By George Sierchio
Executive Vice President and Senior Partner

What do the skills you picked up in the pre-school sandbox have to do with M&A activity in the hot MSP and IT Services market? Everything as it turns out.

When you are able to find the “shovel-and-pail gang” that builds things the way you do, you can quickly spot a company with a culture like yours and a comparable technology stack. Later in life, finding “your sandbox people,” the individuals who share your vision and your work style, can mean the difference between marginal M&A results and unbridled success.

MSP buyers and sellers might talk about “fit” and “culture,” but what they really want to find is that same familiar fun and comfort they found in the pre-school sandbox. Many evaluate their potential partner by asking questions about client mix, technologic emphasis and service offerings. Questions about these vitally important factors might include:

• Are their clients from a single vertical or drawn from many industries?
• What kind of technology appetite do their typical customers have?
• How does their geologic footprint compare?
• What types of tech tools do they use to operate?
• What technology vendors do they use to deliver services?
• What kinds of skills and training do their employees have to service clients?

With those baseline questions handled, potential acquirers will turn their attention to the people involved in the proposed transaction. In today’s highly competitive market for skilled IT talent, the staff’s skill levels, technical specialties and certifications will need to align with the needs of the potential acquirer to make the deal work. Finally, how do the two companies’ market offerings compare? Does one company believe every client should have access to in-house help desk or do they outsource this to a third-party? The same question applies to security capabilities.

Drilling down further, both sides will want to contrast their cultures. If one side wears ties to work and the other hosts keg parties every Friday, you have a culture clash. The same can be true if one company favors WFH and the other mandates in-office and on-site work. How much process and procedure do the two companies embrace? If one organization leans heavily on a PSA while the other salutes the spreadsheet, you can be headed for trouble fast. Employees who have to learn a whole new way to work can’t be expected to stay on board for long.

What MSP Buyers Want

Typical MSP buyers want to find companies with either a similar sandbox or those who represent an opportunity to expand the sandbox in a forward direction.

A large gap in the Buyer’s and Seller’s business maturity level is an important consideration in M&A transactions. An organization’s maturity level generally tracks with revenue. The larger the annual revenue, the more structured the work experience will be, in most cases. As the sandbox matures, the culture tends to tighten. Leadership realizes the need for guard rails and sometimes IT talent from smaller organizations have a genetic predisposition against those same guard rails. If the Seller’s organization is below the level of the Buyer, think a $10M Buyer and $1M Seller, the Buyer is likely not getting a lot of bang for the buck, it could be a very difficult transaction process, and integration of dissimilar sandboxes are often not fruitful.

Advice for Buyers: When to Proceed with Due Diligence

1. You like their sandbox toys and their attitude, and they like yours.
2. You both understand the fit comes from having a similar sandbox but it’s attitude and trust that gets it done.
3. Remind yourself that the goal is to move the company forward and make it better.

Advice for Buyers and Sellers

1. Understand that you’ll never find a company that 100% matches yours.
2. Make a list of at least 10 characteristics of the business on the other side of the transaction, as well as deal structure parameters, that include five “must haves,” five “nice to haves,” and then add in “exclusions and exceptions.”
3. Align with a company that shares your level of business maturity in four key areas: management approach, adherence to processes and procedures, tool sets, and IT talent skill sets.

Advice for Buyers: When NOT to Buy

1. If it doesn’t make your sandbox better, wider or deeper, don’t buy it.
2. If the company you are considering purchasing mainly has customers typically smaller than your lower end of customer size range, merging those customers into your environment is likely to pull you backwards and not a good idea to pursue.
3. If there are only a handful of their clients that you love, don’t buy it.
4. If the main reason, and certainly if the only reason, you want to do the deal is because “you can afford it,” don’t buy it.

Most of all, buyers and sellers need to remember that sandboxes don’t need to be exactly the same – not even in size. People, customers, culture, tool types and processes are what need to be similar. We call this the “fit” between the companies. When the sandbox fit exists and the opportunity to benefit the Buyer, Seller, customers and employees is apparent, you have an M&A environment ripe for closing a successful transaction.