By: Chris Weingartner

In the dynamic and ever-evolving landscape of the IT services ecosystem, owners of Managed Services Providers (MSPs) find themselves at a crossroads when considering the future of their businesses. As the demand for managed services continues to grow, owners must strategically position their MSPs to attract the right kind of attention from potential investors. One critical decision is whether to position the business as a standalone platform for investors or as an add-on to an existing platform. In this article, we will explore the qualifications that make an MSP an appealing standalone platform and the advantages it brings to both the owner and the investor.

Size and Profitability

Ultimately, the biggest factor for determining whether your MSP or MSSP can be viewed as a platform is its size.  The general rule of thumb is that private equity groups are looking for growing MSPs with greater than $3 million of EBITDA.  At that size, there is assurance that many if not all of the other factors that follow are in place and there is a leadership team installed that can drive continued growth.  If your MSP has successfully acquired a smaller group and integrated it well into the broader operations, it will give a potential investor even more confidence that they can help you continue to grow both organically and through additional M&A add-ons.

Proven Track Record of Performance

Investors seek MSPs with a strong track record of performance, characterized by consistent growth, client satisfaction, and financial stability. Highlighting key performance metrics, such as customer retention rates, revenue growth, and profitability, can position your MSP as a standalone platform worthy of investment. A history of successfully adapting to industry changes and embracing technological advancements can also contribute to building investor confidence.

Specialized Expertise and Niche Focus

MSPs that have developed specialized expertise and a niche focus in a particular industry or technology sector are often viewed as standalone platforms with unique value propositions. Investors are attracted to businesses that demonstrate in-depth knowledge, understanding, and a proven ability to cater to specific market needs. Emphasize your MSP’s unique selling points, whether it’s expertise in cybersecurity, cloud services, or industry-specific solutions (i.e. healthcare, financial services, manufacturing, etc.), to set yourself apart from competitors.

Scalability and Growth Potential

Position your MSP as a scalable and growth-oriented platform by showcasing a well-defined strategy for expanding market share and revenue streams. Investors are more likely to view your business as a standalone opportunity if they can see a clear path to scalability. This may involve plans for geographic expansion, diversification of service offerings, or targeting new customer segments. Clearly articulate your growth strategy to instill confidence in potential investors.

Strong Operational Framework and Infrastructure

Investors are keen on businesses with robust operational frameworks and scalable infrastructure. Demonstrate the efficiency of your processes, the scalability of your operations, and the strength of your technology stack. A well-structured and efficient MSP is more likely to be perceived as a standalone platform that can operate independently, minimizing the need for extensive integration efforts on the part of the investor.

Diverse and Loyal Client Base

A diverse and loyal client base adds significant value to an MSP seeking investment as a standalone platform. Showcase long-term client relationships, a high client retention rate, and testimonials highlighting the value your services bring to clients. A broad and loyal client base not only demonstrates the quality of your services but also mitigates risks associated with over-dependence on a small number of clients.

Strategic Partnerships and Alliances

Highlight strategic partnerships and alliances that your MSP has cultivated within the industry. Strong relationships with technology vendors, software providers, and other key players can position your business as a valuable standalone platform with a network that contributes to its success. These partnerships not only enhance your service offerings but also signal to investors that your MSP has the potential for collaborative growth.

Conclusion

In the end, there are plenty of options for MSPs and MSSPs smaller than $3M of EBITDA to be acquired, but they’ll generally be viewed as an add-on to an existing platform that already has private equity backing.  If you’re not looking to continue running day-to-day operations or want to be a part of a larger team that has more service and solutions offerings, joining as an add-on could be an excellent opportunity to diversify wealth, derisk your personal balance sheet, and still retain some upside via rolled equity.

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 unique components of your business and whether you’ll likely be viewed as a platform opportunity, an add-on, or potentially both.  Please don’t hesitate to reach out to Chris Weingartner (cweingartner@foundersib.com), Founders’ Managing Director who covers the MSP sector if you have any additional questions or a conversation would be helpful.