3 stages of MSP Acquisition

Below is the video transcription:

Harry Brelsford 

Hey nation nation, Harry here coming to you from a heat dome over Austin, Texas. It's very hot. So I'm getting a lot of work done inside. More importantly, I'm joined with Nicholas Ashford from Ford house over in London in the UK. So, Nicholas, how you doing today?

Nicholas Ashford 

Yeah, pretty good. Thanks. It's also pretty hot here. And we are, we love to talk about the weather in England, there's about a two degrees difference where it's either too cold or too hot. So we're comfortably on the too hot side today.

Harry Brelsford 

Hey, I want to turn over over to you, you're going to talk about the three stages of a MSP acquisition, so go for it.

Nicholas Ashford 

Sure. So you know, I think the easy way to think about it is the pre pre deal, and the deal itself, and then kind of poster which is primarily around integration. So those are three buckets. It makes sense probably to take them sequentially. So that first bucket pre deal, you know, what's this about? This is about valuation, this is about how do I get the maximum value for my MSP? Or how should I think about about value? And I think, you know, not all MSPs are equal. And, you know, what it what it comes down to the way we think about it, a lot of it's around revenue quality, which for us, means those revenue lines, what are they? And how valuable are they? So, you know, recurring revenue tends to be more important, and non recurring revenue, although there's nuances within that, yep. Pretty clear. Why, because if I buy a business, and I pay a premium for it, and I know is recurring revenue, I don't have to, I know that that I have a security level, my risk is reduced, I know that revenue is there. It's non recurring, I have less confidence, it's going to be there next year, it's got to be regenerated. This stuff everyone knows. But then within that, there are certain buckets that are more interesting. So let's take recurring revenue. Microsoft licensing, yes, it's recurring, but it's a commodity, the client can can go and get that from somewhere else. It's not, it's not defined, you know, there's no sort of margin difference. It's a pretty, pretty boring recurring. On the other hand, support contracts, you've got a five year support contract for this many seats, that's you delivering a service, it's sticky, because they get to know you, they don't have the client doesn't have an IT departments, they're relying on you, if that is a great foundational piece of recurring revenue, that you can then sell other services on the back of so even within recurring are are interesting ones, and not interesting ones, you know, and on the non recurring side, we call viral hardware, it's just 10. You know, it's again, it's commoditized, there's very little margin on it, they can go and get it from somewhere else. So not that interesting. Well, can be quite interesting, though, on the non recurring is some of that kind of professional service work. If it's in the right area, if you're doing some cool as your stuff, you know, not just migrations, batch kind of optimization, and management, those might be one off projects, but actually, they're quite quite sexy. And if they're layered on top of a client has already got a support contract. That's, that's interesting or recurring. So there are nuances there. Just just to make it really difficult, I think an actually good tip for MSPs, I'd say there's a category called repeating. So you have non, you have non recurring recurring repeating. And that's sort of a gray area in the middle. But if an MSP can prove it to potential acquirer, that then gets put into the sort of the okay bucket. And what I mean is, let's say there's a business that buys 10 laptops off you every month, because they haven't refreshed like, as every month for last three year they bought 10 laptops. Yes, it's not recurring, but you can kind of say, this is a known, a known and proven repeating, purchase. And then you know, that bucket could go towards recurring, you get some extra value for that. So I think that's, that's a really interesting one. You know, and so as an MSP, I'd be focused on repeating and recurring, you know, recurring, obviously a baseline, typically, we wouldn't look at a business under 50% recurring, and I would say 60% 60 to 65 is about average, you know, 75 to 80. You you're topping out at normally you only get that through, you know, hosted services, private cloud that gets you some, you know, that gets you there. But I don't want to go beyond that. Because actually, you want a healthy mix of really interesting professional services, you're selling those.

Harry Brelsford 

That's a really good question. I'm in the portfolio diversity in startups. And you know, I don't want to mislead you I have put little sofa change into the market probably wish I hadn't. But I am about diverse diversified portfolio for the the risk and so on. And what's interesting is some conversations I've been with vendors that support SMB Nation and they're new to the MSP community. They say they want to talk to somebody, a telecom did this, we want to talk to someone that's, you know, a 100% MSP with recurring revenue. And I said, I've actually never seen that in my life. Because when you talk to the MSPs, there's always the old lady and the senior citizen center that you build by the hour and you're charged or lower our there's always dad or mom, or the old lady, or the old account that you know, didn't convert over for reason, you're not I'm saying that's ever seen 100%.

Nicholas Ashford 

Totally anarchy, if you got 100% recurring, you're missing the opportunity to do some some cool non recurring for those work for those clients. So yeah, I think, you know, there's a good mix there. But obviously, the higher the recurring, the more confidence a buyer will have. So you know, that those I think, are really the, you know, the key thing for value is kind of looking at looking at that, in my opinion.

Harry Brelsford 

Yeah, we'll just go to stage two. So that kind of summed up stage one. So stage two is we've got the actual acquisitions.

Nicholas Ashford 

Yeah. So you know, just in terms of what a look and feel and the kind of process stages. So you know, typically, you know, you'll have an introduction, or maybe you know, that might be facilitated through a broker, or maybe it's a cold email or a friend or whatever it is. And that's a case of getting to know each other. And I think that phase is really for me about fit. It's less about the numbers and stuff, but you're talking to them, you're thinking, yeah, like, because what will any niggle now, you know, down the line is going to be traumatic. So a big watch out for me is, you know, if we send over an NDA a nondisclosure agreement, and, you know, it's a very standard doc, and people come back and you spend a week niggling over it, it's gonna be a nightmare. When you do a deal, right? People, you've got to be sort of pragmatic about this. And, you know, there's so many twists and turns that you've got to, you've got to be fairly, you just got to get on with the person, I'm going to be honest. Yeah, so I think I think it's fit first. And then typically, some businesses do differently. The way we try and do it is we have about 12 questions that we asked very high level, but that allows us to get to a ballpark valuation. So what we don't want to do, so any business I speak to, they've been dragged through six months of talking and information, and they still haven't really got to a valuation, and they don't know, if you want the valuation, you know, the expectations are here and the value that you get there. So we very quickly, within a couple of weeks, try and say, Look, ballpark figure, this is what it is. And if it's in the right area, that it warrants more work, right and more effort. But if the mismatch is here, and you can shake hands, it's not better, you know, no one's lost too much effort and time or distractions, be distracted from it. So I think that's an important point. And I guess at the end of that point, you know, you're signing an LOI, a letter of intent, or in the UK, we call it heads of terms. Typically, a chunky bit like maybe a one page or two pager, the 10 key points the deal. So, you know, valuation. Is there any deferred? Is there an urn out? You know, is it cash free debt free? You know, who's staying on? How long is that period of handover? So just the key kind of pints of the deal, if you like,

Harry Brelsford 

mask it? Yeah, the question about the fit, because I am big on that. And the fact that takes me back to when I went to my first job out of grad school, while my job in grad school was the savings and loan, and I was in it, thank you. But then when that got done, they moved me over to lending which we didn't like, and they had a phrase of lending character capacity and credit in that order. Right that's that's how we looked at it the Savings Loan and on the character front. I not only do I totally agree, but it's it's kind of a funny story. And oh, seven, large integrated media company was talking to my company, SMB Nation would love to have continued to talk but the market crash was already hitting her vo eight, so they had to pull back and I, my coach, my neighbor, who's done some m&a was coaching me that, hey, you gotta go in with the story and maybe what's authentic? Maybe not, but you have to go in these meetings and go, you know, oh, man, if I just had more resources, I could do these other things, you know, and he's coaching me on the language of this. And I guess there's some of that I, you know, I guess you have to you have to sell yourself.

Nicholas Ashford 

Yeah, you do have to sell yourself, I think, you know, you've got to believe you've got to believe in what you're doing. I but there is a fine line between selling yourself and sort of overcooking it. And I think the two areas we always see people overcook it. One they say I'm not involved in the business tool, and that it's like you're in the meeting that phone's going off 15 times I just sort of, you know, held emails, you know, they hold all the key customer account relationships, and you're like, okay, so it's not quite. And the other one is, you know, they're selling here and their forecasts are next two years or this year. And I always say, if it's a hockey stick now, why are you selling hold on to yours, your business is gonna be quadruple the revenues, according to you. So, I think there's a balance between Absolutely, you've got to sell a convincing story, and the buyer wants to believe in it, but it also has to be grounded. In truth, there's only you know, you can, there's only so far you can kind of push the capital balance.

Harry Brelsford 

And I was young and dumb. And I guess I was too caught up of being authentic in which, which is important. But ya know, in any event, hey, let's, with the time we have left, let's do stage three posts, post acquisitions in integrations.

Nicholas Ashford 

Sure. So you know, in terms of integration, you know, what, I call it the m&a iceberg, right? So what you what everyone sees and talks about is that that white tip is the deal. That's the biggie at the beginning, everyone's excited about they're talking about it, you know, wow. But actually, underneath is this whole King iceberg that isn't seen, which is six months to two years of integration. And if nothing's going to sink your ship, it's that stuff under the surface, that's, that's going to be the killer. You know, and so you've got to be really integration is a skill unto itself. Too many times, we see people say, Oh, wow, we bought these businesses together. Now I'm gonna give it to a manager, please integrate those businesses. But you wouldn't give an HR manager a task to go and sell some MSP services. It's a completely different skill set. And so I think, you know, you've got, ideally, you have dedicated resource, but But certainly, it can become a big distraction, distraction, and it can be painful if you get it wrong, you know, couple of easy examples. Yeah, I've seen it. Yeah. And I think the biggest issue is a deal looks great on paper, Excel, spreadsheet, perfect. But you've got one business that is used to being micromanaged. And the other business which had full autonomy, you'd be those businesses together that has a cultural bomb, right? And, and it's gonna go off, and, you know, you've got to fit, you got to fix that. So that's all the hidden stuff. And I would argue that the key number one reason why integrations fail is a lack of a focus on people and culture. And that is coming from someone who was obsessed with just the spreadsheet and the numbers initially, I cooked it up, I cooked it up enough time to realize, dammit, it's actually about the people, right? If, yeah, imagine that. Imagine that. You know, we always say if you get the people, right, and you keep the customers happy, right. And actually the rest, yes, systems, integration, processes, systems, you know, governance, that has to happen. But though, if you've got the willingness, and you've got your support of your clients, it kind of makes it easy. The only other thing, you but what I would say in terms of how to do it, is don't just take your business and slam the template on, take some time. Oh, still review, review what's out there have a cross functional team, a guy from sales in the acquire got guy from sales in the acquiree. Bring them together to review each other's businesses and processes. I really take time to then design because you'll find some stuff actually, you're like, Oh, you guys do that better. That's cool. Or that supplier, you've got better rates for so, you know, there's always a bit of give and take. And then really design that then I'd say validate iterate, make sure everyone the key leadership and both sides are they've looked at it, they see it, they get it they bought into the to the integration mission, and only then to go into the implementation, you know, you know, what is it the I think it's a US, is it the Marine Corps saying that slow is smooth and smooth is fast. And I think it very much applies to integration that you know, you try to rush it, it will take longer, it won't work. But if you take your time, where are we today? Where do you want to be? What are the changes? Everyone bought into that you can't over communicate? People are really nervous when a business gets acquired or merged? Is my job safe? Is my renumeration safe is my working practices the fact I get the Friday each month off because I've Yeah, that was part of the deal I had with my old boss, you know, make sure people are comfortable with all those first, then you can sell there's there's exciting opportunities here rather than a team of one. It's a team of many, you want to go into cyber, we've got a sock, you can go to that. And that buyer you cannot over communicate because these rumors will be running around about are you know they're going to do this or they're going to do that. So I really think that plan, transparency of that plan and communicate, communicate, communicate. Those are the key pieces for me.

Harry Brelsford 

Know, I appreciate it. And yeah, I'll tell you what, let's, let's let's get you back in a future quarter, maybe fourth quarter just to check in and I'll tell you why. I appreciate the framework he laid out where I'm spending some of my day is in fact, watching CNBC in the broad business channels. I'm assuming you have the same thing over there. Okay, Bull and and I just you know, this is just more of a hobby, but I really am interested in what's going on with the economy and the Fed and the rates and the inflation report that just came out. And I'll tell you this, this probably is my fourth rodeo. I have seen these economic cycles before. If people get all forgetful.

Nicholas Ashford 

Yeah, it's amazing. It's yeah, yeah, it's like history because it doesn't repeat itself. But it rhymes. Yeah, I mean, how do you how do you think then? I mean, do you think kind of valuation for MSPs are kind of peaked, and you think they're gonna come down a bit now or, you know,

Harry Brelsford 

I, I do for a couple of reasons. One is an SMB Nation we tried to bring together. And again, just close to full disclosure, I'm on the board of moonshot equity partners out of Tampa. You know, it's all good. But we tried to bring together a road show this early summer, the idea of being a one day workshop for MSPs. That was a serious workshop, right, you know, more akin to a Wall Street workshop and not a vendor fast. And we, I tried to sell into it by warning people, basically. Guys, the world is changing very quickly, you would need to go to this workshop now. Okay, you need to go right now because the window is open. And maybe I can now answer your question. Yeah, I think the window is closing. Right. I've seen open closed windows, and it's closing that hasn't closed.

Nicholas Ashford 

Yeah, it's getting smaller.

Harry Brelsford 

And, and I do think you're gonna see a decrease in valuations. In my opinion. It got a little frothy. And I know one or two people that sold and God bless them. Yeah. Yeah, I guess I I'm an optimistic person, but I'm also kind of a bear when it comes to markets.

Nicholas Ashford 

Yeah. Yeah. I gotta be honest. I think you're right. I mean, whilst the market is still pretty hot in the UK, what we've seen is, last year, there were a lot of MSPs trying to do deals themselves. And I know that those guys have now disappeared. So now it's just sort of the professional. Professional requires investors. So you know, that is a, you know, they were sort of right at the top of the frothy bit. They've sort of disappeared. Yeah, I think I agree with you on that. All right, you pass how boring

Harry Brelsford 

Yeah, I gotta bounce to my next zoom. So we'll, we'll be in touch. Thank you very much circle.

Nicholas Ashford 

Thank you. All right.