Selling your business is both a milestone and a life-changing decision. On the one hand, there’s a clear path to lasting financial security after years of hard work and stress. On the other hand, selling at the wrong time or in a wrong way might not give you the results you want, neither financially nor psychologically, or personally.
Are you ready to sell your IT service business? Here are a few considerations to take into account.
The first step in preparing your company for sale is applying a few optimizations to make it more attractive for potential buyers.
For example, if you offer multiple services for multiple clients, can you rank them in the order of growth, revenue, and profitability? Since your company is valued based on the multiple of growth and profitability (but averaged out across all services), fixing problematic areas will help you increase the final selling price.
In case you can’t spur profitability or growth for some services or accounts, it might be beneficial to cut them, increasing your multiplier.
When you break down revenue by services or clients, you’ll see that some bring in healthy revenue but are barely profitable in the end.
The likely culprit is COGS — the cost of providing the service is close to the revenue you generate from those services. A typical MSP might find that longtime clients are still paying the same fees while the cost of delivering the service (e.g. labour, infrastructure) has significantly increased. This is the perfect time to have a conversation with your clients and look to implement auto renewal agreements with a price escalator.
Another reason for high COGS relative to revenue is miscalculation, particularly with new services. Unless new services are showing healthy margins and growth, you might want to consider whether it makes sense to keep them or alternatively increase the price in order to increase the valuation.
Owners of smaller but growing MSPs are often not only CEOs but also engineers, account executives, customer support specialists, and occasional bookkeepers — all while paying themselves a bare minimum to survive.
The question to ask yourself is “what would it take to replace you?” The buyer might have to hire a new CEO and other staff at market rates to get the same output. What would it cost them?
You should include the market rate salary necessary to replace your role in your region as part of the adjustments needed to calculate an adjusted EBITDA figure.
In addition, consider whether all your MSP’s processes are clearly laid out or are you mostly keeping them in your head? An important part of the transition is documenting every process the buyer needs to repeat your success.
Reasons to sell a company vary greatly, from personal including divorce to other debt to burnout and of course retirement.
If you control the timing, you should sell at the sweet spot — when your MSP produces healthy profits while continuing to grow. The other side of the equation is “how much do you need?”
While more is better, if you need $4M to retire on the beaches of Thailand, and your business can already be sold for over $7M, is it just inertia that keeps you going?
Conversely, if your business is just picking up steam, consider growing it for another year or two.
The key idea is to know your number, so you can calibrate accordingly.
The buyer will value your company based on the multiple of your revenue, EBITDA, or in the case of MSPs, adjusted EBITDA. The multiple is dependent on many factors including your growth rate, location, specialization (if any), percentage of recurring revenue and customer concentration among other factors.
In general, a healthy growing MSP can expect to sell for 3-6x EBITDA. Wondering what a more precise valuation of your company might be? Get in touch with us at The Host Broker and we’ll provide you with one — free of charge.
There are lots of ways to structure a deal, from a lump-sum cash payout, stock in a Newco or buyer’s firm to an earn-out to seller financing.
Tax implications are an important part of the process. While getting the whole sum in cash today seems like a good idea, paying tax at the highest marginal tax bracket and giving away half of it to taxes might not.
A CPA can advise you on what works best in your situation with regard to minimizing tax obligations and working backwards from a targeted amount if known. You should know what you’re looking for (need for retirement if relevant) before starting negotiations.
If you have other shareholders in the company, getting alignment before starting the sale process is essential. In many cases with a partner, you will be obligated to buy them out if you are not both aligned.
Having a clear idea of a desired selling price and conditions including any requirements to remain working for the buyer are important to think through.
The partner who leads the selling process should also make sure to openly and transparently communicate the progress with others.
When you’re used to waking up thinking about your business, mulling over problems while having lunch, and going to bed with new ideas in mind — adjusting to the new reality might be difficult.
All business owners need a clear direction post-sale. Even billionaires aren’t immune from this.
What are you going to do when you’re no longer operationally involved in your company? What other goals do you have?
A natural impulse for those who are used to working all the time is to get right back into the game with a new company. However, a non-compete agreement might prevent you from starting another MSP for a few years. So have a plan B.
It’s a good exercise to ponder the questions above before you start approaching potential buyers. Not only will you look at your company with more clarity, you might be able to increase its selling price and avoid living in an aimless depressed state after the deal is done.
But there’s much more that goes into a successful sale, from choosing the best buyer to negotiating to getting your books and operations in order. That’s where an experienced broker with a track record of successful deals can be invaluable.
Thinking about selling your MSP? Just reach out to the Host Broker for advice and get a helpful guide throughout the selling process.
When it’s time to sell your IT service business, you want to find a deal that’s fair to everyone — great compensation for you, growing future profits for the buyer, and a fitting new environment for your team — without wasting a lot of time.
Some buyers, however, don’t think that way. Whether they are not serious about the deal, want to aggressively negotiate down the price, or try to lock you into an exclusivity clause to keep their options open, you should be able to spot typical buyer red flags and avoid them to find a great new home for your business.
Tip: Want to sell your IT business without setbacks? The Host Broker will connect you with thousands of trusted buyers of IT firms and walk you through the process step by step, avoiding common pitfalls.
If you meet with a potential buyer and they don’t have constructive follow-up questions, you should be concerned.
Lack of questions might mean that the buyer didn’t prepare for the meeting, willing to waste everybody’s time. It might be a sign that they are disorganized and don’t have a proper process in place. It hints at lack of commitment.
Asking questions already answered in the provided documentation, such as “how many employees do you have?”, is no better. It shows that the buyer hasn’t reviewed even the basic information about your business.
What are some good questions to ask to avoid getting things off on the wrong foot? A few examples questions that demonstrate that the buyer is thinking about next steps could include:
Buyers who don’t pay close attention to what matters to the seller should cause suspicion.
If the seller says that their employees or customers mean more to them than the final price, a reasonable buyer would provide assurances about cultural fit and taking care of the existing customer base.
Instead, if the buyer becomes picky with employees’ lifestyle benefits or some customers not paying enough, it’s likely they will change these things as soon as they take over.
Other important elements of the deal are know-how, certifications, and geographical presence.
If your business works with specific technologies (e.g. Citrix, Oracle, VMware), the buyer should be aware of that and concerned with being able to maintain the same level of service.
If your business services clients in a particular industry (e.g. government or healthcare), the buyer should make sure they have all the necessary certifications, clearances (ex FedRAMP) etc to continue that work.
If your business has clients that require on-premise work in different geographical locations, is the buyer able to support these customers as needed?
No one wants to sell to an incompetent buyer who would run the business into the ground a few years in. The buyer’s lack of familiarity with industry terminology is one of the easy-to-spot red flags that they might not be the right choice.
When an MSP sells to another MSP, industry terminology is rarely a problem. However, if a buyer comes from a different space — finance, oil and gas etc thinking it would be exciting to diversify and own an IT business, you should think twice.
It’s hard to understand the implications of running servers, maintaining infrastructure, making the right technological hires, and supporting customers when you know very little about the industry.
Besides the disruption poor industry knowledge can bring to customers and employees, it can also have a serious effect on the seller if there are earn-out clauses or seller financing involved.
There is no shortage of potential buyers who do next-to-no due diligence before submitting an offer or LOI. The reason is that they don’t want to miss out on a deal and try to beat their competition to it with the idea that they will negotiate the deal down later if they miss something.
The buyer then starts their due diligence only after giving getting the seller into a no shop or exclusivity period.
This creates a asymmetry, since the buyer can still find reasons not to go through with the deal they don’t like (e.g. not liking the exposure to a particular industry), but the seller is likely going through the process in good faith and ultimately wasting their time.
If the deal is not signed, the seller has to start the whole process all over again.
It’s always a good idea to check the buyer’s references and see how their past acquisitions have turned out. Even if they haven’t done a deal before, checking the quality of their references is an important step.
If the buyer has done deals in the past but can’t provide a single reference and is making excuses — a critical red flag.
If the potential buyer always tries to find something wrong with the business and asks confrontational questions that put the seller on the defensive, there is little chance for a trusted relationship to develop.
Examples of contentious behaviour could be nitpicking negative Google reviews, saying that revenue projections are hard to believe (without providing evidence), questioning the competence of employees after reviewing ticket history etc.
When the buyer doesn’t believe they are buying a great business, they are more likely to prove themselves right post-purchase.
When you meet with potential buyers, listening to what they say, how they behave, and what questions they ask (or don’t ask) can be a strong indicator of a good or poor fit.
Watch out for:
Avoiding red flags in negotiations comes with experience of seeing bad acquisitions play out. But you don’t have to go through it if you rely on an experienced IT service business broker.
The Host Broker can put your business in front of thousands of qualified buyers and guide you through the whole process. Contact us to ask any questions, and we’ll give your business a fair evaluation — for free.
Selling a business is an important milestone that happens only once for most entrepreneurs. Make sure to take heed of the red flags above, and you’ll avoid many common mistakes.
What questions should an MSP owner consider before selling their business? Find out in a webinar presented by The Host Broker and eBridge Marketing Solutions with special guest, Josh Peterson, the CEO of Bering McKinley and BMK Community.
The first question to consider is: what valuation does the owner need to achieve their goals? We emphasize the importance of considering this question early on and not waiting until the owner receives an offer or lists the business for sale. We also mention the personal and financial factors that should be taken into account when determining the valuation and the need to consult with a CPA to understand the tax implications of the transaction.
The second question is about the financial metrics that should be focused on to increase the valuation of a managed service provider (MSP) for sale. The valuation methods for an MSP are related to cash flow and net profit. Recurring revenue is another metric that can increase valuation. For smaller MSPs, attaching a cost of goods sold to each item of revenue and knowing where the profitability comes from is essential.
The third question is whether having a sales team in place can increase a company’s valuation. Having a sales team shows maturity and planning, and gives buyers confidence that the company has a system and process in place that will continue to produce growth. However, the assumption is that the sales team is productive and can justify their cost. Relying solely on word of mouth and referrals is not unique and will not increase valuation. Overall, having a sales team can help increase valuation, but it’s important to ensure that the team is effective and can produce results.
We also discuss whether an MSP’s clients are month-to-month, or have break-fixed contracts, that can be converted to longer contracts. There can be a healthy mix of recurring, project, and hourly revenue. But it is important to realize that buyers are looking for certainty in revenue streams and a customer base that will be with them long term. MSPs whose clients are on shorter term contracts may require a greater earn-out component.
The company culture and employee morale are also important factors for sellers to consider when preparing for an acquisition. Buyers will want to make sure that there is a cultural fit, and if the company is a bad place to work, it will be a red flag that will impact the valuation of the business. A good way to measure employee satisfaction is through the employee net promoter score (eNPS), which can help identify areas for improvement. A positive company culture will make employees more likely to stay, which will make the business more valuable to buyers. Remote work can also increase employee satisfaction, especially in areas with traffic congestion and long commutes, and can make the business more attractive to buyers from other regions.
The technology stack and infrastructure are also very crucial when selling an MSP. Sellers benefit when their CRM and PSA tools are similar to those of potential buyers to make integration easier. Having a better-built stack makes a business more attractive to buyers.
The next question is “What % revenue is associated with the top 5 clients?”, where we discuss the issue of customer concentration and its impact on a potential buyer’s perception of a business. For example, having a single client representing over 20% of a company’s revenue or the top five clients representing over 40% is seen as risky. However, sometimes there isn’t much an MSP can do about a situation where a large client grows substantially, in which case a buyer may wish to structure the deal with an earn-out or retention strategy to mitigate the risk.
Lastly, we discuss the cost of replacing the owner’s role in a business, which is an adjustment made to the profit and loss statement (P&L) when calculating adjusted EBITDA. The cost of replacing the owner depends on their role and geography, and it affects the valuation of the business.
If you have any questions, please don’t hesitate to contact us.
Are you doing less than $5M of revenue as an MSP? In this latest episode of The Business of Tech, The Host Broker’s Hartland Ross joins Dave Sobel to talk about deal dynamics for MSP earning less than $5M in revenue per year.
If you enjoy this video, you might also want to check our previous interview with Dave Sobel where we discussed trends in managed services. Watch it here!
The Host Broker offers a free evaluation for owners of IT services businesses considering exiting. Learn about the acquisition process and find out what your company may be worth on the market.
If you have any questions, please don’t hesitate to contact us.
In this episode of MSP Mountain, Hartland Ross explores all the details about selling an MSP. Eric and Hartland dive deep into all you need to know at every step of the way!
Are you an MSP thinking about doing your first acquisition?
Are you privately funding the transaction?
Are you a seller wondering where to start in getting ready for acquisition?
If you answered yes to any of the questions listed above then you have to catch this week’s episode of MSP Business School, where Hartland Ross talks about the world of M&A, and what to do if you are a growing MSP looking to make moves without private equity.
While a successful acquisition can be a major achievement for both buyer and seller, for employees the acquisition process is seen much differently. It is abrupt and the source of concern. Join us for an expert panel about the perspectives of employees going through an acquisition, and learn how you can address their concerns to ensure a smooth transition for all parties.
Devin: All righty. Well, thanks to everyone for joining us today. I’m really excited to be bringing us this webinar panel today. And I tell you what, you know, I say this for a lot of our webinars that we have some great guests, but today I really mean it. We have three exceptional guests. We have James Kernan, Tom Parker, and Troy Thibert. And the topic of today’s presentation is The Company I Work For Has Been Acquired What Now?
And this was a topic that we came up with and we were inspired by an actual post from the MSP subreddit. And I won’t read the entire thing here. You can pause the video and read it if you’d like, but just to quickly paraphrase, the topic was same as ours.
The company I work for has been acquired what now? And, the poster says I’ve worked for a mid-size MSP for 11 years. We had a bomb dropped on us that we’re gonna be sold to another company. Can anyone speak about good or bad experiences they’ve had during a merger situation like this? I’m really trying my best, and to keep an open mind and stay positive, but given how long I’ve worked here, and this was my first real job, I’m very conflicted not feeling so great right now. Any input about what I could expect in the coming months would be great.
So this struck me as, quite an interesting post, just because of the candor of the poster. And it comes across quite clearly that there’s some concerns and really deep-rooted concerns, that this employee is feeling about this acquisition process. So we want to put together a presentation to kind of address some of these concerns, not only from the perspective of an employee but also from the perspective of a buyer or seller of a company, who has to essentially help deal with the concerns of the employees to make sure that the transition goes smoothly.
Devin: So, before we really get into the presentation today, I want to say a little bit about The Host Broker. if you’re watching this video, you’re probably already familiar with The Host Broker, but we are a brokerage and M&A firm for IT service providers, including MSPs, web hosting companies, data centers, IT service firms. And also we sell IP blocks, and we also offer marketing services through our other brand, which is eBridgemarketingsolutions.com. The Host Broker was actually founded in 2005 as spin-off from eBridge due to client demand. We had enough companies asking us for marketing growth opportunities, and we started to offer M&A growth opportunities as well. And if you’re interested in more information, you can check out our website, thehostbroker.com, where we have a free evaluation available for you.
It’s now for a little bit more information about our panelists, and, I’ll ask each panelist to introduce themselves briefly here. And just tell us a little bit about your experiences with M&A, so James, do you maybe wanna start us off and tell us a little bit about yourself?
James: Yeah, you bet. thanks Devin. And I’m, happy to be here. I’m James Kernan with Kerning Consulting. We’re headquartered here in Omaha, Nebraska. So, we’re based in the States. I’ve been in the industry now for close to 30 years, but the first half of my career, I owned my own MSP and Southern California. you know, bought sold owner, ran seven different companies, had a successful exit in around 2006. And then since then just really stumbled into, consulting and coaching. Since then I have been involved in over two dozen M&A transactions, either helping people grow by acquisition or grow their business and, and sell and exit. I also run the millionaire mastermind peer groups and do one-on-one coaching and then special projects like M&A consulting, and so forth, but happy to be here.
Devin: Great. Thanks James. And Tom, do you mind telling us a little bit about yourself and your experience?
Tom: Yeah, thanks very much for having me today. Glad to be here. So, I am working with HostPapa. I’ve been in the tech industry for around 20 odd years. The first half of my career was predominantly on corporate sales and biz dev, in the last 10 years or so I’ve been with HostPapa, and, we’ve been very, very active in the M&A space. So, HostPapa for those of you that aren’t familiar with us, is Canadian owned and operated based in Ontario. We are the largest web host in Canada in terms of Canadian ownership. Since about 2019, we’ve been extremely busy, as I mentioned, with M&A, we’ve probably done an excess of 15 deals for predominantly web hosting companies, but also a variety of technologies and other activities. So, that’s really the connection with The Host Broker. They, as those of you that are familiar with them, we’ll know, great service and, a great relationship there. So, that’s our background.
Devin: Great. Thanks, Tom. And Troy, do you wanna tell us a little bit about yourself as well?
Troy: Yeah, absolutely. First off, thank you, Hartland and Devin for the invite, greatly appreciate it. Yy name’s Troy Thibert, and I’m the owner of an IT firm called IT Partners who originated in grand Prairie Alberta with, well, I guess with a city, population of just under 50,000 at that time, we’ve since grown it to operate, with offices in Calgary, Alberta, Vancouver, Victoria, and operations in west, and you know, in Edmonton as well. So, we started this in 2010, and every year of our existence, we’ve grown in revenue. From our model, right up until 2022. During that 12 years we’ve been successful in three types of growth, through acquisition and mergers. Two are asset purchase agreements. There is a difference. And then of course, last year, with Hartland’s group, I finally pulled the trigger on a share purchase agreements, which is a different leave, path forward as well.
But it also has very good potential exit strategies that come with it. So yeah, So I’m gonna be speaking where I can assist on, you know, from the buyer side and, and what I look for. And maybe one of the things that I’m missing other than the three successes is probably the 16 to 18 conversations, that I, we walked away from for whatever reasons, but they’re just as equally as important for potential buyers to, to watch out for pitfalls to take the knowledge that I believe James is gonna bring as well, and to why you’re going to set up certain, processes and structures within your corporation, so that when it comes to your exit, you’re gonna get the most value for that exit. And so I look forward to contributing and hopefully provide some value to, you know, to some potential buyers out there.
Devin: Great, thanks to that Troy. And last but not least, Hartland.
Hartland: Yeah. Thanks, everyone for participating. And I really wanna thank, James, Troy and Tom for, joining us today and I’ll have a somewhat unique perspective, from them, as well, both, looking at this from a hosting perspective, as well as MSPs, as well as buyers, as well as, sell side. So, being I’m looking forward to today, I think it’ll be a very interesting discussion. I founded eBridge just over 20 years ago, as, Devin said, focused on really, IT firms and growing them organically. And then, we just ended up with a lot of those groups that for one reason or another wanted to kind of grow more quickly, than they could organically or in some cases, less expensively. And so, we ended up, building out, frankly just with, with clients, asking, building out a kind of informal marketplace, if you like. And, that turned into, The Host Broker and so, you know, today we worked with, literally like over a thousand, IT firms, collectively, whether it be hosting or data centers or MSPs or whatnot. So, look forward to today and, let’s get started. So, Devin over to you.
Devin: Great, thanks Harland. You know, and as it was illustrated in the Reddit post we shared earlier, going this through, an acquisition from an employee’s perspective can be very chaotic and there’s a lot of different variables. So, for the purposes of today’s presentation, we wanted to kind of simplify the issue by providing a little bit of a framework. And so, we’ve categorized the types of concerns that employees have into four different categories. We have day to day, financial, cultural, and technological, and recognizing that there’s gonna be some overlap between these, hopefully by keeping to this sort framework. We’ll make this a little bit more digestible today.
Devin: So, let’s start off with the day to day concerns. So, when we’re talking about these, we’re thinking about things like, what change can I expect as a result of this transaction? Who will I be reporting to? Where will work actually be conducted? Will I, or any of my coworkers lose our jobs? So when it comes to those sorts of day to day concerns, maybe James, maybe I can start off with you. Is there anything that comes to mind, but how you would coach the MSPs that you work with to guide their employees, and to help them help to help ease the employee concerns?
James: Yeah, so the first three questions, I would kind of peel off on one side and then, you know, will I, or any coworkers lose our job to me, that’s something separate that needs to be addressed immediately. And, you know, there’s a lot of training. Normally the leadership team will come together and select, you know, I break it down into three categories, people, process, and tools or technology. Normally it’s the acquiring company. You’ve got your tools and processes already, so there’s gonna be a lot of training of the new employees, but, I just wanted to tell a quick story if I could, Devin, and to put things in perspective that the post that you read from Reddit reminded me of the human element of things. And I’m a numbers person. I was a young executive with a big VA on the west coast. And, the first acquisition that I was a part of to hop on an airplane. And we, it was a company called technology integration group, but we bought the microwave of Honolulu. It was, they were based in Honolulu. They’d been around for 20 years. Unfortunately, it kind of looked like a VCR repair shop when you first walked into the shop, but the whole plane right over there, I was looking at all the numbers, all the contracts, the resumes of the staff, compensation. I was kind of going through all the numbers element of it and that’s important. But when I walked in through the front lobby and all of a sudden in the tech support area, there were about 25 human beings, all looking at me. And I walked in with the President and I was Vice President of Sales and Marketing.
And immediately, everybody kind of pointed the finger at me to start the conversation. And before I could say anything, it just, I remember vividly, like it was yesterday. I remember looking at everybody’s eyes and the number one concern, I felt them communicating, or I could see in their eyes was, you know, am I gonna have a job? Am I gonna, is me or any of my coworkers gonna lose their job? And I didn’t have this all prepared. It just kind of came to me. But the very first thing I said was, hey, welcome to the team, welcome aboard. We’re excited to be here. We’re to give you guys an update. The first thing I want to say to everybody is everybody in the room right now is gonna stay here. And there were, there were a couple people I knew we peeled out and had already left the company, know the original owner, was gonna leave the company and then like the accounting person and the purchasing person because central operations were gonna be handled through the corporate office, but everybody else, you know, sales administration and technical support, we needed everybody else.
But to me, that’s, I wanna, you can get caught up in the numbers really quick and, and see if it’s a culture fit and all that. But it’s the people side that, is really important. So, I would carve that out first. So I hope I kind of answered your question, but I remember saying that to everybody and I could just feel the energy in the room, like, you know, everybody kind of relaxed, and then we could talk about some of the other things, we had a training schedule over the next couple days of getting people trained on ours systems, setting goals and expectations. But one of the other things I said, I don’t know if it makes a whole lot of sense today. It’s kind of funny, but I just said, Hey, the first thing I’m going to do here is nothing.
And what I meant by that was I wanna listen. I wanna have one-on-ones with everybody in the team. And I wanted to understand the culture there. But I wasn’t gonna rapidly just start changing everything in the world because, they had their own culture and it was unique. And I wanted to embrace that and understand that before we blended another culture on top of that. So that was, you know, I probably should have said the first thing I’m going to do is do one on ones and, and listen, that’s what I meant. I wanted to listen to all their feedback before we implemented any changes.
Devin: Very interesting. Troy, Tom, and Hartland. Any thoughts on that?
Troy: Yeah, I can go. I think I’d like to maybe offer, you know, I think is some key advice and maybe just taking it, a step, precursor to the questions that are gonna compost announcement. And, that is really, doing the due diligence process is when you’re identifying key resources, the length and term they’ve been with the current company, and being begin to identify and set up a merger committee, the roles and responsibilities, those individuals are gonna corral all these questions that are well scripted. And, as we see in the day to day concerns and the financials, the technology concerns, they’re all gonna be listed thereby having a, a merger group team set up when you’re lucky enough to go through the process of finding the right fit, the right conversations.
And then you get to the close, before you go in and announce the potential merger acquisition, is to give the first line of conversation to that merger committee. Two things are gonna happen there. One is most importantly, you’re going to answer all these questions. You’re gonna build internal advocates with the new group. You’re gonna table all the possible questions that the staff and the groups below you are gonna run into, what is it what’s gonna happen after what happens next? And that’ll be key. And then when the announcement does come, then you’re structured and prepared to ease those questions, because at the end of the day, if you are lucky enough to get across that line, the first and most important thing is to protect that investment.
And yes, you know, the IT model and structure is very key, but to me, the resources also just as key as what it’s gonna look like in your portfolio, after you successfully smash the two companies together. So that’s the piece of advice to that. I would highly recommend for anybody about to go through the process and if you are successful is to take that, cautionary step, take that extra breath and, put that team together. And you’ll find that these key people, they’re internal advocates and, they’ll do a lot of the answering quite for you and really buy you some time to move forward. And in the, well, I guess the extremely hard work you’re gonna have for the next three to six months to intertwine two companies.
Tom: Yeah, I would add to that, if I may. That circumstances of the sailor, the transaction will obviously dictate to some extent the communication strategy, but fundamentally people want to know they’re secure. So, you come back to James’ original point. So, there may be depending again, on the transaction timing, there may be, different people find that a different, different points of, of the process. But you have a transaction purpose. There’s a reason why you’re transacting and why you’re putting a couple of companies together. But it’s important to remember that people in individual areas need to understand exactly how it applies to them. So, people want to know, are they secure, but also what role will they have going forward? And so I think that touches Devin on some of the other, other bullets on the slide here, who will I be reporting to, where will I be working, what are the practical things that will change for me? And I think, again, that depends very much on the circumstances. Is there, is the transaction happening because there’s a missing piece in a larger organization and you’re looking to, really keep the acquired entity intact, is it a similar business? And you’re looking to get, synergies together and cost savings and you’re sort of amalgamating. So, a lot of those things they need to be thought through, but again, just to reinforce my original point there, we’re trying to make sure that people understand how it matters to them. How will it affect them individually? And then they can participate in making sure it’s a success from there.
Hartland: Yeah. And I, I think, the interesting thing about this topic is that we have, three stakeholders, right? We have, we have sellers and we have the employees himself. And although this conversation was triggered by the request that came through from an employee on the receiving end, we’ve got these three stakeholders, all of whom, have a vested interest in a successful outcome. So, you’ve got, you know, from a buyer’s perspective, if as a buyer, you might be focused more and you probably would be by default focused more on, well, is this the right fit for us? In terms of the customer base in terms of the services provided, is in terms of the location, revenues, is this, is this, kind of the right target for us, et cetera. And then, and everything else becomes a sort of ancillary secondary, thought, or afterthought, but, you know, the staff are really important. And a lot of buyers these days are looking at acquisitions, not only for the customer base revenue, revenue stream associated with it, but really looking at it as an Aquahire, right? So, they need the people, they need their resources, they need the expertise. and particularly if it’s a niche market or a technology or, and just even the intimate knowledge of the, customer base. And, as a buyer to have, employees who are motivated to stay and feel like they, their world wasn’t just turned upside down. There’s an incentive because the boat won’t be rocked, the customers will be happy and customers who are happy stay, so you don’t have to put the churn.
And then from the seller’s perspective, often to time, certainly, with MSPs, less so on the hosting front, but within an MSP environment, most of the time the buyer wants the seller to stick around for some period of time. Now it may be three months. It may be a year or more, but, and it’ll vary, but, they’re gonna want them to stick around. And, and so, the buyer sticking around will help with the employees sticking around because they’re gonna feel some continuity there, at least for some period of time that the person that they’ve been working for a long time is still gonna be a part of this process. And they’re going to, you know, the seller, also is, is got their own, issues and questions, right? Because, well, who will I be reporting to? I mean, I’ve never reported to anybody before now. I need to report to somebody who is that person going to be, and where will that be? And what are my, the expectations before I could come and go and do what I want when I wanted now, maybe I can’t do that. So, there’s these questions on these different levels. And, I think it’s why it’s such an interesting topic because, there’s sort of so many stakeholders, but, you know, I really, I like choice point, of having a committee, because I think a lot of this, it doesn’t get thought through well enough in advance. And so taking an inventory, with the seller of, of kind of, well, what is the culture at your company, right? Do we, I’ve heard stories where there’s, Friday afternoon, we, we do our, our, you know, our drinks, right? Whatever you call it, happy hour, or, a, we take Friday afternoons off at our company. Well, the buyer company doesn’t take Friday afternoons off. In fact, they work right till six o’clock every day. So now what do you do? you need to make sure that, that, there’s gonna be some way to address, you know, very different, environment there.
Devin: Yeah. Great points there. and so just one, one thing I wanted to ask and kind of trying to think about this from the employee’s perspective a bit too, is I can imagine that every company who makes an acquisition probably tells the employees that no one’s gonna lose their jobs. Right. And then inevitably it happens, at some frequency. See, so I guess the question is really, how do you come across credible when you’re making that sort of a statement, so that it’s actually felt, genuinely by the, by employees
James: I’ll chime in and, and just say, normally, you know, that upfront, you know, it’s part of the due diligence on the front end when you analyze the staff and most of the transactions that I was involved in most of the time, back to Hartland’s point, you want to maintain that culture and maintain that, all the employees, you know, you may need to pull one or two out of the equation cuz you don’t need those, but you wanna address that right away way. And back to the story that I had, you know, you wanna put their minds at ease so you can communicate, you know, everybody here has a job here’s who you report to. And pretty much across the board, all the transactions I was involved with, the expectation was, Hey, we’re gonna take this existing core team. We’re gonna plug you into the headquarters office with all these other resources behind it. And we wanna grow, we wanna grow the local marketplace. So we’ll be adding additional staff of superstars, just like you are, to the mix. So, but normally, you know, that, I would want to identify that in the due diligence on the front end. So coming into any conversation, you’ve already, removed people that you aren’t gonna have. And, cuz that’s a, that’s a really important point, Devin, that that’s a culture buster right there. If you say one thing and you do something else, that’s not how you wanna start an engagement.
Hartland: And, I think that you know, from the, I’m not involved in the due diligence, so I don’t have full visibility into, some of these, you know, the analysis that goes into it, but from a high-level perspective, I do know that, oftentimes, the recommendations will also come from the seller. Look, you know, I have these 20 people, these are my, a players, these are my B players. And then, these are some that, that there’s, there’s some problems that I have concerned with and you might wanna kind of, take a look at these ones a little bit more closely. And then of course, there’s some people who may be great. It’s just the reality is, is that they’re, they’re redundant. And they just not needed. And they’ll, you know, oftentimes they’ll know, they’ll if they’re, if they’re aware of the process for it in the beginning, and sometimes they’re, they’re the ownership level too, right? So someone might be the CFO, well, now we don’t need a two CFOs, so, that person is gonna go and, and if they’re part of the ownership team, they’re already, kinda tuned into that fact, but if they’re not, then, you know, these are conversations that have to be had and, and probably should be had, you know, con right away concurrently with, with everybody else. So, there’s no rumors, being spread.
Tom: Yeah. The other consideration is that with a, with a larger company, making an acquisition, sometimes there’s new opportunities as well. So it’s not simply a case of will my job stay the same, will I lose my job, but actually there may be an opportunity to learn new skills to move into new roles. So I think there’s, there’s a positive spin here as well. And I think during the due diligence process, you want to identify some people that have a high potential, and maybe you’re looking to bring them into, into the group level, and you’re looking to give them new opportunities and, and enforce the overall value of, of the group management as well at that point.
Troy: Yeah. That’s a great point there to, just to add to that maybe on, of the reverse kind of psychology of, you know, we definitely want employees to stay, reality is, you know, when you do put two companies together, the daily pace of their environment, may increase, to something that they’re not normally, you know, accustomed to. So meaning, maybe have a great it firm smaller, you know, maybe 10, you know, 10 employees and under, and their daily routine has been pretty calm, nd all of a sudden they’re gonna be into new new processes and procedures, and a faster-paced environment. And, you know, they’re excited from maybe day, you know, 10 or 12 on, but the reality is after three to six months, maybe they don’t have a skillset for that fast paced environment, you know, where you can take advantage of those extra opportunities because that is definitely more, more salary, more income, but then there’s more responsibilities, more fast-paced. You know, those are please go aside inside, but you will, you will have some type of churn, you know, with staff that decide, you know, what, I’m gonna go realign myself with, you know, my, my, my current workflow mentality. So that’s just something to keep a, you know, keep in the back of your mindset as well.
Devin: Great. Well, I think, we can probably move on from day-to-day concerns. That was some great insights there. And, we can also talk about some financial concerns from employees. So these are things like, what will I be paid? Will I be better or worse off, how will performance be evaluated? What will my role goals and object objectives be? Will I be signing a new contract, who will pay my vacation pay? So some of this, picks up from what Troy was just talking about. but, what comes to mind for you guys, when you think about the financial concerns for employees going through this transaction?
Hartland: I mean, I, I think what I’ve seen, oftentimes is that the buyer will try to, assuming that they want to keep the team. And, and generally that is actually the case that they will be providing some incentives to, to the employees. So, salaries will be, increased, benefits will be improved, you know, kind of perks associated with the role, would, would improve and, and so forth. So that’s oftentimes what I’ve seen, as, you know, part of the, the kind of incentive, process and, and taking inventory course of, of what the existing, structure is, how much the existing employees are paid, how many hours they’re working, what their, expectations are. I mean, I know, Troy, for instance, you’ve got, some pretty cool things that, that you’re doing with, con pension, contribution. Right? So there’s providing, a bit of a lift overall. I think the, you’ll circle back, if someone else doesn’t cover the vacation pay and, and the new contract. Cause I think that’s, those are two important points, but I’ll, I’ll pause there.
Troy: Yeah, I can, I can add a little bit it, you know, to that. And, I think with, having those little, like you say, incentives, and, so that helps speak to being in a large organization, you know, what’s in it for you, right? So usually that does come with some bit of a salary or income compensation bump, because you are already identifying that their workload’s gonna increase to some, to some level, you know, but it’s also important to note that, there’s time for there’s two types of sales and asset purchase agreement is a smaller in nature and we’re in reality, you’re just buying the book of business in, in the client base that comes over and you just start to implement and, and earn those new contracts under your brand. the next, you know, with a sale purchase, you know, the purchase share agreement, you know, that’s different, you, you have time, you know, there’s gonna be a lot of considerable time to one, one down, if that is the end goal.
So when it comes to vacation pay, the books are gonna be managed, by one quarterback, but in the interest of the direction of where the integration is taking place. So, for our group, obviously signing into a new contract comes in, with our IT P partners logo, that’s where our better health plan is. That’s where our compensation plan is. That is the legal document that puts us on the hook to say, we’re gonna pay all these wonderful things. We’re gonna get you access to our pension plan. We wanna improve your lives and, and kind of, you know, nail a lot of those questions about roles and responsibilities, vacation pay that becomes administrative in, in my books, whether, you know, whether our bookkeeper pays it from the other account while it’s winding down, you know, but the end goal is to move it all under, you know, for us, our QuickBooks, data files.
James: So, Yeah, I think, I think all of these six questions are critical. And the first thing I’d say is they all need to be crystal clear in writing back to the employee that you would want to retain. I was always a big fan of either retention bonuses, but more specifically, increased performance commissions or bonuses, you know, you’d either want to equal or increase a little bit are their salaries, but you would wanna be able to demonstrate that here’s an opportunity for you to make a lot more money based on your performance and achievement of goals. the, the one on the very bottom Hartland will probably talk a little bit more about this, but, you know, who will pay my vacation pay. There was, I think it was that very first transaction that I was involved with. I was, there was a staggering number on, on the bottom of the spreadsheet of the outstanding vacation or accrued vacation pay. And, in that transaction, it was recommended that the seller, pays that out before we would sign them on a new contract, you know, they had to, we go on, on our contracts, and would recommend that. But, I don’t know, in most cases I would say that the liability of the outstanding vacation pay, should fall back on the, on the seller. and in some cases, you know, that can be easily overlooked and that number can be pretty substantial. so, that’s something you wanna look at.
Troy: Yeah, that’s a good point, James, I think, for those that are embarking on this, depending on the time of the year and your fiscal year, yeah. You’ll be admins, what’s called, I guess basically a, a stump here end. And that will start to get that, that pivotal point on, you know, what part of the networking capital you’ll be adjusting that is owed by the, you know, the firm that got acquired pre April one date versus post April one date. And again, I think if you leave with the employment contract and getting them signed up, the vacation pay comes under their group, and then the payout will come from the networking capital.
Hartland: Yeah. So, I agree with James your point about this being a potentially big issue. T these are the types of things in a transaction that, nobody really worries too much about until the end. And I find out, geez, there’s this huge liability, and who’s gonna pay this and you gotta come to terms with, with it, particularly with COVID because a lot of, vacations didn’t happen. And so you ended up with this, this, accrued, you know, pay that, that needed to be, dealt with and, or time, I mean, the other thing is time, right? They’d accrued, six weeks of vacation that they hadn’t used. but generally speaking, it, it is the buyer, sorry, sorry. Excuse me. Is the seller, excuse me, who would pay, the vacation pay as well as any other liabilities up until, the point of close. And so this kind of brings me to another issue which can freak, employees out certainly is that they, do end up, in an asset purchase agreement. They do end up, being terminated. However they get simultaneously rehired, you know, at the same time, the same day. So, the liability associated with the, prior the periods prior to close become, or remain rather with the, with the seller and then the buyer kind of has a clean slate, going forward. So that’s typically what we’ve seen is a simultaneous termination and, and rehiring process. And of course, as, as we said, under a new contract with new, and hopefully better terms, if it’s, a share deal, and, and Troy is, you know, recently done one of those, then a little bit of a different story. And so, yeah, it’s an adjustment to, to working capital, at that point. But of course a new contract can also be, signed.
Tom: One thing, Hartland that I would, regards to an asset sale. And, and what you described in terms of the simultaneous sort of, termination and new account. I would highly recommend that people look into employment law in their jurisdiction and where the transaction is taking place. And you may need in, certainly in one instance, we’ve certainly had to, put protection into the actual asset purchase agreement with regards to the liabilities. Because I know in Canada as an example, they, the courts do not necessarily see, the liability and, and I’ll, I’ll take severance as an example, as an acquirer, you’d like to think that when the seller has terminated, they’ve taken on that responsibility, they’ve paid out severance, the Canadian courts may you that differently because they essentially have had a continuous employment with the, with the business they were involved in, even though the ownership has changed. And so, I think what you’ve described is certainly our experience for the most part, but I would, I would highly recommend getting some legal advice on that point.
Hartland: Yeah, that’s a good, a really good point. and we’ve encountered that issue as well. So, yeah. Thanks, Tom.
Devin: Great. Well, maybe we can move on to the, the cultural is, concern slide here too. So, for this category of concerns, we’re talking about things like which name slash brand will the company take. What’s the direction of the new company? What are the goals, what will the companies cultures be like, and will they synergize? And how will I adapt? How will I adapt to new company culture and what steps will be taken to get there? Does anyone wanna start off, on this topic?
Troy: Yeah, I’ll just, I’ll take a quick lead on this, culture is, is key. If you wanna retain your employees along with the financial and making sure you’re protecting your investment, what they’re used to and they do well and what you do well, all goes back to that, initial, merger committee, and setting that up to what that’s gonna look like. And that should be a major, task item to review, and implement. I wouldn’t stress enough that that is, that is, that is key. when it comes to culture, that’s the integration that you look for, as, as part of one of your tick boxes when you’re looking at making a final purchase. but that is a key concept and, these are great. These are great questions. And I think if you stay ahead of it, you’ll have, you’ll have more, more opportunity to protect your investment when, when the news is, when is brought to everybody and dropped on everyone.
James: Yeah. Yeah. Good, good point, Troy, the, when, you know, culture is key, and one thing I would look at very closely is the company who’s getting acquired. Are you going to of retain any of the leadership in that organization, or not, and, in many cases you do, and something that I’ve seen work really well to embrace those cultures and get everybody on the same sheet of music as, I’m an EOS implementer as well, and work with both leadership teams together and take them through there’s 12 exercises that I would walk through to build out their vision traction organizer, which is a, a two-page document. And then at the end of us completing those exercises, we build a presentation deck and present it back to the entire company. So both leadership teams, you know, had their fingerprints on the updated core values and the goals and the direction and the 10 year roadmap of where the business is going. And then you need to communicate that to the entire team, to really embrace that culture and get everybody on the same sheet of music.
Hartland: I think the, I was gonna take the first point here about the name and the brand, that the company will take. So now this is often a question that the seller will ask, of a buyer is what, what do you gonna do with this brand? And in some cases, the seller doesn’t care. they’re just, it’s kind of more of a curious question than anything else. in other cases, they do, because this is their baby. They’ve built this, this for quite some time. And, and now the buyer is simply just gonna kind of fold it in into their, their brand. And so, it’s a little bit of an affront to the seller to now, kind of have this, this thing that they created, disappear, right, because it’ll be, it’ll be moved into the fold.
And so the employees, to some degree, especially ones that have been around for a while may also, you know, have this kind of feeling that that’s something that they’ve built and, and what they’ve built is ends up being, disappearing. So I think it’s an issue that, should certainly be talked about, in some cases it may just not be practical to keep it, there may be steps to, to take, and, and Tom, you know, your perfect example of this, because you’ve done many acquisitions with many different brands. but, you know, I’ve seen situations where the brand is maintain for some period of time. And then it’s, it’s a brand ABC part of X, Y or Z company. and then, and then it’s a, you know, an X, Y, Z company, formally ABC, right. And then the ABC eventually just disappears. But, it is an important, consideration and you know, as far as the other points go talked about, cultural already. So I, I think looking at these kind of cultural artifacts and norms, and taking an inventory, taking stock of, of what exists in, in the company right now. So as they say, do people, not work on Fridays, do they, do they have a, once a month, kind of, thing that’s, that’s done once a month, we, we go and we bowl together, or we have a company kind of, you know, softball team or whatever it is, what what’s gonna happen to, to these things. And, and in some cases, you know, maybe that the buyer likes the idea and, and, and kind of rolls it out. In other cases, there might be a better, something that’s better than, than what is even being done. But I, I think it needs to be, you know, addressed and communicated and, and, and, and mitigated. And of course you’re not gonna, appease everybody. But, reality is, there is gonna be change, but, not to overlook the importance of some of these things.
Tom: Well, I, I think it’s vital to recognize that these are relationships. So, you have to invest time and energy in, in making them work. And sometimes an acquisition happens quickly. And in terms of the goals, it may be difficult to determine, very, very clearly a long-term plan, but, you know, there’s a short-term need and a fit. And so as a buyer, you need to, you need to really evaluate where the value is gonna come from in a transaction. But then you need to be able to within a comfort level, you have to be prepared to invest the time and energy in, in working with the people that are coming on board, making sure they understand what you’re about and what you’re trying to achieve. And even if you’re not able to set out a 10 year plan at that point in time, helping them to understand the approach that you’re taking and how you want them to be involved in that again, will make a big difference, to their comfort level as to, you know, what’s going to happen. And when, and it will engender, I think a sense of, patience, which in the absence of communication, which I think is a big failing in M&A transactions. A lot of times, on the communication side, people get nervous. And so if, if you’re not clear about the fact that something will happen or something is being worked on, and this is what the role of, of the individuals are, is going to be, people will assume the worst, they get nervous. They wonder whether or not they, the, you know, we, we were promised that we’re gonna keep our jobs, but actually in six months time, I’m gonna lose it. And, and it’s that, it’s that I sense of integrity and, and trust that gets lost. So I think you have to be clear with people. And I think being honest and upfront about something like the name of the brand is important as well. And even to the point where, you know, you don’t wanna do a deal and then have a disgruntled seller, because as part of the negotiation, you said, yeah, we’ll keep the brand. but then subsequently you, you immediately retire it. So I think all of this comes down to having honest trend transactions and, and trying to make sure it’s a win-win for both parties.
Hartland: Tom, because you’ve rolled quite a few brands into, host Papa, what, if any challenges have you seen around groups wanting their brand held onto, or the team kind of feeling like they’re, they’re associated with that brand end? I, I know this can be a particularly big issue, and I don’t know if it’s happened with you where, where, this happened for a number of other hosting brands years ago, where, the companies were acquiring, they viewed each other as competitors. And, and so what was happening was is that the, the, as the buyer continued to buy up other brands, and, and these were competitive brands there became this, still this competitive culture within the company, where it’s kind of us and them, even though it was, everybody was now an us, they’re still maintained that us and them mentality because for years they had been rivals, essentially. So I’m just curious how, how have you?
Tom: Yeah, I think in, in our experience, we haven’t found employees, to be, you know, desperately attached to the brand a lot of time. I think they want to be gainfully employed. They to have purpose in their work. They want to be part of a team and a culture that they, they like, and that matches, you know, their own beliefs. I think it tends to be the seller who perhaps, created it has run that brand for 20 years. It’s, it’s their baby. It tends to be the sellers. I think that are a little bit more attached to the brand name. But in terms of competitiveness, you know, I think there’s an element of that, but I think the way that we’ve, we’ve always tried to overcome it is to, is to really focus on integration. So bringing people on board and rather than leaving individual business units, in our scenarios, we tend to integrate them into their functions.
So you don’t have, five or six different development groups in under different brands or, or different lines of business. Typically, you have it more centralized and that allows, individuals, to stretch beyond what they’ve been doing traditionally, and to work across other projects with other, other developers. And certainly, when you’re acquiring a small group of people who have worked in isolation to a large extent, one of the big benefits of a, of an M&A transaction tends to be that they get to work with other people that have, you know, similar interests, similar skills and, and other people that they can learn from. And we often find with some of the smaller shops, you might only have a couple of people doing a particular job development as an example, and some of those people like to, to have peers. And so that’s part of the integration and getting them to be bought into what we’re trying to achieve as an organization
Hartland: Yeah good points.
Devin: Well, thanks, Tom. And so our last set of concerns here are technology concerns. So these are things like, do I need new training, will the tools and systems I’m familiar with beach, how well documented our new procedures? Well, the skills and expertise I’ve gained be seen as valuable. so, you know, a lot of these are really at the kind of the core of, how technical employees see their value and, and self-worth and things like that. So, you know, these are very significant, concerns. I’m, I’m curious what you guys think about these.
Tom: I think to some extent, it depends on the nature of the transaction again with this one, Devin. So, certainly, and I think it was mentioned earlier in, in the call, if we’re making an acquisition for a technology, then the individuals coming on board are, are managing something unique. It’s something that we don’t necessarily have expertise in. We don’t necessarily have people that are able to, to run that. So you may keep them and, and have them focused on that. And, and the training could actually be reversed. So it could actually be leveraging the skills and knowledge coming into our organization, and spreading that knowledge, to help the broader group, in terms of tools and systems. Again, I, I think it was also mentioned earlier that generally speaking as an acquirer, you have systems and you have tools that you try to want to have standardized across group as much as possible from an efficiency standpoint. So yeah, that’s, that’s an area where someone may need to, to change, but, you know, again, from a hosting perspective, we often find, the companies we’re acquiring are working with the same sorts of technologies that we are anyway. And so there’s not necessarily a major, major shift there. And then in terms of the skills and expertise for, you know, to close for, for myself on this, I would say that it, it points back to, is it a, like for like acquisition, are we acquiring somebody who, or a business that’s doing the same thing that we are today, or are we acquiring them because they offer us something entirely new and somewhere on that spectrum, you’re gonna find that you, you may have very unique skills that you’re bringing in and, and you can actually help us to grow as an organization. Or you may find that, you have peers that have similar types of skills and you can, you can join a large group of people with those skills and, and find new ways to apply them.
Troy: That was a great point, Tom, I’d just like to add just a small item and, and, and when you are doing your due diligence, for an it MSP and being an acquire, you do look for a certain tool sets and what that’s gonna look on the integration side of things, because those are, those are hitting costs. so you wanna make sure that you identify what type of integration challenges you may or may not have. but I would guarantee you’re gonna see some type of, out of scope, you know, pop your head if you’re not aware of, you know, a strategy when it comes to, you know, connecting processes.
James: Yeah. I wanted to mention a couple things here. The one, one key, super valuable asset that isn’t normally on the balance sheet is the people and, you know, their skills and expertise, and especially in today’s workforce shortage, acquisitions and acquiring talent is very important. So, you should be looking for those skills in and expertise with the people that you’re acquiring and, and embellish them, and training. Absolutely. There should be due systems training just on the new company, the processes, the tools, in some cases you’re acquiring some of their tools if they’re better than yours. and, and there’ll be some reverse training, like was mentioned, and hopefully, the procedures and the processes are well documented. and, and most of the time that’s the case, but not all the time. So, but I just wanted to address the people part of it, because that’s, to me, one of the key reasons why the acquisition would be a, a win-win is if you’re looking for talent.
Hartland: And, and, you know, just, from my perspective, I don’t get to info in, in this, really, these types of questions, they’re, they’re really end up falling on the, the shoulders of primarily the buyer, but, certainly, you know, James, you would back up and you know, Tom, you said it is, is just the well, and Troy of course, there needs to be, a commonality amongst the tools, and platforms and systems that are being used. Otherwise the, the costs, just become a prohibitive, to try to keep up with all of the new, you know, updates and different customers using different tools. In some cases they may be somewhat redundant in others. They’re both, security tools doing the same thing, but, just different, competitive solutions.
So, do a lot of times that’s a screen in the beginning, as well as part of the transaction, but, you know, it’s hard to line them up a hundred percent. And so at that point, decisions need to be made. And so some of the tools that someone’s familiar with may not, end up, remaining, as, as, you know, kind of going forward. but, you know, as Tom said, I’ve also seen a lot of times where there’s discussions and, a little bit of a kind of humor comes into it when the, the buyer says, well, we were on this platform and the seller says, huh, we used to be on that platform. We changed our platform six months ago, but their team, I at least knows the platform of the buyer. So they’re not, they’re not having to go to something they don’t know. Now they’ve moved out of that system and it might be six months or a year ago that they last used it. but, there’s still some familiarity, with it. And, and so, you know, that’s, that, that often kind of mitigates, some of these things, but, you know, you are gonna have employees who will not be happy with certain tools. They’ve moved away, they’ve made a decision to move away and now they have to move back and you know, that that’s gonna have to be, navigated as well.
Devin: Great. Thanks Hartland. So that’s, that’s all the slides for today’s presentation. And, I wanna thank everyone for their time. James, Troy, and Tom, those were excellent insights. you know, I, I hope that, you know, our poster on Reddit, if they get to see this, they’ll have a little bit more of, insight into what they can expect for the coming months post transaction. And I hope if you’re, an owner or in the, a leader in a Nike service firm and, you’re on the buy side or the sell side, you got some good tidbits and, and wisdom about how to make sure that the transaction goes smoothly as well. So, thanks so much everyone for joining today. You know, if you’re watching on YouTube, please be sure to subscribe. you can reach out through our website, The Host Broker.com, [email protected]. If you have any questions and, we hope to see you next time. Thanks so much.
If you’re an MSP making $1M to $3M and looking to do your first deal, this webinar is for you. We’re joined by fellow M&A experts to demystify the process and mitigate the intimidation factor.
Hartland and Devin are joined by Dave Sobel of MSP Radio for an engaging discussion about trends in managed services.
Hartland: Good morning. Good afternoon, everybody. Welcome to today’s session. I’m super excited to be joined by Dave Sobel. I’m going to let Dave introduce himself. For those of you who are not familiar, you’re in for a treat. He is, one of a kind. I think, the interesting thing that I really like about Dave is his, kind of ability to ask the hard questions and to not hold back in feedback and responses and to touch questions that, may have some sensitivity with respect to the industry and, vendors and whatnot.
Hartland: So, I’m going to do a quick introduction hereof, myself and us. For the most part, you probably are familiar with us if you’re receiving, this on our mailings already and therefore attending today’s session. But I’m, Hartland Ross. I’m the President of eBridge Marketing. We own and operate thehostbroker.com, which is our M&A practice focused on IT services firms, including managed service providers, web hosting companies, infrastructure providers, data center operators, and service providers, or if you prefer, ISPs to the industry. And the other side of our business is, eBridge Marketing, which is our, marketing division headed up by Devin. I’ll let him do a quick intro there, but from an M&A perspective, we focus on, as, I said, the It services firm. And you can find out more information by going to our site, thehostbroker.com. So, I’ll turn over, Devin, to you to talk quickly about what we do from a marketing perspective.
Devin: Thanks, Hartland. So, eBridge Marketing Solutions is a full-service boutique marketing agency, serving very similar industries to the host broker, including MSPs, web host, data centers, It service firms, ISPs, vendors, really, you name it. We were established in 2001 and by Hartland and over that time have grown to offer a broader range of services to a broader range of companies. And if you are interested in discussing marketing, you can reach out to us through our website, ebridgemarketingsolutions.com. You’ll probably reach me and I’ll get back to you as soon as I can.
Hartland: Excellent. So, Dave, I’ll, let you introduce yourself.
Dave: Sure. So, I’m just a down home guy. Like long walks on the beach. Right. Where do you start these introductions, right? So the way I always started by saying is, I swear, I’m an engineer. I started there. I have a degree in computer science. And I’m always proud of that fact that if you ask College version of me what I’d be doing today, I would have thought I’d be developing software and products and that kind of stuff. Yeah, that’s not how it all worked out. Because after doing some consulting in the early odds in the late 90s, I, wrote a couple of startups into the wall, where the leadership, went into the wall and I said, I can run a company into the wall just as easily as these morons, but I can keep my job because, I’m the owner. So crazily. I started out my own managed services firm, and I started right around 2002. And before we called the managed services, I did manage services. And I ran that business for about a decade. And it was a long version of that story. Grew the business, bought a company, became heavily involved with education and enablement and peer groups and all that kind of stuff. And then I sold that business right around going into 2012. And I said, well, you know, what I want to do is I want to learn more about how this works. And I went and worked for a company called Level Platforms, which was a remote monitoring management solution. Worked there about two years. We sold that business to ABG, and then I hopped over to a company called GFI. We became Logic now, and then we sold it to a company no one’s heard of anymore. Like Solar Winds. You may have heard of them. They’re never in the news. So, in 2016, we sold that business to SolarWinds, and I was there for another three years and I was laughing. Now, the timing of my departure is like a couple of days before they were hacked, so I had nothing to do with it. But I was at Solar Winds, and my whole time on the vendor side was around enablement and helping MSPs build their businesses. And I left in 2019 to do what I’m doing now, which is independent journalism and analysis of the IT services space via podcasts and now YouTube videos and such that I do to be like kind of the guy who sticks up for solution providers. So, I laugh. I have an opinion on just about everything. I don’t claim they’re all right. I just have to be right a whole lot more often than I’m wrong. And if you disagree with me, that’s awesome, because that means you have an opinion.
Hartland: And I love the word independent. Right. I think, that’s a, key piece here that’s, interesting and unique. Dave, I think that you’ve got to be one of the most, if not the most extroverted, computer science grads. Certainly that, I bring into. So I love it.
Dave: Which is why I always like, I swear, I’m technical. You would think I’m a total sales guy. No, I swear. I’m an engineer.
Hartland: Well, it’s unique. It’s unique. Absolutely.
Hartland: Well, look, we put, together, Devin and I, some questions for you Dave today. Things, that either in some cases have been asked of us or things that we wonder about and we have reached into the space and we have our own opinions, but, we’re not necessarily. Well, certainly it’s nice to share, perspectives, I guess. And also, in some cases, frankly, we might not, be in the trenches enough to have a real decent response.
Hartland: Just moving into our first question here, we’ve been wondering and we’ve asked this question of others as well, candidly. But where do you see the MSP space being in, let’s say, ten or 20 years from now? And I’ll provide some context around that. So, we’ve been operating, in the hosting industry for a long time. It’s kind of where, we cut our teeth, I guess. And in that space, we’ve seen a ton of consolidation. Right. It was very fragmented and still is a very fragmented market. It really took nothing for someone to spin up a server and have a dedicated server that they’re leasing from a provider. Throw some customers on it. Throw a few more customers. Hello and behold, you’ve now filled the server. Well, I guess I’ll get a second one. And hello and behold, five years later, I’ve now got this thriving business. Oh, and by the way, I’m only 21 years old. This was, back in 15-20 years ago. But in any event, there was a lot of that that was going on, and it ended up, that there were a lot of groups that were interested in this. Hey, these are real businesses and it attracted private equity. And so that has floated into the space a lot of kind of, roll up activity. The nice thing about, hosting is a lot of it’s virtual, not all of it, but as such, attracts buyers from all over the world. And certainly, the customers can be served all over the world as well. So, if we look at the MSP space, it’s also similarly very fragmented. We’ve got tens of thousands of operators in the US alone. We’ve got growing in lots of other markets, certainly very active in the Western markets, but also moving into other parts of the world. What does this look like? If we fast forward, are we, going to have kind of like the telcos? Hey, we’ve got you could pick between AT&T and CenturyLink, the different telcos kind of thing where there’s really, let’s say half a dozen real operators, or are we going to see the same sort of fragmented space in that time and any other changes?
Dave: Your analogy, the data center is really interesting, right. Because I ran racks of servers, too. Right. Like, even in my medical service provider, there was a time where that’s what we did. And you can still do that today. There are people that are doing that. Right. But do we consider them where the market really is now? That’s not to dis on that business. Right. Like, there’s some people making money on that business. So, your question is sort of like the MSP in ten years? Yeah. There’s going to be some doing exactly what they’re doing now, but that isn’t necessarily the default. And I like to actually really separate this idea of the MSP from what I actually think the core value is. And we’ve got a little wrapped up in this whole managed services thing. And MSP, I believe in the core value of delivering IT services in the SMB is going to be incredibly valuable for a very long time. Why? Because there will be small customers of all sides who need help with technology. That core value is not going away for the same reason that there are some small law offices that are delivering great value dental practices. All of these different small organizations serving up your CPAs, all your business services, they’re all still incredibly relevant. But manage services, like the way we try and put it into all of these buckets of gold, silver, bronze, it must be your standardized stack and all that stuff like, oh, yeah, I think that stuff in your 10 and 20 year time frame will get completely redefined because although there will still be people doing it the old way. Why? Because there’s always that in every market. Now, what I always look at this and say is like, which part of the core value are you most interested in? If it’s that I deliver IT services in the SMB, you’re going to be totally relevant. Now, I think you need to be moving a whole lot more into the business process layer and doing business work. But your core value isn’t going away, although the way you do it is going to be totally different.
Hartland: What I’m hearing is that you still see that there’s going to be these kind of small time operators. But do, you see that there are going to be some, kind of David and Goliath, the behemoth that have got tens of thousands, or more, hundreds, of thousands of small businesses, that they’re servicing through a call center type structure.
Dave: I think it’s going to be super symbiotic, more than like a competition. So, I look at it and say again, back to my core conceit there you a small provider, are going to be able to add a lot of value to your customers. But I don’t get so hung up on what you’re deploying. Who really wants to do Helpdesk service? Really? Do you really want that to be your core value? It probably was never the bit you like. I never wanted to build a business around. So, do I think that big players will be able to deliver helpless services? Yeah, I think it’s going to go a whole lot better. I also think the endpoints are continuing to get so much more simple. If we think about the average endpoint, how much maintenance does it really need? Don’t get me wrong. There’s some patches, like the patching stuff, and I want to make sure it’s backed up. But if I go back and I look at the old literature from managed services from 15 years ago. How many of us are really worrying about how much disk space we’ve got? Really, if I think about the when I sold my early managed services, like, I’m going to make sure your temp files are cleaned up, and we’re going to make sure your disk help. It’s like, who worries about that stuff anymore? They’re solid state drives. They’re really big. I just get a new one every so often, and it’s just massively bigger. And I don’t worry about any of that stuff. So, like, the core bits just bubble up, and I go, nobody gets into this business because I want to be in the help desk business. I just don’t, that stuff will roll up, but there’s pieces of the value that will because pulling these systems together and making them valuable in a business, that’s really hard. And that’s the high value stuff. That’s the stuff we’ll make money off of. That, I think will still be done by small companies for small companies, mid-market size companies for mid-market companies, and large companies for large companies. Size meet size is a pretty universal thing.
Hartland: Yeah. It’s an interesting way to look at it, actually. Okay, excellent.
Hartland: All right. well, let’s move on. This is kind of an age-old question. It’s an age-old question for it doesn’t matter what industry you’re in, but is the concept of specialization. Right. So, I mean, if you look at us as an example, we started off as a marketing firm, and it wasn’t, hey, we’ll just market for anybody, and we’re working with local restaurants down the street, and we’re working with a car dealership. And, oh, by the way, we have a managed service provider, and that’s not what we do immediately. We focused on, although, it wasn’t quite as clear as it, is now admittedly, but, it was still focused on technology, ecommerce type businesses, and hosting was absolutely in the crosshairs of that. If we fast forward to today, we’re really an IT services focused firm in both respects. And so, there’s this question of specialization. Should MSPs be vertically specialized? I know that many of them just kind of basically take whatever they get, and they’re all over the place. I know that others have a sprinkling of sort of specialization, or we’ve got a handful of governments, we’ve got, a handful of education or something. But it’s almost like it’s happened sort of by accident in some ways, and they got some traction, and then they may be a little bit more down that path or they’ve gotten referrals as a result. But I don’t know if it’s necessarily so deliberate. And so I’m curious, and then the other question that we threw in there as a curveball, but just what the most esoteric specialization is something that’s really funky. That would be.
Dave: That’s a good one. I can ponder that. What’s my take on it? It’s all fine. I have this sort of very pragmatic way of doing it. Look, I always sort of said, I’m in the business of making money. I really am. I don’t do this. If this was a charity or this was just a volunteer effort, that would be a completely different thing. I have projects that I do that are entirely because I want to do them for fun. But I’m in this because I like making money. Right. It happens to be that I enjoy it, too. Right. But I don’t build businesses to not make money. And what I’ve learned is that the harder it is, the more money I make. Right. And so, it completely aligns to your statement of, like, specializing. Well, that’s hard. That means by doing things that are hard, I make more money, I can charge better rates, I can command a better position. And the more specialized I am, the more of a Ninja that I am, the higher my rate. if I’m one of a handful of people on the planet that can do something, I am very much valuable. Right. And I look at it that way and I say, I’ll have to go. How many people understand the managed services market and can completely describe those in human relatable terms that might actually be entertaining to listen to and who can go really deep on a technique like, the more specialized you get, the higher rates you can command. So, my statement on this is what’s my position is like. Getting really Ninja good at stuff drives the value that you can deliver and the rates you can command. Right. So I like to go as deep and as specialized as possible, but I also know that’s hard. Right. And you iterate over time on that. The reason most people start out is because they start out with a specialization that’s like, well, I’m going to be good at this technical thing, which is for many of us that have been doing this a while. Okay. I’m good at network engineering. I, will tell you my background in consulting. My little specialization was I was a person who could code and build servers, which was rare. Right. There were people that built servers, and there were people that could write code. And I always laugh. And though the reason I did both was I wasn’t always a great programmer, but I could make up for my sloppy code by making the equipment I ran on more efficient. Well, I didn’t necessarily have to be the best coder, but I could tweak the database to make my code run a little bit better, and I could make up for my own fault. But that also meant that there weren’t a ton of people that could walk in and say, Well, I can understand the whole thing. And that was a value, and I learned it that way. So my statement on your pieces is what’s my position? Yeah, I love it because I love becoming better at something. And the more boring it sounds like, the better it is. The guys that are really, really good at handling medical record transfers in a secure and optimized environment to make sure that the data is never let. That sounds so intensely boring. And I know how hard it is and it commands really great rates.
Hartland: You know, I think it’s a great point. And I’d like to bring it back to at least our wheelhouse one from a marketing perspective that it makes it a lot easier to market a business when it’s clear on what you do and who you do it for and the value that you provide. And so, from whether it’s an SEO perspective and optimizing around keywords for Google or to convey, the value proposition and put together the materials that are needed to as part of, the sales pitch, it becomes a lot easier. I think that’s a great point. It’s no different than any other industry. But the other piece that’s interesting here as well, of course, is from the M&A perspective that with specialization, with expertise comes, as you said, the higher price. But with the higher price, presumably it most likely will come with better margins. And better margins, result in better valuation.
Dave: And that’s exactly what I mean to the whole stack. The more unique you are, the more you command value, the harder to find you are, the higher value you are. And value through the whole bit, right. Both the pricing and the margin and the profitability and the value on the sale. That’s what I mean. When I talk about value, I’m talking about the whole stack.
Hartland: I don’t almost argue you talk about how that’s harder, but I’d almost argue that it’s harder in the beginning. But once you get traction, it almost makes it easier in some ways because, first of all, when you’re going up against other people and you have the expertise for government, for education, for applications, hey, we only service accounting firms of this size or whatever it is, then your competition kind of goes away because they really can’t stand on a solid footing relative, to you. Of course, they can stand on a lower footing from a price perspective. And so, their edge may be on that basis, so that makes it easier. And then the other thing is, well, now I know where to, market so I can market to certain industries, conferences, publications, associations, and things like that. And so you end up being known as the kind of go to for the space.
Dave: Well, it’s exactly. Everyone’s got this experience in their life, right? I always laugh at you. My family members will ask me to fix something on their computer. Like, I walk in and I hit the button and I fix it right, like it’s a quick two clicks and I’m done. And they’re like, well, that looks easy. And I go, well, yeah, except you’re being dismissive of the 30 years of study that I’ve done that allows me to walk in and know exactly what it is. Right. You don’t pay me for the two minutes of time it took me to do it. You paid for the 30 year of knowledge that I’m carrying around that lets me do it in a couple of moments.
Hartland: Well, I’m not going to be able to put my finger on it, but there’s a very good saying or quote or something that is coming to my mind around this. But the other thing that’s I think, important is you’re also knowing what not to do. It’s the downside that’s being prevented. Hey, yes, it only took me 30 seconds, but because I know what I’m doing and I’m doing it right. Whether it be a security vulnerability, ransomware type exposure situation, or if you take it to a different industry, as a financial planner, broker, stockbroker, whatever you want to call them, it’s picking the right stocks, right. It’s like, well, that only took you 2 seconds to tell me I should invest 100 grand and whatever.
Hartland: But it’s all that research to have the perspective on the market, to know what to do. And so I think that’s relevant.
Dave: I knew one person who is really good at celebrity IT support. Built like a whole white and it was all white glove service. It was the perfect white glove service. I know how to handle very large egoed. People that want their stuff to work and have massive piles of money and want their home environment to look cool and be cool, but have the latest tech, and it all just work. And she commanded, like, a huge premium for this because the market allowed for that. Like, these people were just like, I just want it to all happen. And I have piles of money. Right. And these are big A list celebrities. And what they valued was it worked and the Privacy of the service and the white club, she would pick up her cell phone and answer and know them by name and know exactly what they wanted. And it was a very esoteric, like, sliver a little bit. You’ll look and go like, that’s not a huge market. Exactly. but to go super deep in that market, potentially the only person on the planet that good at handling that market or from a competitive perspective, what a handful of people. A handful that can handle the egos and the technical and offer the white glove service, that’s a pretty cool esoteric specialization.
Hartland: You know what? I was interested to see what you’re going to come up with, but, I really liked that one. That’s pretty cool. and I think the other thing is it’s not just the technical piece, but it’s like the counselor. They’re advancing around, the egos. And because you know that, hey, if something goes wrong, these people have very high expectations as well. And so if you’re doing well and also, their circles are more of those same A-list people, and they wouldn’t be viewed as competitors. So, hey, look, here’s who I use. And that’s a pretty cool.
Dave: It was, definitely a cool one. Plus again, then the next question is, well, who do you work for? Well, I can’t say that because the Privacy is part of it.
Hartland: No testimonials for that one day.
Dave: No, but that’s the best kind. Right. Because they’re doing only referrals in that little network, and that’s the way that it allows other engagements, too. So it was cool.
Devin: I have a thought on the slide too, kind of picking up from what you guys were saying. But I think managed services is an industry where there’s not a great number of barriers to entry. And people usually start off break fix and, work in their own network. So generally speaking, with business, strategy, if you’re in an industry, if a lot of barriers entry, you need a specialization. And if you’re not specializing geographically, which many MSPs do, you almost surely need a specialization by industry or application.
Dave: Yeah. Although I think I’d make an argument. I have a YouTube video literally called Don’t Start an MSP, because we talk, about it being a low barrier to entry industry, but that’s changing an awful lot. I started my managed services provider in 2002. The biggest thing screw up that I was probably going to have happened was if I screwed up something, I’d have to do a long data restore. That was really the biggest risk that I guess I could screw up the backups. Right. That would be the biggest risk. But really the biggest risk was the users and my own execution. Now, with regulation and cyber securitycurity and with insurance requirements changing and ratcheting up and the business regulation and the landscape, it’s like this is just a way harder industry. Oh, and by the way, I can do a whole rant and I cover on my show all the time. Like the stuff around regulation, literally, we’re getting into we may be a regulated market in the not too distant future. We say it’s easy, it’s a low barrier entry. It’s getting harder. Like right now, it’s just way harder. And it’s about to tip into more. And so, I want to dispel the like, it’s, not as easy as it used to be by a lot. And I’m not sure I want to call it an easy to get into industry anymore because the skills you got to have are so widespread now.
Hartland: Well, and then part of the barrier to entry is a function of the incumbents and, their sort of penetration into the market. Right. The way that new entrants are going to be able to compete is unless there’s something truly new or revolutionary, very specific. Talking about what we’re talking about here, it ends up being a price exercise. Hey, I can do what they can do, but I’ll do it for half the price. And that’s not a winning strategy.
Dave: Yeah, although I, will say I think there’s room for innovation. I think the managed services space has, got some room for disruption. It’s one of my 2021 predictions. I think this space can be disrupted. It’s got all the signs, right? Like super, mature players, particularly on the software vendor side, like a couple of mature players that have kind of stagnant their own innovation. The industry, like the way people are delivering the services, kind of looks the same as it’s, like the last ten years and factors shifting, and then we, of course, have the disruptor. We added a little pandemic on top of all things, just to accelerate all trends. I think there’s some room for disruption here. It just feels to me like there’s room for something to really change. Somebody could make a real move here and do it differently.
Hartland: Yeah. Interesting.
Hartland: All right, we’ll move on. this is, an interesting one. It’s still kind of early, days here. We’re still obviously involved in the pandemic. It’s February, 26th today, and we’re not out of the woods yet. So I haven’t seen a lot of, activities, certainly more discussions. But we’re in the process right now of selling one MSP that’s got some exposure, to hospitality space. Right. And although the revenues, from that the customer base there, first of all, it’s not 100% hospitality, but the revenues have been fairly consistent. but there was no, ability to upsell them, certainly. And any kind of discretionary, spending mainly around hardware upgrades and whatnot was curtailed entirely last year. So the, question is, what do you think about this space going forward? And so I put, three options right back away. So that’s like run for the hills. Devin, you can queue in Iron Maiden, here or get them at a higher price. Right. Well, I’ll take you on, but I’m not going to because of the risk of maybe bad debt issues. You’re not paying us, paying us late. And then also, of course, the risk that, if I decide to sell at some point, a buyer might view those as riskier, so they’re not going to attribute value. So, if I’m going to go down that road, I’m going to want to have more compensation for it, or, hey, this is the land of opportunity, people are running away from these businesses, and there’s less competition all around. And maybe I should be, picking these businesses up. What are your thoughts?
Dave: Yes, like all of strategies, because one size doesn’t fit all in this. But let me tell you where my heads on it because I make a couple of statements about the approach to the pandemic. Right. The first is and I’ve been screaming this since this all started in March is that you always focus on your basic business execution, your own business. You’d better run a tight ship, because when things are down is when you better be running a tight ship. I’ve been very pleased with the business execution that we’ve seen coming through this. The data says the solution providers are doing that did correct. In that March, April May time frame of last year. They took advantage of programs. Things are better than I thought they would be. Cool. I like being wrong when it’s that one. I will laugh and go, but maybe it’s because I was screaming. Right. But business execution still matters. So, you’ve got to manage that. You’ve got to take care of your own shop first, because, by the way, you can’t help others if you go out of business. Right. So, start there. The second bit is the lesson of this time is you need to understand not just your customers, but your customer’s customer, because you’ve got to understand who they’re serving in order to make these predictions around the markets. So, for example, if you told me prepandemic, I serve lawyers like I serve the legal profession, I would have thought I had enough information. Now I’ve learned no, I don’t have enough information because if you serve lawyers that serve hospitality, that’s all other market. And so I think the lesson here is you need to understand your customer’s customer. By the way, it’s an argument for specialization. Right. Because if I’m needing to go a second level of understanding, I can simplify my own problem by specializing. But we’ve had that conversation. So now my third piece is, by the way, I freely admit, I was down on distribution in the way that we think about all of this prepandemic. Here’s the lesson that I have taken away. You are not the bank for your customers. That is what distribution is for. And that’s what they bring as a huge value. You can work with distributors. What I say is you can get in here on this space, but just don’t play the bank. Bring your distributor in, let them take on some of the risk from a payment perspective, and then you can service them and everybody in the chain gets value. Why should any services company ever play the bank? That’s not your business. And by the way, I look to the classic example that I always cite when people say is I look at Google. Google’s Ad business for all of us that leverage it. They take my credit card and they charge me on the front end. And last I checked, Google is sitting on a giant pile of money, right. If anybody could take a risk on customers, it would be Google. And they don’t. So why would me, my smaller services practice. Ever consider taking the risk? No. Let other people play the bank. So, my answer to you here is, sure. Go after it. Just have an offering that leverages those components so the risk of the financial payment isn’t on your side. Go for it. Just insulate yourself through proper business operations.
Hartland: Could you insulate with a higher price, though, as an argument? Because I think it’s a pretty big business shift as well, to have the service providers, the vendors, assume some of that risk because you’re going to have a, portion of your customer base that’s working under one model and a portion of the customer base working under a different model. Right.
Dave: But maybe it’s just a different collection model. I’m still running the same services business. I sell my services on a contractual engagement. All I’m doing is, in some cases, if I think they need to be financed, I’m using a financing group because I am not the bank. And by the way, because I’ve always advocated, of course you get paid upfront. What do you mean you bill later? No, I get paid up front. So, if you can pay me up front for my services, great. If you are in one of these areas where you can’t, I have financing options, problem solved. I don’t need to over complicate this. I just go, of course I get paid up front. Why? I’m not a bank.
Devin: So, I was just thinking what you were saying about having to understand not only the customer, but the customer’s customer. And we do channel marketing programs for vendors who are looking to, market through MSPs. And it starts getting pretty meta when you’re doing a channel marketing program and you normally have to understand the MSP and their customers, but your own products, from the marketing agency’s perspective, it’s even another layer where we have to understand, like the vendor of the MSP and the MSP client. So, it’s pretty crazy this space is unique in that way in regard to how many stakeholders there are.
Dave: Funny, in that complexity, there’d be money in mystery. There is margin. Like, there’s a reason why everybody does this. Right? Because it’s complicated. Because I was going to say mystery. There is margin. Right. If it was easy, everybody would just be doing it and slamming it out. And I wouldn’t command interesting prices.
Devin: Yeah, exactly.
Hartland: Excellent. Yeah. I really like the understanding of your customers. Okay, so, one of the things that we’ve seen, and we’ve seen this in the hosting space, certainly seen it in the managed services space. And it, doesn’t take going to too many conferences to recognize that there’s just a kind of plethora, of vendors of ISPs. And it seems like everybody and their brother has decided that, hey, I’m going to solve some kind of a problem. And by, the way I’m just going to align myself with these distributors, these managed service providers. And, on the channel side, it doesn’t matter what industry is. It’s sort of I’ll sit back and basically count the cash. Right? All these guys will sell my services for me. And the reality is that it’s like an iceberg. I mean, there are just so many small vendors providing services. In some cases, they’re, very niche. In other cases, they’re probably just up and coming and they are disruptive and they are going to be the next big thing. But I just wonder, whether this pace can continue. We’re having conversations with, one of the large, distributors, and, they’ve, got the ecosystem of the ISPs the vendors. And so many of them want to partner with them, whether it’s Synnex or Connect Wise, Ingram, and, they’ve got to put some parameters around, well, who can play in our sandbox here? Because there’s so many of them and they all want help and they all are kind of grasping, at straws here. And most of them don’t have much in the way of a kind of a budget to work with. And I know that you work with a number of different vendors, and that’s kind of the space that you’ve also had experience in your past, in your career. So, I just wonder, where do we see this? Is it still going to explode? Are we going to get some consolidation? If you look at the martech, I think it’s like 8000. Every year they produce the graphic with all the different Martech Tags. And it’s huge now. So I just kind of wonder, what are your thoughts here?
Dave: Blood in the water. Isn’t it great? So, it’s all about who I’m worried about. Your question. Right. These, days I spend my time worrying about, the MSP, the IT services provider. Right. And so for me, the real bit that I think about, worry about and comment on is I want to make sure that solution providers are making smart analysis about what the money means and the way it’s being spent and what it means for the strategies of those vendors. Because we come from, if you think about the It channel historically. Right. Originally, we had. They were literally just resellers. Right. Computer resellers. Then they became value added resellers, then they became managed services providers. Now we’re even moving into this more abstracting, like, I was talking about this business services delivery system. Right. Each step actually separates them further from the vendor, if you really think this through. Right. In the original bit, when they were just a Reseller, they were 100% dependent on the vendors they sold. And each step has, actually distanced them from the vendor, while at the same time, in many ways, the vendors are more desperate for attention from the solution providers. Right, right. That’s kind of where we go. The solution providers actually have a whole lot more power than they think they do. But they need to be way smarter about analyzing the financial motivations of the people that they’re doing business with. Because the one Achilles heal for service providers is that I think of them more like assemblers versus creators. And what I mean by this is, this is creators are the people that are creating the technology itself. Assemblers are the ones that are taking those components and putting it together. Now, you can be both. Right. So, for example, I think of like an Apple as both a creator and an assembler, because they are putting together components to create stuff. But as an IT services company, you are generally an assembler. Right. You take these bits off the shelf and you put them together to make something for your customers. But the problem is you need constant new things to assemble to keep moving forward with the technology. You’ve got to make sure you’ve got the right mix of vendors that you’re working with who are motivated to create those things based on their own financial incentives. Right. Because as we know, you guys know from the M&A perspective or thinking about investors, there are kind of different motivations for that. I have this kind of grid I look on them from. And I like to think about the way investors are working. Either their focus kind of slanted towards building fundamentals or they’re slanted towards building momentum. And what I mean by that is, if you’re a fundamentals business investor, you’re trying to take something that you think is a good idea, and you might want to make it more and more efficient, like build the fundamentals of the business so it can succeed. Or you’re an investor that says, oh, they’ve got something and they’re running in a way. And what I want to do is supercharge it and have it accelerate out. Right. And you can move back and forth on the spectrum. And it’s a spectrum. Right. It’s more like a balance. You can be oftentimes, like, several of the large PE companies are very focused on the fundamentals. Right. They just want to supercharge something that’s going make it super efficient, squeeze efficiency out of it, make it more profitable, squeeze it, versus, like an earlier kind of investor who might say, I’m here to take this fundamental idea and put some structure around it and help it grow. That’s a balance. You’ve got to have a mix of both as a service provider, in the companies that you work with. But everything I’ve just described about thinking like an investor and understanding how this is not a skill set that many small entrepreneurs come with, particularly if they’ve been in the technical space and they came up through the technical ranks. So, for me, what do I make of it? We have to get a lot smarter about this analysis. For me, it’s the reaction. The way I’m describing it now is this emotional reaction every single time a vendor gets bought. That’s your instinct trying to wrap around the strategy and you recognize the shift. But you don’t understand why, right? You don’t understand the why things might have changed. Somebody gets bought and they’re like, oh, that company is going to get ruined. No, they’re not going to get ruined. The strategy is just shifting because of the way the balance is done. I just need to understand that and potentially reallocate the vendors that I’m working with to make sure that I have the right mix.
Hartland: And I think it’s interesting the way you talk about essentially being in the kind of the driver’s seat there. And I guess that makes sense so long as the solutions are not presented to the customers in, a transparent way. In other words, if you’re selling, VMware or, you’re selling that’s, part of your value proposition is the vendor that you’re representing, then it would be more difficult to make changes. And of course, most, of them aren’t doing that.
Dave: This is why I always say, because most customers don’t care. They don’t, they really don’t care. If I talk to let’s put them all in a bar in the infinite. They were allowed to do this again, right? And I give everyone a beer and I go, Tell me what you worry about. They’re going to say. I just need my technology to work. I need it to solve my business problem. They don’t care about all the components that we talk about. If you talk to most people that own technology think you’re a laptop, right? They don’t care about the specs. The only people that care about the specs are those of us in technology. Everyone else just goes, I need a laptop that works. That is literally their definition.
Hartland: Well, and I guess that does speak to instances where the stakeholder or one of the stakeholders is an internal IT Department that’s outsourcing. And they may have specific, preferences around companies that are supporting certain, facts. Right?
Dave: Sure. But that comes, from a business that comes from a business decision place. And I know they will make a change if there is a business case to be made about it. Right. I know that we could walk into, any customer and we could change their platform. If we can show them the why, they will make more money or cut their costs significantly, they will throw that stuff out and make a change. If I can solve those business problems.
Hartland: Yeah. Okay.
Hartland: Interesting. Okay, well, look, you touched on this next question already, and it’s just a really fundamental question around choosing vendors and whether the vendors are chosen as best of breed or whether there’s a margin aspect to it. So how, do MSPs go about choosing their vendors? They go to the, IT nation or something, and they’re walking around and they’re talking to, different groups, but ultimately, they have to make a decision. In some cases, they might support more than one competing solution. That’s certainly possible. But I’m just curious and sort of generally, do you know how most of these, most MSPs are making their decision?
Dave: Yeah, badly.
Hartland: Using what, what’s their process?
Dave: Stick your finger in the air. My sense is often, a little too badly. Right. They often focus on sort of the wrong bits. They’re either focused on the technology too much or they fall for the like, well, you’ll make a ton of money here. I want you to actually start with the problem you’re solving for your customers and then work backwards versus oftentimes they look at all these vendors and go, oh, I can go sell that. But there are 400 things that I could go walk around. I could go Google them. I could go to their booths in virtual time, either virtual or physical. I can go do any of those things. And you know what? I’m reasonably confident I could probably build a business around just about any of them. What I really need to do is I need to go back to what we were talking about earlier and understand, which customers am I talking to and what kind of problem do I want to solve, and how do I want to solve that problem for them and then build out my stack that’s much more? The way that I think it needs to be done is how does it fit? Because ultimately, you can’t go deep with more than a handful of vendors. Not really. It’s just too much, particularly for the average IT services company. So, again, the average It services company is less than $5 million in revenue. That’s like 93% of the market. You’re not going to have a line card of 50 vendors that you have deep relationships with. No, you’re going to have four or five that you have deep relationships with. So what core problem am I solving? And I picked my vendors based on that.
Hartland: Well, and of course, that impacts profitability. It impacts the ability to, from a pricing perspective, and efficiency, because now you’ve got all these different solutions that you’re supporting and needing expertise on it. You don’t have better pricing because you’ve distributed, that across your customer base. So, there’s a whole other series of implications for it. But, I think the key that I’m hearing here is just looking at this more strategically and saying, okay, who are my customers? What do they want? What are their business challenges? What problems am I trying to solve? And then going and finding the tech that’s going to solve that?
Dave: We, as an industry, need to spend so much more time in our customers heads than in our own. We spend so much time debating the toolkit where it’s like, why don’t instead we go run around in the industries that we serve. I can go really understand those industries a lot better. That I think would be where we spend our time better.
Hartland: Well, I mean, this is the classic I’m selling features, not benefits. It’s the same sort of thing. And of course, you’re not interested in all these features and all the things how we can solve it. Technically, you’re right. And it’s not what they care about. All they care about is that it’s solved. And the benefits to them or to the business.
Hartland: Okay, good. Well, let’s move along. So, last question we have for you here, is just, what your thoughts? a little bit. I’m sorry. Second and last question, actually, is the question around GDPR and, some of the regulatory issues that we’re seeing, that have creeped in. They’re continuing to creep in some of, the government, as you said, you said earlier in another, point around increasing regulation in the space. So, I guess I just sort of open up the questions, to how do you see MSPs. Being sort of impacted, by regulation and including.
Dave: Oh, it’s so coming because here’s my pitch, right. I got two versions of it for you, and I believe I am right on both of them. The first version of it is, let’s take a moment and think about the cyber insurance space. Right. Because this is all going to come, because of cyber. The first is everyone. The insurance companies are paying out more and more for breaches. Right. Losing data. There’s more. Do we actually think the insurance company is just going to let that keep happening? Are we actually believing that we don’t think that they’re going to actually start looking at what’s happening from a service delivery perspective to minimize their risk? I talk to providers all the time. They’re telling me, oh, you know, we’re getting really crazy questions on these audits now. Like, they’re asking, is this stuff on premises? They’re asking all these questions about it. Yeah, that’s called regulation. It just happens to be being done by private companies that insure you. But that’s how it happens, right? It’s really easy to see that the bar is going to rise because you’re not going to be able to get insurance for your general business if you’re in technology or your customers are going to have demands on insurance that they’re going to need to prove for their own stuff. I totally see it coming because the insurance company companies don’t want to keep writing checks. So that’s the first bit. The second bit is let’s take a quick moment and think about cybercrime. And I like to just remind everybody of think for a moment, if I were to describe a cyber, crime in the physical world, gangs of criminals are breaking into businesses and taking hostages. Everything I just said is completely true. Right. It just happens in cyber. Do we actually think business owners are going to let this go on. If this was happening physically, there are calls to the government to put police forces in place, protect us. You need to help us. So, you know, the easiest way, regardless of your political affiliation as a politician, to run to help small businesses is to enforce against cybercrime. How obvious is this? I want to run for office. I’m pro business. I’m going to fight cybercrime, and I’m going to bring regulation to fix this market. And you know how I know I’m right? Because it’s already happening. That’s what happened in Louisiana. The stuff that we covered down there, that’s a red state Republican Secretary of state who pushed for that law. And by his own admission, he’s like, I didn’t really want to step in and regulate this, but the industry didn’t do anything.
Devin: So, I had to correct me if I’m wrong. The Louisiana legislation that applied to MSPs working with government specifically.
Dave: If I’m not mistaken, it totally is. Do we actually think it ends there? Come on. I’ve seen this movie before. I pay attention. Of course, this is fear. And by the way, this is how government flexes muscles, right? Is that they put a requirement in that to do business with them, it must meet the standard. And then industry goes, oh, well, if I want to do that, that’s how it falls in, because then you can see how insurance companies will go, well, I want you to do the same thing that the government’s imposing, and that’s how this all comes together. So, I look at it and say, your question kind of is, do I see an appetite? Oh, yeah, I totally see it because I see it on the other side. I see it from the customers who are screaming about the problem. I see it from the insurance companies. I see it from the government impacts to this. And I sit here covering the space for you guys. I listened to the congressional hearings, the Senate and the House call on that. Oh, I can totally hear all of the regulation coming around, reporting around data Privacy. You can just hear it in the questions coming. At least on the US side, obviously, there’ll be the Canadian Parliament version, too, in a North American statement. But I can totally hear it. You can completely hear them talking about breach notifications and data privacy. It’s coming. The appetite is totally there. So how is it going to impact MSPs? Well, we’re going to have to manage it. That’s going to be the new barrier to entry.
Hartland: I think the interesting thing here is an actual factor, double-edged sword because on the one hand, there’s the regulation for MSPs, which, is going to impact them and cause friction, red tape, et cetera. So, there’s a hassle factor associated with that and the cost of doing, business and whatnot. But there’s also the other side, which is, well, all these customers are going to require, the insurance companies are going to say, look, you’re in this business, you need to have a cybersecurity policy and you need to have these processes in place. What do you have? Oh, we don’t have anything. We better, go find somebody. So now the MSPs are going to be the beneficiaries of that?
Dave: I’ll highlight that. I always, say, here what I think. This is a problem that solution writers, MSPs need to take on themselves. They can’t wait for the vendors to do it. They can’t wait for it. They have to get involved because I’m actually not worried about regulation. I’m worried about bad regulation. I’m worried about regulation written by non-experts, because IT services providers are not involved in the process. You can totally see how well-meaning a well-intended set of people, because they are working on a problem that they’ve seen, they’ve identified their constituents want, they’ll work on the problem. And if we’re not at the table participating in this and helping write the regulation, I don’t worry about solution providers being able to take advantage of it. Either you’re going to be good enough and ahead of this. Right? Or you need the guidance. What I worry about is bad regulation, because that then means we’re going to spend all of our time dealing with things that aren’t the way it’s supposed to be or a bunch of extra pieces that slow the industry down. If we’re a regulated industry, last I checked, that commands higher value. Right? And let’s take a quick observation and look at our friends over in the medical profession and in the legal profession. How did they solve this? They came together, at state level organizations. They wrote their own rules, particularly the lawyers. They write their own. That’s what the bar does, right? They wrote their own certifications, and then government put a stamp on it. I think they’re doing pretty well. I’d like to command doctor and lawyer rates.
Devin: Dave and Hartland, sorry. I know we have one question left when you have four minutes. And this last question was a quick audible we called to add before the presentation because it’s a good topic. So, I want to make sure that we have time for that. So, I’ll advance the slide here.
Hartland: Yeah. So Devin said we were chatting and we had some things that Debbie and I put together here for today’s, session. And then we added this one in a conversation. So, I guess the question here with a few minutes left, Dave, but is related to ecommerce. And, Devin and I have had this conversation, before around the concept of a calculator for MSPs so that customers, can, kind of quickly figure out what might, this cost me for my type of business. And so, putting in some kind of a configurator there. And we have seen it. By no means is it even anywhere close to commonplace. And certainly, there are some challenges, with it. But the idea of a customer provisioning the services without having to speak to somebody is kind of the Holy grail of any business where you can simply put a credit card in and away you go. Maybe you provide that help desk support we were talking about earlier, but that might be the first time you talk to them. And wouldn’t that be great? But you’re an advocate of this. And what are your thoughts?
Dave: Well, quick, plug my YouTube channel. I got eleven minutes of me talking, about this particular topic. Right. So you can catch it at youtube.com/MSPradio. That’s the fun. But I think our discussion around the way sales and marketing is done is from a previous generation. Right. I can go out right now. We could open up a bank account so we could have our banking relationship. We could go order insurance. We could go buy a multimillion-dollar house. I could go buy a car, have it ready for delivery. I can get my legal services. I can get all my business service. I can provision all of that stuff on, websites right now. And why? Because the buyer is so much more empowered with information. And then I go talk to MSPs and solution providers, and all of them say, well, this is such an educational sale, and I have to sit down and talk to them, and I have to meet with every single one, and I have to educate them. I’m like, no, you don’t. We have proven that you can do all of these things very complicated. Sales can be completely done online. I’m not saying this is an or, I’m saying it’s an and you add this as another channel. And the reason why I don’t get to pick how people buy. They pick how they want to buy. And buyers now are super smart. They go do research. It used to be when you bought a car, right? The only way to do that was to go to the dealership and talk to somebody. Now, people buy very expensive things because they’ve done the research themselves. That’s part of the ecommerce funnel. And you can do all the way through to provisioning. Now, does that mean everybody does that? No. Does that remove human touch? Of course not. It’s another channel. But I look around on what we’re doing, and I say, we are just woefully behind in IT services. Do we think we’re a special flower? Come on, we’re behind. And so that means this is a huge opportunity. Anybody who moves on this can make a huge difference. Why are we so reluctant?
Hartland: Yeah, well, I think the interesting thing here is from a marketing perspective, the tenant is sell how people want to buy. Right? And so, if you provide your chat service for some people, you provide your phone number for other people. You provide the ecommerce site for other people and then maybe you have a storefront potentially as well. Right. and you’re going to speak to different people. And over time, that’s, of course, shifting and there’s more comfort and trust and people are willing to accept these types of things. So, I think that this is really like, a paradigm shift almost, here around. I mean, it’s a paradigm shift for the MSPs, Potentially. Probably even less so for the buyers themselves. It’s probably more, on the MSPs, as you say. Hey, I need to tell them about my products. I need to educate them and whatnot yes, there’s some information that needs to be gathered, but there seems to me to be some kind of an entry point here around how to at least get a customer engaged at some level.
Dave: Plus, we’re overthinking a lot of it. I want to tell some solution writers, like, why did you just list buy my best Laptop? You know what? I’m telling you a laptop that works, I promise it will work. It will have these pieces of software that you need, and I guarantee out of the box it will perform correctly for three Years. Sold better Premium. The customer just wants to buy that, Right? Why can’t I just buy that if you’ve done all the homework on your favorite Laptop, right. Or, you know, the way it is and maybe it changes a little Bit. They don’t care about the Specifics. I need a laptop. You promise me it’s the best One? Yes. Will you support It? Cool. Buy it, ship it done.
Hartland: Yeah. Look. Hey, listen, I’m going to listen to the podcast you just released on this topic because it’s definitely an interesting one and it’s timely for, conversations that Devin have had internally. So, look, Dave, we’re at the top of the hour here, and it’s been, a pleasure. I think it’s, been super, interesting. And I’m sure, we could come up with another hour easily of Questions, to talk about.
Dave: We’ll do it again sometimes. Thanks for having fun.
Hartland: You’re welcome. And I would love to take you up on that. So, Devin you have anything closing remarks?
Devin: No, just likewise. Thanks a lot, Dave. And I’ll be sure to include a link to your YouTube channel in the video description. So, if anyone wants to find it, they can click down and go over to your channel directly.
Dave: And you can find all my Podcasts. The business of tech is Daily. It’s on all the podcasters and then links, are at Businessof.tech, so you can find the daily version of the podcast for auto, so that helps everybody find it.
Hartland: Excellent. Thanks a lot. Thanks very much, everybody. Have a great rest of your day. Thanks. Bye now and happy weekend.
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