Evergreen Services Group on MSP M&A

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Evergreen Services Group on MSP M&A

If your goal is to sell, building an exit strategy as an MSP is essential. So, let’s break this lengthy process down by answering one key question: who should you sell to?

One potential answer is Evergreen, a company that’s been buying MSPs nationwide since 2017. I welcomed its Co-Founder and M&A Partner, Ramsey Sahyoun, onto a bonus episode of the Business of Tech.

He had detailed answers to my many questions, so keep reading for an in-depth look at Evergreen’s investment thesis, the MSPs they’re looking for, and each step in the selling process.

Evergreen’s aim to be a ‘long-term home for businesses’

Sahyoun’s interest in the MSP space began in 2017 when he and his co-founder went to the Berkshire Hathaway annual shareholders meeting in Omaha. They walked away inspired to start their own holding company for small businesses and kicked off their search for industries that would be conducive to that model.

When they found the MSP niche, they liked the recurring profit, stickiness, customer intimacy, and rapid growth – all things they didn’t expect to associate with IT. Two MSP acquisitions later, they started seeing a pattern of excellent business across the industry.

They settled on their thesis:

“Instead of buying companies and flipping them, we could be a true long-term owner of companies and operate those businesses independently. So those are the two core tenets, long-term ownership and a decentralized operating model. And we felt like those things were really conducive to the MSP space,” he said.

And, unlike other industries where integrating businesses can result in customer churn, they found that MSP customers tended to stick around. Evergreen even started getting their companies together to share best practices while maintaining their goal of keeping each MSP independent.

The thesis clearly works – it’s remained unchanged for 6 years and 70 MSP purchases.

Increasing value post-sale

However, by deciding to hold onto companies for long periods of time and keeping them independent, Sahyoun has taken the opportunity to sell off the table. So, how does Evergreen continue to create additional value with this model?
Sahyoun broke his reasoning down into two categories: finance and operations.

On the finance side, they noticed that the richest people are single company operators that own their businesses for a long time and reinvest in them.

“When you look at the biggest wealth creators, you don’t find a lot of people that just flipped businesses flip their way to wealth, because you miss out on the compounding nature of wealth creation,” he said.

On the operational side, he’s observed that there are plenty of opportunities from a vendor standpoint to leverage Evergreen’s collective scale to reduce vendor costs. More importantly, he noted, is their approach to talent. A lot of MSPs they acquire don’t have a succession plan, so they use that as an opening to insert executives who help the business get to the next level.

Sourcing deals & assessing viability

If you’ve heard of Evergreen, you may have heard about their reputation for blanketing. So, I asked Sahyoun to walk us through his approach to deal sourcing.

He explained that they try to have as many MSPs as possible in their database, but still adhere to a pretty strict set of criteria for offers. They don’t go below 500,000 in EBITDA, 3 million in revenue, and 50% recurring revenue.

After reviewing a host of other factors, Evergreen ends up buying only about 1% of companies they talk to.

Sahyoun also shared this step-by-step process for their typical acquisition:

An initial conversation with the business owner to screen for size, review, and overall fit.
An NDA to share financial information, along with an hour-long call to go over the figures.
If Evergreen wants to move forward, they’ll push out a letter of intent to kick-start due diligence.
The 60-day due diligence process (the most rigorous step) includes a quality earnings analysis, meetings with the owner’s next layer of management, and customer calls to gauge satisfaction.
Finally, the legal process, which is mostly about transaction execution. So far, Evergreen has yet to discover too many skeletons in the closet.

I asked if any environmental, social, and governance factors influence his investment decisions. They do play a role, mainly through a system with their backer Alpine Investors (his previous employer). They denote if a potential deal is red, yellow, or green on ESG, but nearly every MSP he’s come across has been green.

When yellow or reds do come up, it’s usually because a business’s end-customer is involved in something controversial like cannabis, oil, or defense.

The perfect deal

I also asked Sahyoun to share a bit more about what the perfect deal looks like from a structural and returns standpoint. He named their first acquisition, Wolf Consulting, as the benchmark against which all other MSP deals are measured, thanks to:

The MSP’s solid, operationally mature business model
Its strong founder, who specifically wanted to keep the business independent
Evergreen’s decision to bring in Elliot Hyman as CEO while the founder transitioned out

With a high-quality partner and a great success plan, Wolf has more than tripled in size since the deal, and Hyman has gone on to oversee all of Evergreen’s MSPs.

A look at cash flow

Wondering how Evergreen handles cash flow? I was, too, so I asked Sahyoun for the rundown.

“Every company sweeps the cashflow that it generates on a monthly basis up to Evergreen. We take that cash flow and the cash flow from all our other businesses, and that gets redeployed to fund our future acquisitions. So instead of raising more outside capital and more outside capital, you’re able to internally fund your acquisitions. So you’re not diluting shareholders or bringing in more capital to fund acquisitions,” he explained.

In short, they’ve found a tax-efficient way to compound and promote future growth for each MSP.

The shifting landscape

You might be wondering — comparing today’s rate levels with those of 2017, wasn’t Evergreen started during a time when money was easier to access?

Sahyoun’s POV on the shift might surprise you:

“That period of time where debt was really cheap was tough in a lot of ways because there were some bigger businesses that we pursued and just couldn’t be competitive on valuation. Now today, I feel like our valuation framework hasn’t changed, but we’re winning a lot more deals,” he said.

They’ve kept their valuation framework the same over the years, but feel more competitive than ever.

He also touched on a few more areas of change.

He’s eyeing the impact of AI, telling me he can’t quite decide if it’s going to ramp up efficiency, margins, and growth, or disrupt the industry by commoditizing some of the lower MSP work.

He’s also been mulling over how to increase organic growth from new customers (something he thinks the industry as a whole struggles with) instead of relying on upselling existing customers on cloud and cybersecurity for revenue growth.

Has Sahyoun’s insight inspired you to get the ball rolling on an exit strategy? Learn more about his work at www.evergreensg.com.

As always, my inbox is open for reactions, questions, stories, and whatever else is on your mind.

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