MSPs in the spotlight as local activity heats up – ARN

“The IT services market is still fragmented, so acquiring companies is a natural way to grow,” he said. “It’s easier to acquire a whole batch of clients at once than trying to win them organically and from a revenue and asset perspective, it makes a lot of sense.”

According to Frank, sometimes these deals are “arbitrage opportunities” where a company might be looking to sell because they can’t solve certain problems anymore. Another company might come in and buy the business to solve those issues, making it a win-win for both parties.

An example of this is a New Zealand based entity that has been speaking to Frank Law and Advisor, who are in the government space.

“They were looking at how [to get] a foothold in Australia to get access to some of the government contracts, but also there’s all the nuances of security clearances and that sort of thing,” he said. “How do [they] solve these two things?

“Look at an acquisition that kind of accelerates that and then gives [it] the relational connection that [it] can then start to chip away at what other services [the entity] can provide in because [its] now [a] trusted brand and part of the bigger group.”

Concentration creates opportunities

Frank believes there will be a lot of mergers and acquisitions in the mid-market, which represents a big opportunity because there has to be competition, which is a good thing.

Local firms will have to focus on quality revenue, securing bigger shares of wallet and expanding capacity. He explained this will attract bigger players from the top end of town, who might acquire mid-market firms to solve their labour and contract issues.

“New firms tend to pop up to fill those gaps,” said Frank. “Even with the big players coming in, there will be room for local firms to thrive and maintain market balance.

While there will always be room for global players like Accenture in the market, there are significant local players who can continue to grow and be just as competitive, explained Frank, who believes concentration in the market often creates opportunities.

However, the market isn’t likely to cannibalise itself, as the race to the bottom doesn’t work long-term, Frank explained. When dealing with enterprise and government-level clients, price is important, but so is delivery.

“Customers now expect a one-stop solution, not piecemeal approaches,” he said “They want seamless, efficient service. Otherwise, all the efficiencies that technology offers get lost, and you end up being inefficient.

 “If a provider does a terrible job, it doesn’t matter how cheap they are,” he said. “Clients want the right supplier, and they recognise value in continuity of service so long as the provider doesn’t become greedy.”

What to keep in mind when selling

Value was also important when it came to selling a business, the “general assumption” during the sale is the business is “running profitably with good margins”, said Frank.

“If you can confidently tell a potential buyer, ‘if you sit in this seat tomorrow, you can expect the same revenue, the same margins, and the same quality of service with no key staff leaving,’ then you’ve got a really strong asset to sell,” he said.

Keeping your house in order was a key point Frank highlighted before and after a sales process. For example, sellers must go beyond having legal documents, when it came to ensuring contracts where in order.  

“It’s about what’s actually included,” said Frank. “What are the deliverables? Can you deliver on your promises?

“This will impact things like post-acquisition warranties and claims, especially if you’re selling something you can’t deliver.”

He advised sellers should focus on the contracts, customer revenue and the quality of that revenue, which should show how much of it is project-based, one-off, or recurring, which can “sometimes lead to a shift toward a different model altogether”.

Frank believes it was important to get employee or contractor situation in order to make sure they’re appropriately engaged, paid correctly and that their restraints are properly set.

“You’re selling the relationship with the people who deliver the service you’re contracted to deliver,” he said. “The quality of the people delivering that service is key.”

Lastly, focus on highlighting the strategic aspect of the seller’s deliverables. If the business is just a bunch of contracts with a basic MSP offering, then it “probably shouldn’t try to add something fancy at that point”.

“Instead, focus on doing more of the same and building a solid client base with strong EBITDA [earnings before interest tax depreciation] margins,” he said. “However, if you’ve already expanded, make sure you can lock in on your growth strategy and become indispensable to your clients, boosting the quality of your revenue.”

Rapid fire acquisitions are doable

For buyers when it comes to rapid acquisitions, Frank said it can be done as long as the right systems are in place.

“The question I’m always asking is, how much of the integration happens and how quickly,” he said. “If you don’t get that integration piece right, that’s where you can really fail miserably.”

Often, Frank said there hasn’t been much effort or thought put into what integration post-buy looks like.

For example, if a company just bought a book of 200 managed clients but they want 100 under the new ownership, the plan should be to transition the clients, standardise contracts and integrate them under the new entity.

“The seller has to be kind of across that and lead that transition for a period of time, because that’s where the trusted relationship is for that to be successful,” explained Frank. “If it’s not led well then that’s where you get value leakage and you don’t get a good multiple.”

The goal for the buyer will be to retain as much value as possible because every dollar is worth more in the post-sale phase, noted Frank.

“That’s why it’s critical to focus on integration to prevent value leakage after the sale, just as much as you focus on pre-sale preparations,” he said. “In fact, post-sale integration is even more important for the buyer.”

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