The Maturity M&A Multipliers for MSPs

AI know-how can get MSPs extra money at exit. Lax security practices are guaranteed to get them less.

So let’s stipulate, per Garver, that when it comes to exit valuations, nothing beats growth, especially if it results from landing new clients. What else helps? The answer, I’m almost sorry to say, is all but too predictable.

“Automation and AI aren’t bolt-ons for us,” says Integris CEO Glenn Mathis (pictured). “They’re built into how we design work and how we manage work.” And therefore, he adds, they factor “massively” into who Integris buys and how much it pays.

It’s not just Integris, either. “It’s probably the single biggest multiplier out there for an MSP,” said Kevin Lancaster, CEO of BetterTracker and Channel Program, of AI maturity during a recent episode of MSP Chat, the podcast I co-host.

Joshua Skeens, CEO of managed services heavyweight Logically, has a somewhat more nuanced take on the matter. If a potential acquisition knows roughly as much about AI as Logically does, it’s unlikely to get extra money.

“If they’re doing something that we’re not doing, then yes, it would definitely increase their valuation,” Skeens says, and especially if there are skills involved that Logically doesn’t yet possess. “If you can acquire a really good company with really good revenue, with customers and EBITDA and things like that, and extremely talented employees? Big win.”

Mathis agrees, in no small part because Integris regularly turns custom AI apps developed for its own use into new revenue streams. “A lot of those same automations, AI systems, and tools that we leverage internally, we can apply to a product or to a service that we then sell to a customer,” he says, just like the company did this past week in fact.

All of that said, Skeens notes, you’re not out of the running for a sale to Logically if you’re strong on everything that matters but weak on AI. “It’s almost a positive for us,” he says. “Now we can grow exponentially more because we can put our AI and automation in there.”

VC-funded rollup Shield Technology Partners, it’s worth mentioning, thinks pretty much the same way. The company actually prefers buying companies that excel at recruiting, retaining, serving, and satisfying customers but know little about AI automation, because that’s the kind of acquisition likeliest to experience hockey stick growth when Shield deploys the Palantir-grade AI it’s building.

Inherited chaos

OK, so growth makes MSPs more valuable and AI know-how can too under the right circumstances. What if anything makes them less valuable?

It’s a question that came to mind specifically in the context of security some time back when I read this post by the always interesting Ross Haleliuk. The context for his take on the topic, which is about how security best practices weigh on startup funding, is different, but the pattern he describes among private equity investors especially lines up pretty closely with how PE-backed MSPs think these days: get your security house in order if you want to command top dollar.

“We take that extremely seriously when we look at these acquisitions,” Skeens says. “Are they doing the right things? Do they understand security? How much legwork are we going to have to do when we go in just to secure the actual company that we’re acquiring, and then go back into their customers too?”

And to be clear, Mathis adds, the issue is your operational rigor, not how good your security software stack is. “We can scale tools, but we’re not interested in inheriting chaos,” he says.

Nor is anyone else, for that matter. Security chaos sells at a discount.

That podcast Lancaster was on? It draws interesting guests pretty often.

Like the team responsible for Cisco’s newly rolled out partner program, for example, the team behind Slide’s next-gen BDR solution, and the chief security officer of WatchGuard, to cite three recent examples. This week’s episode features Michael Assraf, founder of the open source MSP tool maker I wrote about last week discussing the company’s unconventional strategy at length in his own words. Well worth a listen, IMHO.