Guest Column | April 22, 2016

The Impact Of M&A On The MSP Market

By Arlin Sorensen, O and Founder of the Heartland Companies which includes HTG Peer Groups

It’s all the rage right now. Everyone seems to be a buyer or seller; some are even trying to play both sides of the M&A puzzle. It is hard to find anyone who is not actively considering M&A as a strategy for growth or exit. And while it may be exciting and the seemingly best option for growing or transition, it also comes with some baggage that can become detrimental if not managed well.

One of the biggest deterrents to the M&A craze is the distraction that accompanies it. There is a tendency for owners to become obsessed with the potential to do a transaction, whether pursuing the buy side or the sell side, and they lose focus on running their business. If they don’t control the information flow, not only will they become distracted but often the entire team can lose momentum in anticipation of a coming change. That creates chaos and even worse, can limit or at least slow sales to the point that profitability can be diminished and valuation damage can occur.

If I learned anything in my ten M&A transactions while running my MSP business, it was the need to closely control the timing of when communication happened.  Over a ten year period we were involved in 10 buy/merge side events and one exit event. I still recall our first where we communicated early and often what we expected would happen months before we got to the closing date. Business almost stopped as speculation began on what would happen with our structure, who our new teammates would be, and the myriad of things that people dream up when there is a lack of clarity and information.

The problem is that as you work through a transaction, you can’t provide clarity because you haven’t got everything figured out yet. That was the error in another event.  We made some early projections on what would happen but of course didn’t get it exactly right so had to make course correction after the event and got plenty of feedback that we didn’t do what we had intended. That was accurate but not because we were misleading the team; we merely didn’t know what would happen as we completed the transaction.

If there is anything I have learned doing this many deals, it is that there is always at least one somewhat major surprise that comes with the deal. They vary, and each time we made sure we didn’t make a prior mistake again, but no matter the due diligence there are some things you just never expect. If there is one thing entrepreneurs are extremely talented at, it is being creative in how they run their business and how little of that they actually document or even remember as you go through the due diligence process. Certainly we had the option to back out of some of the transactions, but after investing significant time and resources to get to the close, you often have to swallow the surprise and move on. That’s when giving too much information to the team on “what will be” can bite you when it doesn’t become “what is.”

I’m a big believer in M&A as a powerful tool in growing a company, and it is also certainly a transition tool that many will utilize to exit their business. Here are a few tips that I’ve learned if you want to sharpen your game in this area:

  1. Always be looking.  Whether you are currently considering a transaction on either side, keep your eyes and ears open and build your network of people that you can stay close to. The majority of deals we did happened with people we knew in the industry, mostly through associations or peer group relationships. You need to be active in the industry to have visibility into what is happening.
  2. Hold your cards close to your chest. Don’t let too many people know once you begin to get serious about a transaction. A majority of the time, deals don’t materialize. Those are equally as disruptive to a team as the ones that do, except there is no upside potential. For every deal we closed we walked away from at least a couple others that didn’t work out for a variety of reasons.
  3. Be willing to walk away. One of the biggest mistakes I see people make is the obsession to do a deal, even if it doesn’t make sense. You have to be willing to say no if it isn’t right.
  4. Have a team of external resources you leverage. Whenever we were serious about a potential opportunity, I asked my external team of our CPA, banker, attorney and insurance agent to provide input.  They usually were part of the due diligence process and my request was that they throw the red flag early if they had any doubts on the success of a deal. Listening to their counsel was extremely important in keeping us from making bad decisions as they were able to evaluate without the emotion or relational influence.
  5. Listen to your spouse. My bride has a way of seeing things I am completely blind to. Sometimes her intuition was about internal limitations which I wasn’t even considering as I was focused on due diligence with the potential acquisition. Learn to listen and heed this counsel.
  6. Create a list of non-negotiables for any transaction. Know when you will walk away. You have to take the emotion out of the deal.  The mistakes that happen are usually obvious after the fact and often are driven by an emotional decision rather than one based on facts.
  7. Be prepared for much more work post transaction. Completing a deal is the easy part of any merger or acquisition. It is the work after the event that makes or breaks the deal, and it never goes exactly as planned. It goes slower, takes more time and effort, costs more, and never works like you draw it out on paper. The biggest problem without a doubt is people – and almost always it is people on your payroll – seldom the customers, vendors or other external folks.  Culture is the battleground and it is almost always going to be a battle because no one likes change.

There’s plenty more I learned on our journey of growing and exiting a company through M&A. It isn’t for the faint of heart, and certainly can keep you awake at night, but it also can be a great tool to grow a company or find an exit strategy when it is time to move on.