MSP 501 Profile: Capstone IT Strikes the M&A Iron While It’s Hot

Company Name: Capstone IT

Company MSP 501 Rank: 195

Co-CEO: Michael Fowler

Headquartered: Rochester, NY

Primary Services:

Twitter: @Capstoneitinc

The past few years have brought us a level of M&A activity that the channel has never seen, which has changed and reshaped our world in countless ways.

While some companies have used this as an exit strategy, others, such as Capstone IT, have used it as a growth opportunity. Owner and co-CEO Mike Fowler saw the opportunity to expand Capstone’s product offerings, and jumped on it. On July 1, 2019, Capstone IT completed a merger with four other IT companies to form Iconic IT. It now has offices in Rochester, Wichita, Dallas and Denver – all four of which are on the 2019 MSP 501 list.

Capstone IT’s Mike Fowler

“I saw this as an opportunity for us to grow, expand our market, offer opportunities for our employees and provide more advanced services to our clients,” recalls Fowler.

It’s a route many MSPs are taking these days, and for good reason.

Here, Fowler talks about how Capstone IT has differentiated itself from other MSPs in terms of the prospects they pursue, how the increase in M&A activity has impacted their business and how being members of a peer group has been a big success factor.

CF: You recently went through a big merger with three other IT companies. We’re seeing a lot of this as private equity flows into the channel. What should MSPs looking to leverage that opportunity be focusing on?

MF: The influence of private equity has made one thing clear: Size matters due to how it increases earnings before interest, taxes, depreciation and amortization (EBITDA) multiples, which in turn increases valuations. Valuation has become a KPI for MSPs. This is great because whether you want to sell soon or run your business for 20 more years, the march to increase valuation is now part of your decision making. A higher valuation means your decisions must include the health of all aspects of the business.

To maximize valuation, you must also show that you have proper processes and controls in place, steady growth among existing clients, a marketing and sales process that can consistently acquire new customers, and that you can efficiently integrate acquisitions. If you are looking to grow, unlike any time I can remember, today’s market provides the incentive.

To tie all of this together, a higher valuation provides more access to capital and attracts PE investments, which in turn allows more growth. No one knows how long this will last, but right now, this is really a good time to be an MSP.

There are of course risks to some MSPs. The companies that decide to invest in growth in order to capitalize on higher valuations will be outspending other MSPs, particularly in marketing, building sales teams, and research and development. You must have a strategy in place to combat this or you risk losing market share. Many are probably already seeing this.

CF: Valuations, EBITDA, maximizing efficiencies: These aren’t things that many MSP owners are naturally familiar with. How did you learn what to watch out for, what to focus on and how to get where you wanted to go?

MF: Capstone and the other three businesses that formed Iconic IT have been providing IT services for over 15 years. Success was not overnight. But over the last 10 years, our companies have taken off. We are fortunate to have great leaders and dedicated employees and there are many other ingredients to our secret sauce, but I believe the biggest factor …

… in our success has been being members of a peer group.

There are plenty of great businesses that have not been in peer groups, but if you are looking for answers or need to understand what “good” looks like, a peer group is going to help you.

What I love about the MSP industry is the willingness to help other MSPs. For about 10 years we have been members of groups like ConnectWise Evolve (formerly HTG) and Technology Marketing Toolkit, which is probably better known by its leader’s name, Robin Robins. During this time, we have evolved to be less tactical and more strategic in how we manage the business. We have spent time putting together both business and personal goals to ensure there is work-life balance. We have learned how to set up a chart of accounts so we can compare results to best-in-class companies. We have learned which levers to pull to increase margins, shared pricing strategies and service offerings, learned how to define a target market, do strategic planning, conduct a webinar, implement a marketing program, incent salespeople, hire A players, and so much more.

Not only do you get the opportunity to hear from great speakers, many of whom are successful business people and authors, you also get time to work in small groups and help each other solve problems, share best practices [and so on]. For years when I had a problem, I took it to my peer group for advice. We traveled to each other’s businesses to do structured reviews and offer guidance. I was fortunate to be in a group with people who understood the more you give, the more you get. People I respected, trusted and who truly cared about my well-being. And with the formation of Iconic IT, now I get to call them my business partners.

Channel Futures: It feels like every time we turn around, there’s a new company offering managed services. How do you stand out from the crowd in order to grab the attention of potential investors or M&A partners?

Michael Fowler: We can’t be everything to everyone. We know who we are, and we have built our company in that image. Then through sales and marketing, we look for prospects that need and will appreciate the service and service levels that we offer.

More specifically, Capstone’s objective is to identify prospects that have a similar operational maturity level (OML) as Capstone, within our target market. Then throughout the sales process we highlight our people, processes and tools, built in the image of that OML. The prospect either connects with it, or they don’t. At the same time, we are evaluating the prospect. When we have a perfect match, there will be a strong connection and they will show us they prefer our solution.

Sometimes, we are too structured for some prospects who, for example, have never budgeted for IT (lower OML). In other cases, we are not structured enough. The short answer is we look for prospects who are the right fit. Then we demonstrate that we are the right fit through the sales process. We focus on high quality services, delivered in a timely fashion.