Here's What MSPs Should Know Before Accepting Private Equity, Selling Their Business
Several industry experts preview their CP Expo session on private equity and M&A blueprints for MSP leaders.
March 14, 2022
We have all done some level of MSP dealmaking, so we know the details of what goes into them. But, what MSP leaders need to know about private equity, especially considering all the activity in the market lately, requires partners to drill down into the nitty-gritty.
In their session on this topic at the MSP Summit, April 11, co-located with the Channel Partners Conference & Expo, four executives will share what MSP leaders need to know about private equity (PE). They will begin with new platforms – the lifeblood of private equity – and will address what are called add-ons.
Fierce Competition
Know this: The competition for standalone MSP platforms has been fierce over the past two years. Why? Because there is a limited supply of companies in the $2.5 million-$6 million range seeking private equity groups. The good news is, it’s a seller’s market. This is forcing private-equity groups to get more creative than ever as money pours into the channel.
This session will also look at how to judge if a company is a cultural, strategic and financial fit; also, how M&A can fill employee and leadership gaps or help inactive shareholders exit while increasing capabilities/footprint and reducing customer concentration.
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We asked the session leaders – Juan Fernandez, co-founder/CEO, MSP Growth Coalition; Michelle Accardi, CEO, Logically; Cristian Anastasiu, managing partner, Excendio Advisors; and Colin Knox, CEO, Gradient MSP, to weigh in ahead of the show. See the insights from Knox and Anastasiu below.
Channel Partners: What are a few of the key things that MSP leaders need to know about private equity?
Gradient MSP’s Colin Knox
Colin Knox: It generally involves a change of control investment or full acquisition with employment retention. And it often involves a remaining equity position for executives.
Determine how to maximize your value, if being acquired by a PE firm, or an MSP that is PE-backed. This could be unique geographic coverage, specialization in a vertical or technology stack, or high profit. PE strategies are built on leveraged financing plans against the earnings of the total combined business. So profit is very important to them.
Cristian Anastasiu: Private equity groups, also called financial buyers, are in business to produce significant ROIs for their investors. As a result, the financial aspects of a business are very important to them, especially when compared to strategic buyers.
PEs are different from strategic buyers …
… in a few distinctive ways:
The financial aspects of a business are critical. Think high profitability, low customer concentration, mature systems and processes, market share, etc.
They expect business owners to roll over equity, resulting in the business owner becoming a minority investor post transaction.
They expect the owner to continue with the business until the next liquidity event. This typically happens after 5-7 years, but that period can be shorter or longer.
If the company is a platform, there is a high probability that the legacy, name and culture of the business will be preserved. This is unlike when a strategic buyer acquires a company.
The capital structure post-transaction often includes up to four times EBITDA in debt. Because of that, the owner “owns” debt in the new business in addition to equity.
The PE owns and manages multiple companies in various industries at different stages. Consequently, sometimes the decisions they make are not based on optimizing that specific company. Rather, their total portfolio.
PEs differ in their requirements for minimum EBITDA for platform acquisitions. Some will consider companies with EBITDA as low as $1 million-$2 million. Others have $4 million-$5 million as a minimum threshold, while others require $10 million or more in EBITDA.
PEs are buyout firms, as opposed to growth capital firms. There are more than 4,500 PEs in the U.S. currently. Also, there are PEs and family offices that have dedicated funds raised prior to pursuing acquisitions. There are also fundless or independent sponsors. These people raise the funds necessary for an acquisition specifically for that transaction. They also search funds, whose objective is to acquire and then actively run one single business.
CP: Why are new platforms considered “the lifeblood of private equity?