‘The more willingness to have conversations and to do research, [that will] help sellers down the line as they think about the right fit for them,’ says Sydney Hockett, vice president of Evergreen Services Group.

When it comes to selling an MSP business, owners have a lot of options. Merging or selling to a holding company or to a larger MSP are all on the table. But it’s essential to prepare the business before having initial conversations with a buyer.

“For those thinking about selling, the hardest questions to answer for sellers are what do they want? What do they want for their business? What do they want for their people? What do they want their role to look like? All of that is really dependent on who they end up selling to and what that model looks like,” Sydney Hockett, vice president at San Francisco-based IT services holding company Evergreen Services Group, told CRN.

The company has about 85 MSPs under its umbrella that span multiple countries, including the U.S, the U.K. and New Zealand, according to Hockett. It has acquired about 15 MSPs in the last six months.

“The more willingness to have conversations and to do research, [that will] help sellers down the line as they think about the right fit for them,” Hockett said. “Make sure to ask questions. Talk to the different buyers out there to really understand the strategies and know what you’re getting into and what makes sense for you.”

When it comes to Evergreen-backed MSPs, they still have autonomy to run their teams and their business how they see fit.

William Kapes, director of technical operations at Austin, Texas-based MSP Integritek, said he likes the independence the MSP still has under Evergreen.

“A lot of those who are doing an acquisition come in and say, ‘Hey, this is how we do things. This is how you’re going to do things. This is how we structure our contracts. These are the tools we use. You’re going to become us, essentially,’” he told CRN. “It’s really about being more supportive and less prescriptive. We have more opportunities now because we’re part of a larger organization.

“We still operate as an independent business, but we have the benefits of being part of a larger organization and have purchasing power to support all those things,” he added. “We’re basically a part of a really nice peer group.”

CRN spoke with Hockett about the process of acquiring MSPs, what MSPs should and should not do in preparation to sell and how to better position the business to attract buyers.

Are there any economic factors that play into acquisitions such as inflation and interest rates?

For us, interest rates have had less of an impact on our valuations and ability to do deals than one might have expected. I think our cost of capital is more expensive when interest rates are higher. The cost of using debt is more expensive and so I think for newer acquirers that are coming into the space that are looking to raise capital, it’s a lot harder to do when interest rates are higher. For us being fairly established, we were fortunate enough that that didn’t make an impact on how we were valuing businesses and our ability to acquire them. It does impact as we think about our debt service on the back end.

I would say other macroeconomic events certainly affected things. COVID was a big unknown and ended up being really positive for the MSP space because a lot of people needed to work from home. But early on we weren’t sure how that would affect the acquisition landscape. The political landscape always has effects as well. You don’t know what’s coming in terms of tax changes that affect what sellers take home in a deal. There are certainly some things that have meaningful impacts on how we’re thinking about our financing and ability to do deals, but luckily there hasn’t been anything too big to date.

What are some of the key indicators you look for when eyeing an MSP?

Oftentimes, we’ll see businesses that aren’t actually doing what we would consider a fully outsourced IT, generally for SMBs, so it’s making sure that the service offering is really what we’re looking for. We do have a size threshold. We’re looking at a certain size of business, roughly in the $3 million of revenue and a half a million of EBITDA or above range. Alongside that we want to see at least 50 percent of the business be recurring. We look at recurring revenue in terms of both services and recurring products like Microsoft licenses. I would say those are really our criteria that determine if there’s an initial fit. Beyond that there’s a lot more we dig into around growth of the business such as new customer adds, existing customer retention, existing customer growth, what does the operational maturity of the business look like, is the team running really lean and do they have a management team. It’s a lot of things along those lines that we start to think about as we get a bit deeper.

What should an MSP not do when looking to get acquired?

I have conversations with a lot of people that say, ‘I wasn’t thinking about selling so I haven’t gotten the business ready to sell.’ You want to think about maximizing the value you’re going to get out of a transaction and pump up EBITDA. The reality is when we see a business that’s running way too lean, investments need to be made for the business to keep growing. That’s a harder profile of a business for us to acquire because we’re ultimately going to have to make those investments shortly after the deal is done.

As owners think about selling, it’s getting their books in order, being able to pull financial data easily, thinking about what their team looks like or do people have swim lanes. In terms of, I’ll call it ‘juicing’ the business it’s really bumping up numbers.

What does the initial conversation look like when you’re talking with an MSP that is looking to sell?

That initial conversation is a diligence call for both sides, almost more so than evaluating the business. I’m introducing Evergreen, telling them what their life could look like inside of Evergreen and what that would mean for their business. I spend the majority of the time talking a little about Evergreen, our unique model and how we would think about a transaction. We don’t get super deep into the numbers, it’s more of a relationship-building exercise.

What would your message be to an MSP that is thinking about being acquired?

Outside of Evergreen, for those thinking about selling the hardest questions to answer for sellers are what do they want? What do they want for their business? What do they want for their people? What do they want their role to look like? All of that is really dependent on who they end up selling to and what that model looks like. It’s spending time thinking through that answer, doing some research and having conversations ahead of time to figure out what might fit. That can really help make the process easier.

When it comes to Evergreen, if you’re looking for a permanent home for your business, there isn’t going to be another transaction. All of your staff are going to be retained. Both the staff’s day to day and the customer’s is not changing materially. There’s still a ton of autonomy to continue running the business.

What can an MSP expect in the first year after they’ve been acquired by Evergreen?

The biggest change is just the financial side, the financial reporting is a much bigger lift. When you become a private-equity-backed business, and that’s obviously not just for Evergreen, it’s thinking about the first 90 days. And we have resources to help with that. In terms of changes, it’s really not a lot and that’s core to our model. We’re not changing the tech stack they’re using, we’re not changing their operating systems or how they go about business. But as time goes on, what they can then tap into is the broader resources that are provided by Lyra, which is our operating team that sits over all of our MSPs.

What is Evergreen focusing on for the second half of 2024?

We set some really, really big goals for what we want to accomplish this year. What’s been exciting for us over the past year is we’ve always done well on the ‘Do No Harm’ piece with our businesses, but now we’ve really dialed in how we helped make them better through Lyra and our operating playbooks. Being able to bring as many businesses as we can under that fold is exciting. It’s continuing on the M&A front but also really focusing on the organic growth of our businesses and making sure that continues. We’ve expanded internationally over the last year and so that continues to be a focus area for us. It’s making sure that that expansion into both the U.K., Australia and New Zealand is very successful and ultimately building our team across all of those veins.