Peer Groups serve an incredibly valuable role for MSPs and their owners/management teams that participate in them. From benchmarking to sharing best practices, MSPs who participate in peer groups often are better run and operate with scalable processes and procedures that potential investors find very attractive. They also can highlight areas where your MSP may have a services or product gap to close and help facilitate trusted relationships between the group members. As a result, a natural fit for an acquisition or merger can arise between members of peer groups, which brings both pros and cons to the selling or merging owners. From our experience observing M&A taking place between peer group members, the pros and cons of doing so are important to understand before exploring that option in depth.
- Familiarity – in any acquisition or merger, the buyer is always looking to understand the unique attributes of a business and the value an acquisition would bring to the table. When you’ve worked with someone in a peer group, many times for years, a rapport is already in place, and you often can avoid the steps required to get an unfamiliar group up to speed. You’ve likely already shared and processed strengths and weaknesses and built a high degree of trust in your business with the acquiring peer group.
- Speed – in selling to a peer group member, an MSP owner often deals directly with just them to explore the M&A opportunity. Because you’re only having dialogue with that one group, attention can be focused and the determination of whether a transaction makes sense for both sides can be assessed more quickly.
- Trust – just as you’ve shared about your business in the peer group, you’ve also heard from the potential acquirer what their strengths, goals, weaknesses, and strategies are. You will know if the group member has a strong reputation and operates with integrity, and if they are a partner you can trust to take care of both your employees and customers going forward. Many MSP owners are worried about their legacy, and transacting with a peer group member can bring confidence that their legacy will be in good hands and maintained well.
- Competitiveness – in considering an acquisition by or merger with a peer group member, you may not be dealing with the buyer who would pay the top valuation and yield the friendliest structure available. Many owners struggle to know whether they got the best deal available in the market when selling to a peer group member. Indeed, given the proliferation of buyers and interest in the MSP sector, a competitive process is likely to reveal a higher price and more favorable terms than working directly with a peer group member.
- Control – a well-designed sell-side process is focused on maintaining as much control over the information shared and timeline to close a transaction as possible. Without the competitiveness of a process with clearly defined timelines and milestones, transacting with a peer group member may lack the focus required to close a deal efficiently, leading to a more drawn-out and distracting transaction.
- Positioning – while a peer group member will have familiarity with a fellow member’s business, that familiarity may also include transparency into the warts and issues that exist. One goal of running a competitive process is to position a MSP’s weaknesses as opportunities and challenges as areas where a potential buyer can add value. Telling the story of your business well not only mitigates concerns with perceived issues, but also can get buyers even more excited about areas where they see “low hanging fruit” to tackle that will result in better performance operationally and financially.
- Financing Risk – with MSPs trading at extremely strong valuations, a peer group interested in acquiring may not have the capability from a capital perspective to pay a fair market value for the business. That could result in having to close the transaction at a lower valuation/multiple than what a process would result in, or timing risk associated with the peer group buyer having to raise capital and source debt to effectuate the deal.
We are big fans of peer groups and the purpose they serve, but caution MSP owners who are only including fellow peer group members as potential buyers of their business. In order to ensure that you’re achieving the highest valuation, optimal structure, and smoothest path to close, we’d highly encourage an owner to consider running a competitive process.
If you are an IT Services business or MSP thinking about undertaking a transaction, we’re happy to hop on a call to discuss the pros and cons of selling to a peer group member further and answer any questions you have. Please don’t hesitate to reach out to Chris Weingartner (email@example.com), Founders’ Managing Director who covers the MSP sector.