Questions Every MSP Owner Should Ask Their M&A Advisor

Amidst continuing consolidation in the industry, many owners of Managed Service Providers and other IT Services companies are assessing whether the time is right for them to take some chips off the table and consider undertaking a transaction.  Given the years of effort and energy it took to grow their company to a transaction-ready size, this is a decision that shouldn’t be entered half-heartedly, nor one where we suggest going at it alone.  Typically, the acquirers and investors that an MSP owner will be dealing with are mergers and acquisitions experts, and the information and experience asymmetry puts the owner/operator at a major disadvantage right off the bat when it comes to understanding whether they are getting a fair offer with a transaction structure that is in market.

Before selecting an advisor to help guide your potential transaction, here are five questions we recommend addressing.

  1. What experience do you have selling “X” companies? Whether your X is an MSP, MSSP, Systems Integrator, or another company in the IT Services sector, working with an advisor who understands what buyers are looking for, the challenges and opportunities in your industry, and knows the players in the ecosystem is key.  An experienced advisor will help accentuate the positives of your business, know and mitigate any risks, and ultimately result in the highest probability of a consummated deal at the best value.  There are many generalist firms providing M&A advice that would love the opportunity to guide your transaction, but they likely will not achieve as optimal an outcome as a group with significant industry experience.
  2. Do you work directly with any private equity groups? A big driver of the transaction volume and activity in the IT Services/MSP sector is a result of private equity groups entering and rolling up the space.  We highly caution against working with a group that works on both the buy-side and sell-side, or who has previously taken sell-side engagements with private equity groups. If a firm that wants to represent your company in its sale (sell-side) is also engaged with a private equity group to find potential companies for them to acquire, it is difficult to be confident that they’ll not play favorites or steer you toward their clients.  Similarly, if the advisor has helped a private equity group on the sale of their MSP before, they may steer you to a group with whom they’re hoping to eventually help exit in the near term.  PE groups can make great buyers but avoiding these two conflicts of interest is paramount to have confidence the market is speaking and you’re getting the best transaction possible.
  3. Can you tell me about your process and share deal materials from former MSP clients? While there certainly are commonalities between IT Services companies, each business is unique and should be positioned and marketed distinctively.  As a result, each process should encompass genuine front-end preparation, including creating custom deal collateral and analysis specific to your business.  It is crucial to ensure your advisor appreciates the intricacies of your business and can effectively tell its story to extract value. Additionally, advisors whose big pitch is the volume of transactions they do may be leaving money on the table by not focusing on telling your story as well as possible and try to shoehorn your company into a Mad Libs like presentation package.
  4. Who is my team? Running a proper M&A sell-side process is time intensive and requires a focused effort from a team of professionals. You only get one shot at the process, so you do not want to skip a step because every detail is important. When choosing an M&A advisor, you want to know your deal is getting the attention and energy required; you should understand the depth of the team you’re engaging – their backgrounds and experience. You’ll also want to understand who will be working on your deal and how the team dedicated to you will divide those roles and responsibilities.
  5. Can you clearly understand their fee structure, and is it aligned? Most reputable transaction advisors will structure the overwhelming amount of compensation associated with their engagement on getting a transaction closed.  Heavy immediate/initial fees or little compensation at the deal’s finish line may signal you’re working with a group whose best interests aren’t aligned with your own.  Our strong preference is around engagements where the M&A advisor does better and participates in the upside along with its client when they successfully drive a premium offer.  Structuring an engagement and fee agreement to incentivize the advisor to push for as strong an offer as possible is preferred.  We also highly discourage working with any group that expects full payment at close on any earnout structures…good advisors should be comfortable getting paid when you do, which further ensures they’re focused on structuring a deal with as much consideration up front as possible.

With nearly 20 years of experience helping founder-led and owned businesses pursue exits, recapitalizations and mergers, we’d love to share further perspective on what questions to ask when screening your transaction advisor. If you or someone you know have questions regarding the above or are an MSP considering undertaking a transaction or liquidity event, please feel free to reach out to Chris Weingartner, Managing Director focused on MSPs, MSSPs, and the broader IT Services ecosystem.