company was overwhelmingly positive:

"It really was evolutionary for my life. I lost 80 pounds, I got out of that bad marriage, got my nights and weekends back, I got into competitive powerlifting, better money, and just really am a happier person."

This experience shaped Adam's perspective on M&A and motivated him to help other MSP owners navigate similar transitions.

Building an M&A Division

In 2021, three years after joining ITS, Adam was asked to build out the company's M&A division. At this point, ITS had grown to about $10 million in revenue through a combination of organic growth and small acquisitions.

Adam embraced this new role, feeling his personal experience made him well-suited to guide other MSP owners through the acquisition process:

"I feel like the poster child for M&A. I'd lost a ton of weight, I was just healthier mentally, physically, emotionally - everything. I said I would absolutely love to do this."

Early Acquisition Strategy

In the early days of ITS's acquisition efforts, the approach was relatively informal:

• Target criteria: $1M+ revenue, profitable, 50%+ recurring revenue
• Deal structure: All-equity transactions (no cash)
• Valuation: Based on industry-standard multiples (2-5x EBITDA for smaller MSPs)

Adam describes the process as "Run and Gun" - aggressively pursuing deals without a highly structured approach.

The Pitch to MSP Owners

Adam's pitch to potential acquisition targets focused on several key points:

1. Joining a larger organization to accelerate growth
2. Reducing stress and improving work-life balance
3. Participating in future upside through equity ownership
4. Leveraging economies of scale and operational efficiencies

He emphasized his own experience as a seller to build trust and rapport with owners.

Challenges in All-Equity Deals

The all-equity deal structure presented challenges, particularly when approaching owners without pre-existing relationships:

"Trust is very low. They don't know me from Adam, as the saying goes. We had to approach it a little bit differently."

Many owners were hesitant to sell without receiving cash upfront, which led ITS to explore other financing options.

Bringing in Private Equity

To address the limitations of all-equity deals and fuel more aggressive growth, ITS decided to bring in private equity investment. This process involved:

1. A three-way merger to reach $22 million in revenue and $4.2 million in EBITDA
2. Securing private equity investment in May 2022
3. Setting an ambitious growth target: $100 million revenue, $20 million EBITDA

The private equity investment allowed ITS to offer cash in acquisitions and pursue larger deals.

Changes Post-Private Equity

The introduction of private equity backing brought significant changes to ITS's acquisition strategy:

• Larger deal sizes: Focusing on $1M+ EBITDA companies
• Higher multiples: 5-7x EBITDA (up from 2-5x previously)
• Cash deals: 100% cash upfront with option to reinvest equity
• More structure: Weekly meetings with PE firm, formalized processes

Adam's role shifted to focus more on relationship-building and guiding owners through the due diligence process, with the PE firm handling negotiations.

Key Considerations for MSP Sellers

Based on his experience on both sides of MSP transactions, Adam highlights several important factors for owners to consider:

1. Valuation Expectations

Understanding realistic valuation multiples based on company size:

• Small MSPs ($500k-$1M EBITDA): 2-5x EBITDA
• Mid-size MSPs ($1M-$2M EBITDA): 5-7x EBITDA
• Larger MSPs ($20M+ EBITDA): 15-20x EBITDA

2. Deal Structure Options

• All-equity deals (common in smaller transactions)
• Cash + equity rollover (typical with PE-backed buyers)
• Earnouts and performance-based compensation

3. Cultural Fit and Integration

• Alignment of core values and company culture
• Integration approach (light touch vs. full integration)
• Treatment of employees and clients post-acquisition

4. Post-Sale Role and Responsibilities

• Clarity on future role within the combined organization
• Transition period and knowledge transfer expectations
• Decision-making authority and reporting structure

5. Second Bite of the Apple

Understanding the potential for future liquidity events:

• Reinvesting equity for potential future upside
• Realistic timelines for additional liquidity (often 4-6 years)
• Balancing immediate cash needs with long-term potential

Red Flags and Challenges in MSP Acquisitions

Adam shared several potential red flags and challenges to watch out for in MSP acquisitions:

1. Cultural Misalignment

Even with seemingly aligned values, integrating company cultures can be challenging. Adam advises patience and allowing for regional variations in culture while maintaining core values.

2. Rapid Exits

Owners pushing for extremely quick exits post-acquisition can be a red flag. This can lead to challenges with staff and client retention.

3. Secrecy Around Transitions

Keeping acquisition plans secret from employees and clients can backfire, damaging trust and relationships. Adam advises transparency whenever possible.

4. Peer Group Influence

Sellers discussing deals with peer groups can sometimes lead to unrealistic expectations or cold feet. Adam suggests being selective about who you share deal information with.

5. Identity Loss

Some owners struggle with the loss of company identity post-acquisition, particularly around branding changes. It's important to address this emotional aspect of selling.

Best Practices for Successful MSP Acquisitions

Based on Adam's experiences, here are some best practices for successful MSP acquisitions:

1. Build Relationships Early

Develop relationships with potential acquisition targets well before any transaction discussions. This builds trust and can lead to smoother deals.

2. Be Transparent About Changes

Clearly communicate expected changes to the seller, employees, and clients. This helps manage expectations and reduce friction during integration.

3. Focus on Cultural Integration

Pay close attention to cultural integration, allowing for some regional variations while maintaining core values across the organization.

4. Provide Clear Post-Acquisition Roles

Offer sellers clear, defined roles within the new organization that leverage their strengths and provide a sense of purpose.

5. Address the Emotional Aspects of Selling

Recognize and address the emotional challenges sellers face when transitioning out of their business. Provide support and understanding throughout the process.

6. Encourage Seller Reinvestment

When possible, encourage sellers to reinvest a portion of their proceeds into the combined entity. This aligns interests and can lead to better outcomes.

7. Leverage External Advisors

Encourage sellers to work with experienced M&A advisors. This can lead to smoother transactions and help manage expectations.

8. Plan for Proper Transitions

Implement a structured transition plan that acknowledges the end of the old company, navigates the neutral zone, and embraces the new beginning.

The Future of MSP Acquisitions

Looking ahead, Adam sees several trends shaping the future of MSP acquisitions:

1. Increased competition for quality MSPs, driving up valuations
2. More diverse buyers entering the market (PE firms, strategic buyers, etc.)
3. Greater emphasis on recurring revenue and scalable operations
4. Growing importance of cybersecurity capabilities in valuations
5. Continued consolidation, with larger MSPs acquiring smaller players

Conclusion

The world of MSP acquisitions is complex and ever-evolving. For owners considering selling their MSP, it's crucial to understand the landscape, set realistic expectations, and carefully consider both the financial and emotional aspects of a transaction. By learning from industry insiders like Adam Krian, MSP owners can better prepare themselves for a successful exit and transition.

Whether you're a potential seller or an MSP looking to grow through acquisitions, the key takeaways are clear: focus on building strong relationships, maintain transparency throughout the process, and carefully consider cultural fit and integration. With the right approach and mindset, MSP acquisitions can create value for all parties involved and drive the continued growth and evolution of the industry.

Article created from: https://www.youtube.com/watch?v=PHS0dbKozac