There’s no question: mergers and acquisitions activity in the MSP space has picked up significantly over the past few years. We’ve seen first-hand more inquiries, higher valuations, and a growing diversity of buyers. Private equity firms are increasingly targeting smaller MSPs, more solo buyers are entering the market, and of course, existing MSPs are still thirsty for growth opportunities. All this attention has led some to speculate: are we in a bubble? To answer that, we need to understand what’s driving this surge in M&A activity. So in today’s blog, let’s take a look at three of the most important factors we see driving M&A acquisitions for MSPs:
The scope of services provided by MSPs has expanded considerably in recent years. Whereas the traditional focus was on infrastructure management, cybersecurity is now a core component. This has created challenges particularly for smaller MSPs, who may not have been able to invest in broadening their services to include robust cybersecurity. Those who are unable to-do-so may not qualify for cyber insurance, and neither may their clients. This poses not only a risk for the MSP in terms of not being protected, but also a risk that clients may churn.
Regulatory obligations have also become more complex, with MSPs expected to comply with frameworks such as HIPAA, NIST, and GDPR. Smaller MSPs may find it difficult to meet the standards. For some, the best path forward is to exit and be absorbed into a larger MSP that has the needed infrastructure and expertise.
The question becomes, do you foresee a future where cybersecurity threats are lessened, or will they continue to increase? While the future is hard to predict, when you consider our current geo-political climate, it seems unlikely that cybersecurity concerns are going away anytime soon.
Another major factor driving acquisitions is the age of MSP owners. Many MSPs still operate under their original founders who started their businesses in the 1990s or early 2000s. Those owners are now approaching retirement age and are looking to exit. Even among younger founders, burnout and family priorities often lead them to consider selling and retiring early.
This trend aligns with broader demographic patterns. Baby Boomers and older Gen Xers are retiring across all industries, and IT services is no exception. It seems probable that the wave of exits is going to continue over the years to come.
Nearly every MSP I’ve ever spoken to gets most of their leads from word-of-mouth or referrals. But this approach only takes you so far, and often MSPs find they hit a ceiling somewhere between $1.5m-$2m in yearly revenue. Scaling beyond that requires significant investment in marketing and sales. But many MSPs aren’t keen to incur the costs to-do-so, and don’t have the patience required to see it through. So, they get stuck.
Even when solid leads come in from marketing efforts, it’s very competitive, and there’s a good chance the lead may be speaking to 5+ other MSPs. Prospects may not appreciate the true value of managed services and may be inclined to go with the lowest bidder.
In instances where you are reaching out to a company who already has an MSP, they likely won’t want to switch providers unless they experience a service failure. Which makes the timing of outreach tricky.
Acquisitions can bypass many of these challenges. Instead of fighting for every new seat, MSPs can grow quickly by acquiring a book of business with established relationships. So, as organic growth becomes tougher, more MSPs are looking at M&A as their preferred option.
Looking ahead, will organic growth become easier? It’s unlikely. Larger MSPs are investing more heavily into marketing, automation, and AI-driven outreach. So going forward, small-to-mid sized MSPs may find it even harder to compete.
When we look at these important factors driving M&A activity in the MSP sector, there’s a strong argument that all three of them are going to persist for the foreseeable future. Could valuations soften or buyer interest shift? Sure, markets always change. But the core reasons behind increased M&A activity don’t appear to be going away anytime soon.
Considering buying or selling an MSP? Contact us today — our team can guide you through the process.