What I learned from Leading 7 MSP Acquisitions over 15 Years

Acquisitions can be tough and stressful but hugely rewarding. In this blog, I want to share with you the core lessons I learned from carrying out seven acquisitions over a span of 15 years. In all of these cases there were dynamics we certainly didn’t anticipate at the time, and even though we got ‘smarter’ after each one, we kept learning (in some cases the hard way) lessons that continue to help us today.

I’ll lay out the seven events chronologically describing each transaction and provide you with some of the key takeaways from each one. I won’t be naming the companies acquired in his post but I will be describing a bit about how the specifics of those companies provided interesting obstacles and challenges that needed to be overcome. Let’s get started!

Acquisition 1 – August 2003 – The ‘Big One’

While I don’t want to create the perception that this was a Vegas wedding, we began to, as Ray Noorda would say, do ‘coopetition’ with a cross-town competitor. What we found in the due diligence were some things that I would caution you about when contemplating your next transaction. The company we were going to acquire was technically bigger than us, both in headcount and revenue, but they were very product led. In hindsight, there were some red flags that we could have recognized particularly around the team we were adopting. First, there were family ties throughout the organization. The Father-in-law had a stake in the business, the lead Sales guy was marrying the HR person, one of the Service Managers was the brother-in-law of the President of the company. These all presented unique and often times challenging dynamics in the combined company. What it meant is that we did not have a level playing field. We literally had to explain to new employees all these dynamics so they understood them and didn’t misspeak. Second, the acquired company was bigger than us, yes, but they were 80% product, and 20% services and had just begun to dabble in managed services. The dollar signs in our eyes saw dozens of untapped clients that had not heard about all what we could do for them.

What I harken back to is a speech I heard years ago from Michael Hayes, then a Gartner analyst, who said that product-centric salespeople will take 3-5 years (at least) to convert to being services-led or managed services superstars. That was very true. While the company we acquired had great sales energy and was go-go-go, having the Sales staff ‘sell everything’ was a long strategy and hurt us in the near to intermediate term. To do it over, we would have segregated our sales staff and had people focused on, and incentivized to sell nothing but managed services. Finally, we learned that at that time, (granted it was 2003) we did NOT function well in two different buildings 12 miles apart. We needed to be under one roof. Perhaps now in 2018 that would be different, but there is something to be said for walking down the hall to talk to someone over an sending an e-mail.

Acquisition 2 – January 2004

To answer your question, yes, we did another one that quickly! The company we had just acquired had been in talks with a small IT firm an hour and a half away and put that on hold to do our deal. The context for the acquisition was to grow our footprint and touch more clients with our gospel and educate them on why they should do more business with us. Again, in hindsight, some things came to light in this transaction. Even though this small company was effectively failing, the owner of the business felt he was all-knowing and never really appreciated the ‘being a part of something bigger’ versus having the agility he had as a four-person company. Unfortunately, he was the only owner we ‘acquired’ who stayed with us three-years or longer. You see, the way we structured almost all of our transactions was to give the owner half the agreed upon money up front, and let them earn the remaining half over three years, with a three-year employment agreement. This helps with the transition and gives the departing owners time to get their own affairs in order and also give us time to know the company inside out before steering it in the direction we want to go.

As I’ll share throughout this blog, most times, the former owner moves on after about 18-24 months. There were two core lessons to have learned from this. First, we should have done a better job of vetting the owner of the business we were targeting and ascertained he was not a good fit for our culture. Over the years he was with us (about 12) he caused more strife and disruption in our ranks than it was worth and the longer it went, the more beholden we became. We should have cut bait from the beginning or early in his tenure. The second core lesson was that he had a retail business that we tried to keep alive. Big mistake. It was a money drain. The types of customers you attract with a retail business are not who you should be looking for as an MSP. It took us some years, but we killed it. Fast forward to our acquisition in 2016, which also had a retail business, we ended that immediately. Live and learn.

Acquisition 3 – March 2004

Yes, we did another one only a few months later. We were approached by an IT firm owner that had health issues and he wanted to transition his company. While we didn’t get many clients out of this, we got a stellar engineer and some sweet chairs! Note, this company was purely services (professional services) and the owner did not want to carry on after the sale. This made for a very clean transaction that we structured like the others – half the money up front and half paid out over three years.

Acquisition 4 – May 2007

After taking a bit of a breather we entered the fray again. This time, a pair of owners of a failing company (because they were trying to do it moonlight style) approached us about taking over. There was no staff, just a few assets, and a client base. We saw this as a clean opportunity to add clients to our growing business. Lessons abounded. What we learned is that while the owners did not want to join the combined company, we needed their domain knowledge of the clients. Furthermore, the clients were so upset at the poor service they had been receiving prior to the acquisition, we were not able to salvage most of them. While it didn’t cost us much money, the cost of time and distraction taught us this was a bad deal.

Acquisition 5 – April 2011

I get asked occasionally – how do you find acquisition targets? In this case, I sent out letters. I went to Microsoft’s website, looked up resellers within 100 miles that provided similar services to us, and sent each owner a letter. Not long after, I received a call from someone that had a small IT firm an hour away that was ready to sell. In most cases, our transactions have involved a smaller company with an owner/operator that was looking for an exit plan. That held true in this case. The woman that owned this company had built a five-person company and wanted to retire within a few years. Using our normal approach, we found that there were several ‘tailwinds’ instead of ‘headwinds’ in this transaction. First, there was good service alignment. They offered many of the things we did. Second, the clients were loyal and had been getting well taken care of. Third, while the owner wanted to come forward, they were OK with being a ‘princess’ instead of the ‘queen’. This ego shift is a big deal and hasn’t always worked. We have continued to retain almost all of the clients today even though the former owner has long-ago moved on.

Acquisition 6 – February 2012

This was more of a client-base assimilation. A large non-IT corporation that dabbled in providing for-profit IT services was dissolving the division. We were able to acquire key talent and a client base for next to no cost. Sometimes it’s better to be lucky than good and relationships matter!

Acquisition 7 – April 2016

Remember the letters I sent in 2011? Well, this owner received one and after five years called us up to inform us he was ready to sell. On the surface, this looked like an easy transaction but there was a minefield of challenges to confront. Specifically, there were two owners, one wanted to continue on, one did not. The one that was not the majority owner made things difficult by their nature. Secondly, we thought being on the same PSA system would be a huge convenience. It’s not. They used the system differently enough that we had to un-train and re-train, as well as break down the “the way we did it was better” mentality. The cycles spent on this was not worth it. Finally, we learned the owner did not embrace becoming part of the larger company and tried to run her old, smaller company, under us. That did not work for us. She retired after 24 months, much like the others.

Conclusions

So there you have it. Seven times we’ve done acquisitions. Let me give you some quick and dirty lists of what I see as ideal candidates, and then my lessons learned.

Good Candidates for Aquisition:

• Ideally a single owner
• Clients that know what managed services are – don’t educate the clients
• A different PSA, accounting, etc is OK. The same systems sometimes make it harder
• Provide similar services as you
• Are not product led

Lessons Learned:

• That the owner, if coming forward, aligns with you – it needs to be made clear that they’ll be expected to get with the program
• If you are in the same market, consolidate buildings
• Don’t bring in someone that is toxic
• Make sure the clients are happy prior to the acquisition
• Our structure of half the money up front and half over three years is good – it’s actually proved to save us money because the owner usually exits before three years
• Don’t do retail

There’s certainly much more to dive into, but this gives you a primer to know what you could be dealing with.

All in all, dealing with acquisitions is not easy and often involves emotional baggage as well as difficult decisions that can have huge effects on all those concerned. However, when done right it can be truly rewarding to turn a company around and bring in fresh ideas to an existing structure. It has also been very important for us to ensure that former owners are fully happy with the process and feel their legacy is not ignored. Are there any more acquisitions for us in the pipeline? Watch this space 😉

Ready. Aim. Fire…

What about you? Have you been thinking about an acquisition? Have you made any over the years? What were your experiences like? We’d love to hear about it! Let us know in the comments section below!