astro posted on May 20, 2010 09:15
It is the holy grail of MSP growth: how can you dramatically grow your business while maintaining and improving both margins and customer delivery? The answer to this question may be found in a strategy that is proven across many industries, but seems just to be emerging in Managed Services: Growth by Acquisition. Growth via acquisition is dramatically faster than organic growth. After all, few MSPs can organically acquire dozens of new customers over a few months. But that is exactly the opportunity strategic acquisition offers; and top-line growth is just the beginning. By consolidating resources like overhead, technology and staff, the incremental revenue delivers margins far higher than either the acquiring or acquired company could achieve on their own. Firms can dramatically grow their bottom lines – and the value of their businesses – by executing this strategy effectively.
Yet the opportunity to pursue Growth by Acquisition is more broadly available than many MSPs realize. We find that a profitable, well-run MSP with about $750k in revenue is often ready to pursue an acquisition. After all, a small firm can dramatically impact the top and bottom line with a modest-sized acquisition, where a larger firm needs a much larger acquisition to realize the same percentage impact. Additionally, mergers can often be creatively structured so deals can be done without large quantities of cash changing hands up front while still delivering a solid win-win for the acquired company.
So why isn’t everyone pursing this strategy? While pursuing and consummating an acquisition can be easier than many firms expect, executing the integration of the merger may not be so easy. We see three common pitfalls. First, negotiating and consummating a merger is a time-intensive function and resource-strapped firms often have a difficult time keeping their eye on the ball of day-to-day operations while they work the process. Second, there are a number of post-merger “integration issues” – things like culture clashes, customer angst and operational mismatches – that can emerge as the acquired firm assimilates. Finally, firms can encounter growing pains as they scale. After all, running a 30 person firm is very different from running a 7 or 8 man shop and management that is used to running a smaller firm needs to make that leap as the business scales.
Working with MSPs around the country, we perceived both the opportunities and the challenges Growth by Acquisition presents. We founded Cogent Growth Partners to help MSPs understand whether Growth by Acquisition is an appropriate strategy for them, to help acquiring firms avoid the operational pitfalls that can emerge, and to help acquirers take advantage of their new-found scale to improve margins and customer delivery. Our goal is to help firms across the industry maximize their growth opportunity while minimizing the risks.