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Erick and Rich discuss Lexful’s ambitions to build the ultimate AI-native data repository for MSPs, as well as proven strategies for updating your managed services prices between renewals. Then they’re joined by M&A expert Abraham Garver of FOCUS Investment Banking for an insider’s take on today’s exit environment for MSPs and the rise of “mega mega” MSPs with nine-figure top lines. And finally, one last thing: A Seattle Seahawks fan who’s even more excited about this weekend’s Super Bowl than Rich because a home team victory will result in his first haircut in over a decade.
Discussed in this episode:
Mega MSPs Are Old News. Say Hello to the Mega Megas.
Seahawks fan hasn’t cut his hair since Super Bowl 49 loss, won’t until Seattle wins again
Some guests on this podcast are clients of Channel Mastered. Compensation plays no part in their appearance or the content of the discussion unless the episode they appear on is a “bonus episode” explicitly labeled as sponsored.
Transcript:
Rich: [00:00:00] And 3, 2, 1. Blast off. Ladies and gentlemen. Welcome to another episode of the MSP Chat podcast. Your weekly visit with two talking heads, talking with you about the services, strategies, and success tips you need to make it big and manage services. My name is Rich Freeman. I’m Chief analyst at Channel Mastery, the organization responsible for the show.
I’m joined as I am every week by your other co-host, our CEO and chief strategist at Channel Mastered Erick Simpson. Erick, how you doing?
Erick: Rich. I’m doing well, but some of our friends back east aren’t doing quite as well because p satani, Phil predicted another six weeks of winter. Here in Southern California doesn’t affect me that much, but what about you?[00:01:00]
Rich: Yeah we, winters tend to be mild here in Seattle, so I don’t think that will that will affect us as much as it is some people in this country who have probably had more than enough winter, just in the last few weeks. Yeah, that was bad news.
Erick: Yeah. Yep.
Rich: How about some good news?
How about our story of the week? Or at least interesting news? I’ll promise you that much. Because I want to talk a little bit about a very young company, a startup officially, they just came out of stealth mode within the last few hours as we’re recording this on Wednesday February 4th, name of the company is Lex Full.
On the surface, Erick, this is another one of these AI native system of action kind of vendors that we’ve been talking about on the show pretty regularly now. Systems of action are basically agentic AI applications, unlike the applications we’re used to in the IT world, the managed services world that kind of streamline, accelerate the work.
MSPs, do these systems [00:02:00] do more and more of the work for you with increasing autonomy. So those are systems of action. They, the opposite end of the spectrum is the system of record. These tend to be big core business applications like the PS a in the managed services world. They are most valuable above all else for having this big data lake, a big repository of data and serving as the single source of truth for an organization.
So we’re seeing all of these startups, AI native companies come out there and use AI to automate business processes that MSPs are doing all day long. And Lexel out of the gate is basically an AI native documentation tool. So this is the particular workflow that they are automating right now.
And they have a a very familiar kind of gen ai interface that they call Ask Lex and, chat bot style, natural language, you can query all of your documentation and [00:03:00] ticketing data and get answers to questions very quickly. Looks like an interesting instance of something that we’ve talked about fairly regularly on the show.
But what their actual ambition, their strategy is a little bit different than that. A little bit more interesting than that. They’re starting out with documentation over time. They’re looking to become part of more managed services workflows, not because they ultimately wanna be the biggest, most comprehensive system of action Erick, but because they wanna be the new system of record for the AI era.
So they’re working with PSA data. They’re working with documentation data as they get into other areas. If they’re gonna be increasingly pulling in information from teams and Slack and OneDrive and HubSpot and all of these system, and they’re gonna be building a new single source of truth that is more comprehensive than today’s legacy system of record.
[00:04:00] The the PSA system. The PSA system’s gonna be a subset. It’s gonna have the ticketing data and contract data. Its data is gonna be a subset, Lex, full hopes of the data lake and the single source of truth it’s building, which is gonna pull in information from everything that the MSP is doing and become the most strategic important.
Solution that is in any MSP stack. And just to make clear how little interested they are in the whole system of action business, in, in terms of winning that market and putting other systems of action out of business and so on, they look forward to integrating with all of those tools. Today, systems of action, these AgTech ai solutions, they integrate with the PSAs, right?
They need that data down the road at some point. Lex Full wants all those systems integrating with its system of record, its comprehensive data lake and relying strategically on the data that it [00:05:00] has amassed and aggregated better than anyone else in the industry. So this is a different, very different.
Kind of AI native startup strategy in the managed services world for the first time, in my experience at least, we’re not talking about a company that wants to build an agentic AI system of action for an MSP workflow. They actually wanna build the new system of record heavily automated AI native, et cetera, for the new AI era.
Erick: It’s very interesting, rich. A lot of questions come to mind, but like the first couple obviously are who are they competing with today? So are we talking about, IT glue and IT boost and maybe some other documentation platforms? Or are you seeing something different in market?
Rich: So I would argue so obviously logically they are in the documentation business, so yeah, it glue, it boost.
But those [00:06:00] platforms are not nearly as AI forward as a solution. Like LFO is. The only other system solution out there that I’m familiar with that’s very similar to what LFO is doing is a product from a company we’ve talked about in the show before called Sift, CYFT, very similar kind of thing where out of the gate what we’re they’re doing right now is listening in on all of the calls that your technicians do with customers.
And then based on what it hears, it automatically documents everything. And they too are gonna be building beyond that and filling in this data like so that, not identical but similar and different from the legacy documentation systems in the degree of ai and agen capability that they’ve got built in right now.
Anyway.
Erick: And they’re funded and are now launching into the market.
Rich: Yeah. Again we’re recording here on Wednesday, February 4th. They just, within the last few hours came outta stealth mode. They are funded at [00:07:00] least partially, I don’t know if this is where all the money came from by top down ventures.
We’ve had the top-down guys on the show before, and in fact, my first real exposure to this company was attending a top-down event last November in Scottsdale, Arizona. So they, they are involved in in the creation of launch of this company.
Erick: Got it. Just a, my, my brain squirreled off as it often does, rich, and I think I’m thinking we’re seeing all of this happen with, the industry that we are most familiar and passionate with, right?
So the MSP channel, the technology industry. And I am I’m running forward in my brain thinking, my goodness. I think eventually there will be products out there for consumers where it is the system of action for your entire life. Like why put boundaries around it, right? There was a movie, a sci-fi movie a while ago.
It had Robin Williams in, I forget what it was called, but it was basically the premise was [00:08:00] that, in the future, everybody was basically recording every moment of their life. And he was this I wonder if he was a funeral director or something. He would composite, moments of their life during the funeral and things like that.
So I’m just thinking fast forwarding into the future, is everyone going to have some device that they wear, like a watch, like a pen, like something glasses that now this is my personal system of record, so it helps me, and not only. In my work, but it helps me in all other areas of my life. Hobbies, family, things like that.
Kind of interesting, but scary too.
Rich: And it is a different topic I’ll say, but yeah, absolutely. In terms of the consumer system of record, that’s absolutely what the LLM companies are looking to build right now. We don’t know a lot about them, but we know that OpenAI in particular has this whole family of devices coming.
And the whole idea basically is, if you’re a chat GPT user today, all they really know about you is [00:09:00] what you’ve told them through the chat. If you have maybe hooked it up to your email and so on, then it’s got a slightly bigger, but if you were wearing some device that was listening to and watching everything happening to you and had total context about your wife, it could become the system of record for your wife.
And then the theory is provide you much better, more actionable specific advice. On the other side of that though, and this is where I thought you were going because as we’re recording this right now. The story that is all the rage in Silicon Valley is the system known as, or originally as Claw Bot and then Mt.
Bot and then Open Claw, which kind of is the system of action for consumers. And we won’t go down that rabbit hole. It’s a fascinating thing. I’m not going anywhere near it because of the security implications right now, but that is an example of that. There, there will be more secure AI in the not so distant future that is just doing everything for you [00:10:00] that you would really rather not have to devote time to.
Erick: I’m certain that Hollywood is all over these scripts and pitches for movies all about what this what this bodes for humanity moving forward.
Rich: One last note before we move on to your tip of the week, the founder and CEO of Lexel is gonna be on the show with us in a few weeks, so save up your questions, Erick.
You’re gonna get a chance to ask them to her directly. And our audience will get a chance to learn more directly from her about what she’s building and why. But let’s move on to your tip of the week. We’ve been talking a little bit about m and a and valuations on the show recently, and EBITDA obviously is an important variable in that calculation, and you’ve got some EBITDA related advice for folks this week.
Erick: Yeah, wrench. Great tee up. Thanks. And, I’ve been thinking about, the conversations that, that we’ve been having that MSPs have with, their peer groups and their colleagues and at events and things like down the hallway conversations about, the need to make sure [00:11:00] that that we’re truing up, our individual subscriptions, right?
The cost of our tools as an MSP. Increase over time just like anything else. And, I’ve always talked about making sure that we’re truing up our pricing for, as our costs of doing business go up. And I’m a big proponent of doing an annual rate increase no matter what, just to keep up with the cost of doing business and the cost of inflation and things like that.
But I wanna step a little bit higher in today’s tip of the week, rich, and talk about the, how often we actually increase our agreements from a strategic perspective and maybe not limit it to an annual increase. We may be looking at things that are affecting our businesses much more rapidly.
So maybe biannual increase is heck. Maybe a quarterly increases. If you’ve got clients as an MSP and you really are [00:12:00] having trouble with these folks, getting them to sign a one year or a longer agreement, and they may be on a month to month agreement, you can increase your agreement rates and keep them true up.
I think from a, maybe not an an easier conversation from the difficulty of it is to let a client know the prices are going up, but from a contractual basis it makes total sense so that you can have a little bit more fluid conversation. Let, I just wanna drop that at the beginning of the conversation, but I wanna just mention some things that maybe MSPs don’t consider Rich when they’re thinking about the reasons to increase their agreements.
And scope creep. If your rates and this is one that I probably, have not spoken about too much, but if we’re delivering projects for a client over the term of an agreement, typically an Ms. P will have a labor rate in their agreements. Or the more mature MSPs that, feel like they have a really good handle on a specific type of [00:13:00] a project, may include a project or two in that flat fee agreement every year.
But guess what? Scope creep and scope seep are a real thing. When I talk to MSPs Rich one of the biggest areas where they need help is avoiding scope creep and scope seat. They need better project management protocols and understanding how to write a project plan with checkpoints along the way to phase things in and to do phase reviews, and then to also identify how to manage risk and change.
And as soon as. Change is necessary. The immediate response should be, okay, that’s outside the scope of this project. We’re going to get you to agree to an adjustment and for that fee. So I think from a, from an overall EBITDA increasing strategy, not just increasing the prices of your agreements or your individual subscriptions, if you’re billing [00:14:00] clients on sub consumption and things like that, making sure you’re trued up there.
But think about projects specifically and think about not being locked into a flat rate for a project, and understanding that you may have an agreement rich that is three or five years old and your rates for projects, may not have changed. It’s totally fine to say, okay, we’re, here’s what we’re gonna quote you.
Here’s what we’re going to deliver, and give them a price for the project. You’re have to line item how many hours and things like that. I know some of us do that, I know some co-managed IT engagements require that because you’re not reporting to the business decision maker, you’re reporting to more of a technology decision maker, and they want to know how many hours do you predict it’s gonna take and things like that.
Just remember, manage scope, creep and scope. See effectively increase your rates for your for your recurring revenue solution. So maybe you don’t need to increase the overall agreement rate, but you can make a change [00:15:00] for parts of your subscription. Microsoft is a good example, right? You’re gonna make sure that if Microsoft raises their prices to your clients, you’re gonna raise if you’re to make sure that you’re meeting your margins.
So a couple other things. So think about everything that you bill your client and analyze it. More than annually. So a thought came to mind, rich as I was thinking about right in the tip of the week, and I said daylight saving times while it lasts, right? They’re always trying to get rid of it, right?
But daylight saving time, we move our clocks up or back twice a year. And they all, and we are also told, oh, that’s the best time to remind yourself to change your smoke alarm batteries. So maybe just if you’re easing into this for the first time, bi-annually is a good time to look. But if you’ve got fluctuating prices or you’ve got a price increase from a vendor because you’ve renewed your agreement, at, in, in Q1 of the year, Q2, and it’s a significant increase.
And by all means, have a conversation with your clients and [00:16:00] don’t ask permission first, ask forgiveness later. Say, as a result of an increase in some of the components in our portfolio of services we hate to do it. We need to increase our rates to you and just deal with the half a percent of clients that will potentially, question you about that.
Don’t give ’em a pass, but have a chat with them and explain to them the necessity of you maintaining your margin so you can be there to deliver service to them. Remember what they say when we take an air plane flight, right? Rich in the event you know of, we lose cabin pressure. Who do they say to put the mask on first?
They say put your mask on first before you help others so that you can help others. Saying concept here,
Rich: This gets to an issue that I don’t know the best practice for. And and you do, and I, and you may have just provided it, you’re an MSP, you go to conferences, you attend webinars, you learn about new [00:17:00] solutions.
You see something you like, you decide, I’m going to invest, I’m gonna add this to the stack. And at that point, you either. Have to raise your rates or eat margin until the, next renewal cycle comes around. And I mean it I’ll just open it up to you. What is the best practice there?
Are you basically saying if you’re doing true ups more often, then go ahead and add that solution to the stack if you think it’s gonna benefit your customers to do that and don’t wait and, 10 more months until renewal comes around to, to raise rates. How do you advise them as peace to handle that?
Erick: That’s a great question, rich, and I think it, it all boils down to the relationship you have with your clients. If we all talk about, the A clients, the B clients and the C customers, the pyramid that we slice up. And if all you have is a transactional relationship with the C customer that is not growing and is not, is always worried about what things cost and is always, is arguing with you over your [00:18:00] invoice.
They’re probably not gonna take kindly to you. Just, sending them an email saying, oh, prices are going up. You’ll see that reflected on your first invoice. Of your a clients, certainly you have a better conver, a better relationship with. You are being more strategic. And hopefully, now that we are in 2026 new MSPs are starting businesses and they’re understanding that this is a strategic business partnership with clients and the MSPs that have been doing this for a while are evolving to that point where you say, okay, I am at a point where I get to choose who I work with.
I think that’s kind of the tipping point, right? When I can say no. I remember a, an advisor told me one time, he said, there’s gonna be, and you’re building your business, there’s gonna be one word that is gonna change the direction of your business. When, and I said this, what is this magic word is it beam?
’cause I’m, I don’t need more bean stocks. He says, no, the word is no. When you can say no to an opportunity, that means that you are being strategic about [00:19:00] who your ideal customer profile is, your unique value proposition. You’ve aligned your services and deliverables to meet their needs. And when you stop churning clients because they’ve outgrown you, I think is another thing to think about.
But in general, rich, I think just having conversations with clients and the first time that this happens, it’s gonna be a little rocky with some of those relationships that you don’t really have a strong bond with or that are, on the verge of churning out anyway because they’re really not growing, they’re probably not a good fit for your organization.
I’m not suggesting you lose revenue, but the first time you do it will be the hardest. It’s like the first time you have to fire an employee. It is the hard and it never gets any easier. But at least you’ve gone through it and know how to improve it over time. So the first time you do this with clients a little bit rocky, you’ll figure it out.
But if you do it regularly and it becomes a consistent [00:20:00] way that you do business, then your clients will understand that is how you do business. And when you bring on a new client, you explain to them the harsh reality of doing business in the economy that we’re all in and where it goes, Hey, there will be periodic times where we will need to increase our rates.
When we do that, this is how we handle it. And so it’s just like when you’re doing a project for a client and you’re walking them through all the phases and you say, Hey, there may be times when change is required, and here’s how we handle change. We identify the need for change, we communicate the options.
We inform all affected parties, and then we implement that change. And then if there’s a. A need to change budget or timing, we will inform you. Same thing. So once you train your clients to understand that change is inevitable and you’re in business to help their business grow, but you’re in this together and, some of the best squirreling off a little bit, but some of the best advice [00:21:00] I received when I was building my MSP practice, rich was from some of my really smart clients.
I listened to them and started taking tips from how they were running their businesses. So yeah, there’s no magic bullet on, on, here’s exactly the best way to do it. My advice would be just build strong relationships with clients. Let them know during your strategic meetings with them that, hey, just so you know wanted to, make a to, cover this topic with you guys.
The changing E economy and things like that may force us to raise our rates periodically. This is how we will handle it. So if you message them that there is a real possibility that rates well, there’s an eventual po eventuality that you will need to raise your race just like they raise their racist, same business and let them know how you handle that and how it’s communicated and why it happens that will prepare them for when it does actually happen.
Rich: That is great advice. Erick [00:22:00] and folks in our audience get that gold for free on MSP check every week. I cannot possibly add anything to that useful, so I’m not even gonna try. Instead, I’m gonna say that we are about to take a quick break when we come back on the other side. I will be joined by Abraham Garver of Focus Investment Banking.
They work with. MSPs on the sell side and the buy side and m and a transactions. He’s one of the most informed people about m and a for MSPs. I know. He’s gonna be coming to us live from the ConnectWise IT Nation Evolve event in Houston that he’s attending this week. Unfortunately, the only time he was available was a time when Erick is not available, so I’m gonna be flying solo on that interview.
And then when that is concluded, Erick will rejoin us and we will share some thoughts based on what we learned from Abraham Moments from now about m and a for MSPs right now. Stick around. We’ll be right back[00:23:00]
and welcome back to part two of this episode of the MSP Chat podcast, our spotlight interview segment where I’m very pleased to be joined by Abraham Garver, the managing director of the MSP business at Focus in Bedford Banking, who is coming to us as folks watching on video, can see very live from the ConnectWise IT Nation evolve event in Houston.
Abraham, welcome to the show.
Abraham: Awesome, thanks, rich. Yes. I’m here at the IT nation Evolve, which is the peer groups and then grow which is the community day and kind of m and a focus mid midweek for the peer groups.
Rich: We’re gonna come back to peer groups towards the end of this interview ’cause you wrote something very interesting about that last year and we never got a chance to talk about it on the podcast, but I really wanna zero in here on the, a conversation that you and I had privately recently about the m and a landscape for MSP right now, which kind of resulted in a post on my blog hard that I’ll link to in the show notes.
Before I even get there though for folks who don’t know you, [00:24:00] haven’t met you before, just tell ’em a little bit about who you are and what focus is.
Abraham: Yeah, so Focus is a middle market and investment bank. We have 11 industry verticals and there’s one within technology. I founded our MSP team.
And we got super active in kind of 2019 and 2020 especially right around the time of the pandemic. We, fast forward six years and the MSP team at POCUS has been the catalyst for and advised on MSP transactions with 13 for 13 platforms and 90 parties buyers and sellers. It’s been an incredible kind of run as the MSP businesses have been consolidated.
Rich: Yeah. And it, it’s resulted in you being thoroughly plugged into what the m and a landscape looks like for MSPs out there. The reason I reached out to you recently and we spoke earlier, was you and I [00:25:00] talked a good year and a half, maybe more ago, about how it looked like we were right at the beginning of this wave of really big mergers involving big MSPs, getting even bigger.
As we look at how things have changed in the last year and a half, how big are the biggest MSPs now compared to where we were in the spring of 24 say.
Abraham: Yeah, when we first really started in, in call it 2020, they were 3 million to 5 million of ebitda. And EBITDA is the cash flow that the MSPs generating on their own without institutional money.
The largest ones we’ve worked with and have seen in, about 5 million in ebitda. Some of those in 2020, I’ll use an I’ll pick on Integris. One of our clients started with three of ebitda. And within five years when private equity fuel was added to the fire they grew to [00:26:00] 30 million of 30 million of ebitda.
And then, so they’re across the, across the globe, there are 202 private equity backed platforms, MSP platforms that all started out in that three to five of EBITDA range with the private equity group. Some have I’d say on average they’ve grown to about 10. About 10 of ebitda.
Some what you’re asking about the exceptional kind of leaders of the pack. I think of Thrive, which last year was a hundred million of ebitda. New charter conversation I had here yesterday is at about 60 million of ebitda. Evergreen’s been a hundred million plus for I think for some time.
And then a couple, a couple others in what they some of those not really new charter or Evergreen but some of the other platforms have begun buying other platforms. [00:27:00] And an example is Integris. The first one I was talking about that was three went to 30 of ebitda. Once it recapitalized a second time, got a second larger private equity group.
It bought one of its peer group members, tech md. That was 10, 11, 12 of ebitda. And so you have platform buying platforms. At first it was this land grab, and then some of us started to talk about it was a platform, a platform grab and, for, for your audience those MSPs, let’s say they’re three, 3 million of revenue, kind of 10 million of revenue.
And above many of those, what’s changed now in the landscape is before the play used to be to put two call it $2 million EBITDA MS piece together, bundle them and get a platform investment. That was the highest valuation. What we’ve been observing with [00:28:00] on the frontline, with our clients is that some of these largest MSPs.
Now have the ability to pay more than a private equity group that doesn’t already have an MMSP. So an example might be you don’t need two directors of hr if they’ve already got a HR director. You don’t need two controllers and on and on a, a five of ebitda MSP that’s being acquired by one of the mega megas as we’re describing them.
You may have a synergy of nine or 10 people that essentially that synergy means it’s, instead of having five of EBITDA that you’re selling to the large mega, they look at you and they see 5.8 of ebitda. And so the amount of money that they’re able to pay is greater than a private equity group that doesn’t already have an MSP.
Rich: Yeah. And when we spoke recently, I think you said there [00:29:00] was something like 125 private equity firms out there right now that don’t own an MSP platform, but would like to, so I mean that there’s a lot of bidding activity out there, but because they’re buying into the market, so they just don’t get to realize that efficiency that you’ve described with respect to the big companies that are already there and don’t need two HR directors and so on.
If you’re a one of those 1 25 PE firms buying in, you’re paying for ebitda just the way it looks like
Abraham: just the way it is in the business. Yeah. So you’re at a, there, those 125, you’re exactly right, are at a competitive disadvantage. And so it’s really what’s, I think has always been most important is the founder, CEO and management team.
One situation we were involved in recently, they had been going for 25 years. And were ready to, even though they’re young, still call it a day [00:30:00] versus their management teams that we work with that say we want to be a platform and we wanna grow. And really have fun with the private equity money grow organically, inorganically.
And I think those are the doing what you would do if the money wasn’t there. Really understanding that is what’s most important. So I think people would take an 11 x if they really wanna be 11 times ebitda. If they really want to be a platform, the management team and over a 13 x, if it meant they had to cash out of the business and they were no longer involved in, would go away.
So it’s not always the highest valuation. That’s the kind of most important outcome. In fact, it really, I would say most of the time clients and people that are most focused on getting the highest multiple are focused on the wrong thing. They should really be focused [00:31:00] on what’s my life and my team’s life and my customer’s life gonna be like for the next five, six years with this new partner.
Rich: So we just spoke there about how the mega megas, the biggest of the MSPs right now have a competitive edge over private equity firms. But one of the things we talked about recently is they’ve got a competitive edge over other m platforms when there is an attractive acquisition target out there.
The biggest of the big I the wording you used, they’re pulling away from the pack in terms of their ability to continue growing faster than other platforms because of some of their their scale and their competitive advantages. Talk a little bit about that.
Abraham: Yeah, so if we think about somebody that’s got a hundred million of EBITDA 400, which means 400 million of revenue, taking 1% of that or $4 million and investing in AI for the business can really, you in theory in the [00:32:00] markets, today, continuing to debate the value of AI and should there be capital investment and what’s the return.
But for that 400 million revenue, 1%, 4 million going into. Implementing and getting the AI workable and increasing profit margins. If I have a, a 10 million the math is much different. The, 10 million of revenue versus 400. If I take 1% of the 10, I’m just really not gonna be, as it relates to ai, as an example, as competitive as the mega, or even as somebody that’s the middle the next size down.
So I think we, we’ve seen this in other industries as the consolidation goes on, the, the kind of first to arrive with scale, with talent with great capital those tend to earn outsized returns for their investors because they. [00:33:00] When more often than not, when they get into competitive situations.
Rich: Yeah. It’s a phenomenon that we’ve spoken about on the show in recent weeks, and it, like you said it’s true historically across time, but it’s especially true in the AI Ave basically where yeah, there the kind of flywheel effect where the big get bigger, faster than everyone else because they have more clients and more data and more money to spend on ai, more data to put into the AI systems.
And that just gives them an advantage that keeps allowing them to pull away from the pack a little bit.
Abraham: I think so. And then you and I have talked about too, kind of specialization. To the extent it’s an MSP that’s smaller, one of the ways they can be competitive, continue to be competitive is to really specialize within a niche.
It may be community banks, it may be. Know, fill in the blank, but you look at your customer base and where you’re doing [00:34:00] well, where you have great references and where you can go in new logos, and that’s what’s most attractive to the mega Megas. Now reminds me of a transaction we closed at the end of November.
They were incredibly strong in senior senior care. And the mega, mega was not. So when they bought it, the mega got this great set of customers, references, ability to compete, and especially with their scale, win more and more. So to the extent you have the ability as a smaller MSP to make yourself really strong in a vertical.
You’re probably gonna get better margins. It’s gonna be easier to get new logos and bonus, you’re gonna be more attractive to the mega that may not have some of that expertise in, in-house and would like to buy it rather than try to build
Rich: [00:35:00] the other thing. Another thing that will be advantageous to MSPs who are, contemplating an exit is something that you’ve written about recently on, on on LinkedIn.
And I think a blog post I’ll link to this from the show notes, but you were saying that, obviously recurring revenue is something that acquirers look at pretty closely, but not all recurring revenue gets valued the same. So talk a little bit about, from the acquirer’s point of view, they’re looking at an acquisitions target recurring revenue.
What are they looking at and how are they SPAC ranking the different ways that can come in?
Abraham: It’s, it reminds me it’s the, it’s a similar valuation that we use that SaaS companies. That rule of 40, which is your growth rate plus your ebitda, if it totals 40 that’s a better, that’s a really healthy, nice run, either SaaS company or MSP.
What’s most valuable in that when we get, do a [00:36:00] data request on an MSP and start to really look at it, the chunk of recurring revenue that, that they have we’re really looking closely and the buyer is on a monthly basis, back for three years and each one of those months, and it’s especially even more of a lens on the latest 12 months.
Retention is an important kind of cross sell upsell which is typically one time, if you put MSSP revenue onto a existing customer, what’s most valuable? What we wanna isolate is your new logo growth in over the last 12 months. Do you have an engine that’s I call it printing new logos?
That new logo, new customer especially in a vertical that you are, focused on, the community I’ll pick on community banks. If that’s really if [00:37:00] you can show that in the past 12 months you’ve added 15 new community banks, that new institutional investor that you’re bringing on is gonna feel pretty confident that.
In the next year, even if they do a face plant, they’re still gonna add another 10. Let’s say we’ve had we’ve had clients that have had 33 new logos in the past year and, just a feeding frenzy from the mega megas, from the people that want to back it as a platform. We really see from the front line what these buyers are valuing and what they’re not, and putting two MSPs together that don’t have new logo, organic growth in 2020 that everybody cheered and said, this is a great asset today.
It’s kinda like that expression. Show me the money. It’s show me the new logos. [00:38:00]
Rich: Yeah. I wanna drill down a little bit on the word engine that you’ve used there. And part of what I’m doing here is fishing a little bit for advice that we can give to MSPs, in that, whatever, five to $10 million range in the audience right now.
And they’re thinking ahead. That’s in some kind of timeframe to an exit. You’ve already pointed out specialization. It’s gonna be attractive to an acquirer. You’re gonna get a better valuation, new logos, organic growth, important. One of the things you told me before is that a new logo engine that is not founder or owner dependent, like if an acquirer can see, you’ve got a team and a process, and even if you, after your earnout exit, it’s still gonna run.
That’s something that’s important as well.
Abraham: Yeah. The, the. Once you get your first private equity institutional, like investor, a lot of excuse me, MSPs will get a CRO, chief Revenue Officer. [00:39:00] And what we’ve seen, I’d say, especially in the past 12, 18 months, like a VP of sales, that’s a little less expensive.
That’s especially find one in the niche, find somebody with nice business development experience like in the community bank niche that sold long-term like managed services, contracts. That would be, that’s really where to put where I’d encourage people to put money. As opposed to trying to buy somebody that is down the street, another business that’s maybe also vertical agnostic, doesn’t maybe doesn’t have great organic growth.
Rich: Now you, you can imagine some folks in the audience maybe who, aren’t contemplating or an exit or they’re just not, interested in selling into a platform, selling to a PE firm, selling to one of the mega megas, et cetera, looking at the market and getting a little bit disturbed because the biggest [00:40:00] companies are, have more clients and data and they’re pulling away.
And you’re gonna be competing against these giant companies with giant efficiencies. But you pointed out a few things when we spoke that actually, the, and I’ll call them silver linings, basically for the smaller MSP one of which was that you’re seeing at least some of the mega megas move up market.
So as they get bigger, they’re selling to maybe bigger clients.
Abraham: Yes.
Rich: Who create some leeway and smaller clients or smaller MS foods.
Abraham: Yeah, so the I like at the beginning of every year, I like to talk with every buyer and they’re about 200 in any given year. 125 looking for a new platform, 75 that have one.
I wanna, in our team, we wanna check in with them and find out what’s changed with your acquisition criteria, what are you looking for? And that, that really informs our thinking is [00:41:00] where, what, who fits with who and in what timing. So having the mega Megas, one of them said to us, we need to add $20 million of acquired ebitda.
They’re adding also organic growth, but this year they meet 20 million, which might be. Five of five. And then a founder, CEO owned like five and five of ebitda, and then one of the platforms that’s at the 10 million EBITDA range. Like when you do the math to figure out, that’s a big, that’s a big job to get 20 20th acquired EBITDA when there’s as many as 200 buyers that you’re competing with.
It’s a, so it, but the mega Megas are still winning because they can pay, let’s say a turn and a half of EBITDA more because of those synergies we were talking about. But really in the [00:42:00] same way that I’m asking for kind of our sellers, I think all M MSP should be asking what are the mega megas looking for?
And what, where do I wanna steer this? Over the coming year so that I’m more valuable to ultimately who I may transition to.
Rich: And are there any additional variables you wanna add to the mix there? ’cause again, we’ve talked about specialization and organic growth and so on. Are there other trends you’re seeing in terms of what really holds appeal for a buyer
Abraham: geography?
Historically, like there were a couple years where every single phone call I took was, we won an MSP in Florida. We won an MSP in Florida. And it was just like, you couldn’t, I would just start the conversation with that. So let me understand this. You want to before you even. But I think with, in the same way that you’ve seen probably some of the population leave [00:43:00] Florida because of the hurricanes, what’s going on with real estate hurricane insurance, I think it’s a you want to be, we wanna have MSPs where there’s, where the businesses are and where people are going. And it’s been pretty consistent. Like California has not been of interest to people for some time, although there are a lot of great MSPs that are in California. But geography, and that’s not something you can really easily change if you’re five to 10 or 15.
Your geography is what your geography is. But the, as they get bigger, they want more density. So if you look at where the mega megas are have a lot of their employees also that acquisition criteria we’re getting from them, pretty much across the board from people is, Hey, this year we really wanna add more density in the market.
Another MSP that’s [00:44:00] already where we are. So sometimes you can actually benefit from that. And let me digress one second. To your question, about $5,000 of so some of the acqui, one of the acquisition criteria that we’ve been getting for a couple years from one of the mega megas is your customers need to have at least $5,000 per month of managed service kind of project and product.
If you’re below that when that’s okay, when they acquire you, they’re gonna help find another home for that. For those kind of customers, if they, so something to think about. If you’re in the five to 10 range, it’s nice to get bigger customers. You don’t want to, you don’t want customer concentration though.
And by that, the lenders, private credit lenders would say top one customer should be 20% or [00:45:00] less of your revenue, or top two are 25% of revenue or less. And in practice, like anytime you get over 5% with any one customer, there’s gonna be more attention. You’re right before the transaction closes. It’s very, it’s market to call all the most important customers and, just get a pulse as to the relationship and.
Where things are going in the future. So I think that’s, that would also be something, if we could put it on a wishlist, like pick customers that are in a niche that play to your strengths and then pick customers, all things being equal that are a little larger because they’ll be more, they’re more stable.
Like it really happened during the pandemic. Dental practices as a, as an example that were valued like everybody else [00:46:00] before just dove to, and there are very few verticals, like hospitality was another one with the pandemic. I think again, just like really foc pick the vertical that you’re great at or you just enjoy.
And then look for a little bit bigger customer if you can.
Rich: And avoid concentration. That’s really great advice
Abraham: too. Avoid concentration. Yeah. Five, maybe even 10%. But what happens is, like one I know really well one of the buyers at one of the mega, mega megas and he said you could, you can just he loves m and a and has been doing it since 20 17, 18.
He has, he and others have purchased MSPs that have concentration and they shortly after they lose that customer and all the economics are destroyed and they’ve got a huge mess on their hands. And so once they’ve been, once they’ve [00:47:00] put their hand on the stove you can’t convince even in fact that the senior care I thought it was a great asset.
It was purchased by one of the mega megas. I thought it was a great. Asset or purchase for another one of the mega megas. But they had been burned with customer concentration and said, I’m sorry, we’re not gonna pursue this.
Rich: I wanna just flight test what might be a crazy or stupid idea with you, because it occurred to me, you were talking before about how some of the mega megas out there just really aren’t interested in retaining a customer who’s under five KA month.
They’re gonna transition those people out. Is there an opportunity for the smaller, mid-sized MSPs out there right now who are not selling to form a relationship with the mega and basically say, Hey, if you’re looking to shed a three KA month, Ms. P give me a call. If I’m very good, I’ll take care of them and I’m happy to talk about it.
Abraham: There were some [00:48:00] people in, I remember in Minneapolis, nexus Tech did a, was one of. First platforms in that geography. And one of the MSPs smaller at the time was saying, Hey, I’m scared of taking private equity because when this one did in our ne in our backyard we got all these customers and they really perceived it as it’s just, it is a great thing to pick up a lot of new customers.
But it really, when you drill down in there, it’s their, I’d say over half of ’em they’re transitioning things that don’t make sense in their model. So one of the, one of the situations we worked on, they had cleaned up before the transaction and had 2,500. Anybody below 2,500 was moved off.
But there was still that. The delta between 2,505,000 a month. That [00:49:00] will be dealt with over time. And it’s just less, if you present that to the buyer, hey, they’re all 5,000 or above. And the integration person who, that company’s done 27 acquisitions the integration person says, you’re at 5,000.
I don’t have to do, I don’t have to off and have all these uncomfortable conversations. I’ll pay you more. Like I’m happy that like you’re a perfect fit. Like where have you been hiding? So it is helpful to understand what people, like the people, when you get to where you want to go what are they looking for?
You build, build to that.
Rich: So I, I hinted at this at the beginning of the interview and I wanna make sure we get to it. Before I let you go you’re at a community, a peer group event. Yeah. Last year you wrote a piece basically where you were talking about a very interesting and I would say maybe not intuitive relationship between peer group membership and [00:50:00] valuation.
Explain a little bit about what you find or found, what you’ve seen out there and what kind of explains it.
Abraham: I think I understand your question. To me, the peer groups of every MSP across the country and really across the world peer groups are just so invaluable to, if you think about getting on a quarterly basis to be base to base with 11 other people in your peer group that are founder CEOs, similar sized business, also trying to figure out like what do we do with ai? How do I get new logos? How do I decide what industry vertically should specialize in? Kind of everything that’s everything that’s going on, a hundred out of a hundred times. About 50% of our transactions are with peer group MSPs that are in peer groups.
They are by hands down [00:51:00] by far the best MSPs in the country. Because you think you add the institutional investor and instead of just having, one person or that kind of board giving feedback, you’ve got a built in 11 giving feedback plus the board, plus the larger community around you to solve.
Problems that are there, plus your facilitator who’s probably run an MSP and sold it and it’s in a give back mode. And we saw it with Integris I call it relational equity. So the Rashad’s relational equity over 10 years. He knew by being in peer groups with different MSPs around the country, which ones had great reputations, which ones were easy to work with, the problem solvers, those with energy.
So when he got institutional money from Frontneck, he could go [00:52:00] organically with his relational equity go and attract them to be merger. Candidates for his business. And that’s how it grew from three, to call it thirty, thirty five of ebitda, four or five years. And so you, you will, by being in the peer group, you’ll get opportunities that you wouldn’t if you’re on an island by yourself trying to figure this out.
It’s a beautiful thing about our industry are these peer groups. Compare and contrast it to a decade ago, I used to do e-commerce m and a and it was just, you couldn’t really tell another peer what you’re doing. It was just like margin compression. You wouldn’t tell a peer how you figured out the next kind of mousetrap.
But in this industry it’s just like we’re at 25 years this it nation of all of, know, building the peer good community. And there’s [00:53:00] 20, last year there were 24 private equity backed platforms in the Evolve community. And so they, they sit there and in the same peer group were Rashad of Integris and Kevin from TechMD.
And they, the platform bought another platform a platform, bought another platform Kevin Cook with purple guys. And so you’re in, there’s not what you don’t want as an outsider introducing a deal idea that doesn’t know the culture and the founder CEOs haven’t worked together.
What you want are people that have, worked side by side challenging each other quarter after quarter to. Become true partners in an equity sense. It’s one of the beautiful things about New Charter also is just exceptional. Just exceptional individuals that are founder CEOs of [00:54:00] new charter businesses that they’ve acquired.
I think we’re at 30 or like in that range of 30 plus that have been acquired all from, I’d say, I haven’t seen the numbers, but I guess 90 plus percent are peer group. Like they’re trained with the culture of we, we can bench, they’re benchmarking quarterly their financials against their peers and against the larger community so they can look at and isolate, here’s what I’m doing wrong and here’s everybody’s advice for how you can fix it.
It’s just it’s, adding steroids to your Ms. P to be in a, to be in a peer group.
Rich: And it’s just one of those things. MSPs hear about peer groups. I trust a lot and hopefully understand the benefits of that, but probably don’t all understand that on top of the other advantages of being part of a peer group, there is potentially an exit ad advantage as well.
Abraham: And the [00:55:00] really good peer groups they are approaching the founder, CEO and kind of others in the management team holistically. There’s legacy planning, there’s leadership planning, there’s value creation planning. There’s a theme around each kind of quarter that is, it’s even, it blows, it continues to blow my mind even, definitely you want coaching to make your MSP better.
But what I love about this community is it’s just they’re help, they’re making the individual’s family the individual’s, employees and community like that’s the emphasis is holistic. It’s not, transactional. It’s relational. And it goes back to a book that is just within the culture, which is the Go-Giver the Go-Giver book and is you think about I was just had lunch with Robert who had a cyber attack, I think it was three, four years ago.[00:56:00]
Totally shut down his MSP. And he had, I think teams from four different, like peer group members, put teams together, flew into his office and helped him, quickly. Figure out what was going on and get back to, get back into business. It’s just that kind of a Go-Giver culture, like looking out, put others first.
That’s a great story. Yeah.
Rich: Abraham I, so thank you for making some time for us in the middle of a busy day. I love talking to you,
Erick: rich. Yeah.
Rich: For folks in the audience who would to learn more about you, get in touch with you, talk about some of what we’ve been discussing, where should they go?
Abraham: Yeah. Just LinkedIn or email is great. Abraham Dot Garver, G-A-R-V-E-R-F, focus banker Scott Cole.
Rich: Okay. Fantastic. Once again, thank you so much for joining us Abraham. Very interesting conversation. We’re [00:57:00] gonna take a very quick break here on the other side. I will be rejoined by Erick.
We’ll share some parting thoughts about this interview I just completed here. Have a little fun wrap up the show. Stick around, Amy. Be right back
and welcome back for part three of this episode of the MSP Chat podcast. Once again, thank you very much to Abraham Garver of Focus investment Banking for giving him us his insider expert perspective on the m and a landscape in managed services right now. I mean there are a lot of different places I could go with this.
Erick, there’s one in particular I wanna tag you in on. I will just say we, we wrapped up by discussing a little bit. Some of the advantages from an exit standpoint for an MSP of being in a peer group. And just one little data point that came and went very quickly in the conversation is ’cause Abraham is right now at a [00:58:00] a IT Nation evolved peer group event in Houston and he said there are 24 private equity platforms.
So basically 24 roll-ups that belong to IT Nation evolve peer groups, which is a lot more than I probably would have guessed. And it does help quantify a little bit why there might be some advantage. You just think about the relationships you form in a peer group, the trust you build by, in essence this is not how you really do it, but you’re auditioning for people.
So I, anyway, very interesting angle on thing. But there’s one thing in particular. He said that I wanna run past you, Erick, ’cause this is right up your alley. And he was talking about how acquirers right now, among the many other variables that they’re looking at when they’re evaluating an MSP one that they look at is concentration of revenue.
And he said if they see an MSP getting more than 20, maybe 25% of its revenue from one business, that is a red flag. That’s too much concentration of revenue. And [00:59:00] I could swear we’ve talked about that specific issue on this podcast before, that there was maybe a tip of the week about this once upon a time, but I’m curious what your benchmark is around concentration of revenue, what is or isn’t healthy.
Erick: Yeah. Love to revisit that that question because what we’re talking about is mitigating risk for the buyer. And it’s the same risk that an MSP any small business owner has when they have too many of their critical eggs in one basket. And as as MSPs know, they’re the clients that they serve.
Rich get acquired all the time. So we experience this churn. And I, I’ve had this happen in my MSP, I’ve worked with many MSPs who had a high concentration of revenue in a client that maybe they haven’t lost the business because they’ve done anything wrong, but because there’s so much more m and a going on, at least [01:00:00] maybe it’s because we’re tracking it so much more closely rich, that these these partners are losing clients through acquisitions of their customers going away.
Not, not talking about MSPs getting acquired, but their customers being acquired. In fact, I’m working with an Ms. P right now that had three significantly. Sized clients get acquired, not by the same acquirer, by different acquirers in 2024 and 2025. And that really created an additional level of stress and anxiety that, is hard to describe.
So typically when we’re working in m and a engagements with MSPs and vendors the metric that we’re trying to green flag, yellow flag, red flag, it is, if if your, what percentage of your top 10 customers represent more than 25% of revenue? Is it one, is it two? Is it three? Is it [01:01:00] 10?
So the more distributed that, those customers are, the less risk there is. But if you have a concentration of 25% of your revenue in one cornerstone client, rich, that’s a big red flag. Typically we wanna say no more than 15% per client. But it’s unrealistic to expect that really with how MSPs operate unless they’re really growing and trying to distribute that growth.
Here’s a great example. Rich, you’ve, we’ve all heard the story told of that one contract that changed our business, right? It could be a government contract, it could be a municipality, it could be a giant client. Heck, I’ve experienced that, in my career. It’s like that one agreement that you’re not gonna say no to, but it re it just represents such an outsized portion of your revenue that going [01:02:00] in.
You have to be cognizant that says, okay, that is a significant portion of my revenue. It could be 50%, am I right? It could be 90%. We’ve seen some organizations that they just kill it with one, one contract, a government contract, let’s say Rich, and that is what made that company what it is. So high risk, but I would say, try to stay below 15% of any one client.
Getting up closer to 20, 25% just becomes a lot riskier for buyers. Just make sure that if you do have that kind of concentration when you’re dealing with a potential buyer, rich, my guidance would be to say, Hey, we are actively, recruiting more clients because we recognize that risk. So just by having that awareness and transmitting it to your buyer immediately will elevate their perspective of your maturity as an operator and saying, okay, then it leads to a question, not of.
The, then the question and then becomes, okay, how’s that [01:03:00] coming? When do you expect to be able to close that gap? We’d like to see it more around 15, 17, 18%. And then you can have a conversation to say, I’m actively doing those things and we’ve got other deals in the pipeline. Things like that.
But great discussion point
Rich: and good, solid advice Erick and one of several issues that Abraham raised that are really worth considering for folks out there, regardless of where you are right now in relation to a potential sale down the road. And that leads us folks with time for just one last thing and we’re recording this on February 4th, which means we are four days away from the Super Bowl.
And as regular listeners know, I am coming to you from Seattle, Washington right now, which means I obviously am pretty excited about the game. I’m gonna be rooting for my hometown, Seattle Seahawks. Congratulations to the a FC Champion New England Patriots. May the better team win, but I’ve got a clear favorite in this game and I’m pretty excited about it.
But maybe not as excited as a [01:04:00] fellow Seahawk fan named Mike Hemler. Who, like me was very excited and watching the last time the Seahawks were in the Super Bowl, which is back in 2015. You might recall that game too, was against the New England Patriots that ended in heartache for the Seahawks that interception in the closing moments of the game on the two yard line or something like that.
And it was such a brutal moment for Seahawks fans that Mike Kemler vowed. I am not cutting my hair until the Seahawks win a Super Bowl. And it’s been 11 years folks, and Mike now has a, there are lots of reasons why Seahawk’s Nation really wants to bring home a victory on Sunday, but there’s a huge additional reason for Mike Hemler, which is he gets to get a haircut for the first time in over a decade if the Seahawks win this game.
And of course, if, should it turn out I hate to even say it, that the Patriots win this game. It’s been 11 years. How much [01:05:00] longer could this guy need to go before he gets to get a haircut? Again, so please, folks, for the sake of Mike Hemler, join me in cheering for the Seattle Seahawks on Sunday.
Erick: Well, rich, I’m forced to to join you anyway because I lost a big bet. And I will be hosting you when the Seahawks play the Rams at SoFi Next. My twisted brain starts thinking about all the marketing opportunities that now, can or may have already been presented to Mike.
Think of the the haircare products line that could have jumped in, during this time and saying, Hey, we’re sponsoring Mike and we’re hope we’re, hoping for the ci. And they got, all of the places where you get your hair cut. They could be like in the wings waiting to just, get a little bit of oomph since he is now national news.
Rich: See there, there’s opportunity out there for you, Mike almost regardless of what happened Sunday. But best of luck to you and the Seattle Seahawks [01:06:00] and folks. That is all the time we’ve got for you this week on the show. We’re gonna be back in a week with another episode for you. Until then, I will remind you this is both a video and an audio podcast, which means that if you’re listening to us, but you’d like to check us out on video, you can go to YouTube, look up MSP chat there.
If you are watching us on YouTube, but you like audio podcast too, go to Apple, Google, Spotify, wherever it is, you get your audio podcast. You’ll probably find us there as well. And wherever you do find us, please subscribe, rate, review. It’s gonna help other people. Find, enjoy the show just like you do. This show is produced by the great Riley Simpson.
He’s part of the team with us here at Channel Mastered, where our mission is to work with vendors that have or wish to have a thriving MSP channel. We have a full range of services to help them with that. You can learn more about that at www.channel Mastered.com. Channel Mastered has a sister organization called MSP Mastered, that’s Erick working one-on-one with MSPs to help them grow and [01:07:00] optimize their business.
You can learn about that at www.mspMastered.com. So once again, we thank you for joining us. We’ll see you in a week. Until then, please remember, as we always encourage you to, you can’t spell channel without MSP.
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