Unless you are operating your MSP in stealth mode with little to no web presence, odds are that you receive inquiries from private equity groups (PEGs) on a near-daily basis. While this is flattering and can be exciting, it is important to first understand a few basics of how PEGs work, and second, appreciate the best course of action when you receive those inbound inquiries.
PEGs and private equity backed operating companies are focused on investing in / acquiring strong businesses and helping them grow. That growth can come organically, through improved and accelerated sales and marketing efforts, product and service expansion, geographical expansion, and a variety of other strategies. Another growth strategy they employ is focused on “inorganic growth”, acquiring other companies and consolidating them to build market share.
Generally, PEGs will invest in a “platform company”, a business whose management team is sophisticated, looking to continue running daily operations, and has achieved meaningful scale. For MSPs, the typical threshold for being viewed as a platform company is greater than $3 million of trailing-twelve-month EBITDA. Once they’ve made that investment, there is a concerted effort to acquire smaller add-on companies that check strategic boxes. Geographical overlap or expansion, expertise in a different product and service ecosystem, new end-market expertise, strong financial performance, acqui-hires and many other components are reasons why you may find yourself being pursued as either a platform investment or as an add-on to an existing platform.
One of the values of PEG partnership is their experience in M&A. They almost all employ numerous junior level teammates whose sole focus is to identify and engage acquisition targets for their investments. The goal is to initiate a conversation, build a relationship, allure you with the benefits of joining their platform, and close a deal where they’re the only group you are engaged with. The simplest analogy is that they’re a home buyer who is putting notes in every mailbox in your neighborhood, hoping that they’ll get a few call backs and can negotiate with you directly rather than have your house hit the market.
I don’t want to suggest that their intentions aren’t good. In some instances, they may be paying a fulsome price and the deal is crafted with market terms, but most often the goal is to prevent a competitive process from being launched.
We always recommend utilizing an experienced advisor who can help you position your business most favorably and solicit competitive bids before bringing on an investor or being acquired, however, in the more immediate term, what should you do with all those inbound solicitations?
Here are some steps you can take:
1) Research the PEG
Before responding to any inquiries, research the private equity group to ensure they have a reputable track record and align with your company’s values and goals. This can include looking into their previous investments, success rates, and management team. Understand who is reaching out and who you’ll be speaking with. If it is someone whose bio highlights significant experience investing in MSPs and a senior position at the PEG, it may be worth a 30-minute conversation to pick their brain and gather market intelligence from them based on their experience in the ecosystem. We don’t recommend chatting with everyone, but one or two calls a quarter could be indefinitely valuable.
2) Determine your goals
Consider your long-term goals for your company and determine whether an acquisition or investment aligns with those goals. Do you want to sell your company and move on to something new, or are you looking for additional resources to help your company grow? They’ll sell you on the benefits of joining a platform which can include offloading back-office tasks, a deeper sales and marketing bench, cross-selling opportunities for products and services you offer that they may not, and the ability to both take some chips off the table while also rolling equity into a larger, ideally more stable platform. Hear them out and utilize a handful of conversations to understand your options and help craft your goals.
3) Seek professional advice
Consider seeking advice from an investment banker who can provide guidance and help you navigate the process. We oftentimes get pulled in when a MSP has a Letter of Intent or Term Sheet on their desk and they’re trying to determine if it is fair and reasonable. There is a huge information asymmetry between the seller (you) who may go through a few transactions in their lifetime, and the buyer (PEG or PE backed company) who is perpetually hunting for and doing deals. Strong advisors will level the playing field, help drive a competitive market process, and ultimately ensure that you’re getting the maximum value and optimal structure whenever the time is right to achieve the goals you’ve established.
4) Respond professionally
If you do decide to respond to the inquiry, do so in a professional manner. Thank the PEG for their interest and express your desire to learn more about their offer. Be sure to communicate your goals and expectations clearly. If it isn’t a group you feel compelled to speak with (and we absolutely don’t advocate speaking with every group), simply file the email inquiry away for revisitation with an advisor whenever the time is right.
5) Proceed with caution
Remember to proceed with caution throughout the process. Don’t disclose sensitive information until you have a non-disclosure agreement in place and be sure to involve your professional advisors in any negotiations.
Ultimately, it’s up to you to determine whether an acquisition or investment is the right move for your IT services company. By conducting your due diligence and seeking professional advice, you can make an informed decision that aligns with your goals and values. As a firm whose purpose is to be Servant Leaders who value relationships and results, we love building relationships with groups, many times years in advance of a transaction, and helping them understand their options and make informed decisions about how best to steward the business they’ve built. For further discussions on how to manage inbound interest from PEG and the latest intel in MSP M&A, please feel free to reach out to Chris Weingartner.