What’s happening in the world of M&A

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What’s happening in the world of M&A

The team at MSP Success did a great writeup of what I’m doing with the Business of Tech. If you want to get some insight into why I do what I do, it’s a fun read.

During last month’s IT Nation event hosted by ConnectWise, I had the chance to sit down with Abraham Garver, a friend of the podcast and managing director at FOCUS Investment Banking. I’ll never pass up the chance to unpack the current state of the mergers and acquisitions market for MSPs with Garver, especially as we’re all buckling down to plan ahead for 2024.

Ready to get up to speed on the latest market dynamics? Keep reading for a rundown of our latest conversation from a bonus episode of The Business of Tech:

A Look at the Present Market

For the last four years, Garver and his team have catalyzed and advised on MSP transaction switch 74 parties. They’ve developed a real knack for analyzing the many pieces of this jigsaw puzzle, and the first thing he flagged is that the market is absolutely changing.

They say never to bury the lead, so I’ll summarize his main thesis first: he’s concerned that valuations may be coming down.

According to Garver, there are 150 private equity groups with 13.2 billion dollars of committed capital. About 76 of them don’t yet have an MSP platform and are hoping to make a first-time investment, and the other half are looking to do add-ons. He describes them as sophisticated buyers ready to write checks.

And though they’ve been watching interest rates go up to 5%, it hasn’t hurt demand. MSPs in the lower end of the market with 7 million EBITDA and below also also haven’t seen their valuations go down, but Garver made it clear that he thinks that’s changing.

Why? It’s simple: he’s hearing from his team that many MSPs (up to three-quarters of some of his facilitators’ groups) don’t think they’ll hit their revenue and EBITDA budgets for the year.

And when revenue and EBITDA goes down, so do valuations.

Potential Changes to Come

I asked Garver to explain what the valuation range looks like now versus what it might look like if his prediction comes to fruition.

He explained that typically, businesses are valued at around 15 times their EBITDA. So, if a business has 15 million in EBITDA, it would be expected to sell for 15 times that amount. But if investors are no longer willing to pay that much, larger businesses might see a decrease in their valuation by a turn or two. This, in turn, would affect a range of businesses from those with 750,000 to 6 million in EBITDA.

And in a world where interest rates continue to rise, it would have a particularly negative impact on those with EBITDA above 10 to 8 million, because their customers are affected by higher interest rates.

The Narrowing Middle

One trend we’ve talked about before is the concern of the narrowing middle, MSPs with roughly sub 10 million in revenue. There’s a growing gap between the substantial platform MSPs and these more typical MSPs, so I asked Garver to share what he’s seeing from this middle band.

He confirmed that fewer and fewer MSPs in this group are selling because they think they can add even more value within the next 18 months. They’ve seen crazy growth over the past three years, so they’re holding out in hopes of reaching that higher price point. A tax benefit also encourages them to wait before selling to PE investors.

Garver’s biggest flag on this front is for those in the market with larger assets. He’s hearing in conversations with MSPs (specifically ones that he’s considering for add-ons) that they’re getting ready to take 2-3 customers from other MSPs that are seemingly thriving. This poses a serious risk for those who are waiting to sell, as their valuation could take a hit before they reach that point.

For Garver and other folks in his position, this is a wait-and-see situation.

Where Investors are Putting Capital (and how Garver helps)

Want to get a better sense of what PE folks are shopping for? I asked Garver for his take, and he explained that the size of the PE fund determines the size of the MSP platform they’re interested in. Funds range from 500 million to 4 billion dollars, and they aim to make around 10 platform investments per fund. So however much they raise, divide it by ten to see what asset size they’re looking for.

Buyers typically seek MSP platforms with 15 to 25 million in EBITDA, but there aren’t many platforms of this size out there. To move things along, Abraham’s team facilitates mergers of equal-sized platforms. So if a buyer wants a 25 million EBITDA platform but there are only 5 or 6 available, Garver may merge a 15 million and a 10 million EBITDA platform.

The highest demand is for platforms with 5 to 6 million in EBITDA, but these are also rare. Again, Garver’s team will handle mergers of equal-sized platforms with a focus on matching up cultural fits, technology alignments, and strategic compatibility.

Garver’s MSP Market Maker

If you haven’t already heard the news, Garver and his team are in the throes of launching MSP Market Maker, a database that aims to streamline the M&A process for MSPs. Over 300 MSPs and PE groups signed on during pre-registration, and far more are expected to join.

The marketplace has two parts. One is called MSP Radar, which allows PE groups to look into 4,600 MSPs globally by factors like employees, the year it was founded, etc. On the MSP end, business owners can see where 13 billion PE dollars are mapped and who’s ready to write a check.

The goal is to make the whole process more efficient and remove the lengthy ‘how do I find this person’s contact info’ step. People self-register for it, so if this is something you’re interested in, this is your sign to join.

Beyond MSP Market Marker, Garver’s advice for MSPs owners is to break the ice and start talking to buyers. Whatever situation you get into will help you better identify your options.

If 2024 is the year you start walking the M&A path, allow me to be the first to wish you luck! I’ll continue sharing the latest info from this ever-changing market, so stay tuned for more. As always, I’m available to connect at [email protected]

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