M&A Symposium Looks to the Power of Small-Cap MSPs

Since 2016, Kaseya’s M&A Symposium has been a pre-day staple at its global events, providing crucial and actionable insights into the rapidly growing industry consolidation trend. On Monday, Kaseya held its most recent M&A Symposium as part of Kaseya DattoCon Miami.

CEO Fred Voccola kicked off the symposium, addressing a packed room of 500 attendees. Fred highlighted the state of the market, current trends and critical actions for those looking buy, sell or maintain status quo in their business.

The good news: The MSP market continues to grow, and it currently has a projected compound annual growth of 13.5% for the remainder of the decade. M&A is also expected to continue to increase, albeit at a slower pace in 2024 than last year.

In general, deals have become more expensive due to increased competition as fewer “tier1” targets are available to be bid on by multiple buyers, including private equity firms and aggregators. This is making deal return thresholds higher and larger players have paused their activities. There is also a focus on internal and organic operations as businesses take time to absorb previous acquisitions. Economic uncertainty, particularly around high interest rates, is also playing a role in larger players slowing down.

There is a bright spot in this hazy forecast that is driving continued growth. Small-cap M&A among MSPs with earnings before interest, taxes depreciation and amortization (EBITDA) of less than $750,000 is exploding and has increased dramatically in the past six months, Fred told the crowd. These smaller deals are typically financed by the sellers themselves and thus are less impacted by borrowing costs.

At the same time, new MSPs continue to spring up. By a 3:1 margin, more MSPs are started each year than get acquired. At the same time, consolidation is increasing as more MSPs enter the market.

Regardless of your M&A plans, Fred emphasized it is a good time to be an MSP. The benefits and plan of action will differ, however, depending on whether you plan to buy, sell or hold.

Buyers: Don’t discount the smaller players!

MSPs looking to grow their business through acquisition are more likely to see success if they keep the process easy and humanized according to Fred. Taking the time to engage with the seller and getting to know the key players allows them to better understand the business and its culture, leading to a successful transaction and ultimately less employee and customer churn.

MSPs with less than $500,000 in EBITDA comprise the largest group of MSPs. Combined they support most end customers managed. Their end customers are a similar size to those of large MSPs.

These smaller players drive much of the current growth in the M&A space.

The advantages of pursuing smaller players are noteworthy. For starters, the multiples at the small-MSP end of the market are lower, and the end customers of those MSPs tend to be loyal to the business, enabling the acquiring company to pick up additional customers less expensively. In addition, 75% of MSPs looking to sell said they want to remain with the business post-acquisition, providing the continuity needed to retain a connection with customers and minimize churn.

Sellers: Be honest

For sellers, being honest about the performance of their business is critical. “The numbers are what they are,” Fred emphasized to the audience. Owners should strive to avoid what he calls the “seller fantasy” of believing their MSP is worth more than it is.

This is particularly challenging because most MSPs are owner-run, which means the seller often has a deep personal and financial investment in the business. It’s not surprising, therefore, that 78% of MSPs believe their business is worth 15X to 20X of its EBITDA.

Having good EBITDA will make an MSP a much more attractive purchase. A distributed customer base, a recurring business model and long-term contracts also increase a business’ value. Fred advised that MSPs that delay pursuing a sale and take the time optimize their business will later reap the benefits.

Market Bystanders: Leverage the change to drive growth

Most MSPs are not looking to buy or sell their business. In fact, only about 1 percent of MSPs have been involved in an M&A transaction as either the acquirer or acquiree.  The impact of these transactions is not, however, limited to those directly involved.

MSPs should be aware of what is going on in their local markets, including who is buying or selling, and be ready to adjust their strategy to the inevitable ripple effect of change that arises when M&A takes place. If a competitor is acquired, particularly if they are bought by an aggregator, the impact will be felt acutely. Sales and marketing efforts will be amped up, and current customers are a potential target. At the same time, there is opportunity for organic growth should an MSP wish to pursue customers or employees of the acquired MSP.

Successful M&A is hard

Regardless of which side of the merger or acquisition your MSP falls, M&A is challenging. Fred cautioned that M&A takes practice to perfect. Yet nearly nine in 10 MSPs are first-time sellers, and 71% of acquiring MSPs do not have dedicated executive experience with M&A when they make their first transaction.

Not surprisingly, most M&A does not yield the long-term results expected. Fred noted that “71% of acquiring MSPs report ‘success’ in their acquisitions” while “52% of acquiring MSPs’ license counts grew less post-acquisition of the acquired entity over 24-month span.”

M&A will continue to play a significant role in the MSP landscape as a conduit for companies seeking to exit the market or expand their service offerings or market reach. Buying or selling an MSP should be viewed as a strategic action and not undertaken without comprehensive planning and alignment.

With proper planning and synergy, a merger or acquisition will bring growth, expanded EBITDA margins and total addressable market expansion.