Managed service providers (MSPs) are IT businesses that can service a wide variety of clients, from SMEs to large corporate and government clients.  As a result of the pandemic, services provided by MSPs are more in demand.  As businesses were no longer able to host staff, customers and third-party service providers in physical offices, MSPs stepped up to hasten their digital transformations.

According to research and analysis by Macquarie, the Australian MSP market is forecast to grow in the five years from ~$A9 billion in 2018 to ~$A12 billion in 2023.


Inorganic growth opportunities

Amidst this growth, some MSP owners might be looking to cash in, according to IT Glue’s 2021 Global MSP Benchmark Report.  Based on survey responses from MSPs for 2021, the report indicates that mergers and acquisitions interest is bouncing back after the pandemic. Nearly half (48%) of the respondents to IT Glue’s survey indicated some degree of interest in acquiring another MSP. Conversely, approximately a quarter of respondents expressed some degree of interest in selling their business.

Joseph Perrone, Technology Industry Lead at Macquarie Business Banking, says “MSPs looking to grow via acquisition of other MSPs, should ensure that they are appropriately assessing target businesses before signing on the dotted line”. According to Joseph, there are four core areas that should be at the forefront of an acquirer’s mind when assessing acquisition opportunities.

Four core areas for acquisitions

1. Sources of revenue. Within any MSP there will be a combination of either consultancy / implementation work, product sales, or managed services.  It is these managed services, which, if structured correctly, generate recurring revenue for the MSP.  As a lender, Macquarie Business Banking looks for MSPs that have a steady, regular income stream that is ideally derived from monthly recurring revenue.

2. Customer retention and growth. Purchasers of MSPs should consider whether a target MSP is generating predictable revenue from retaining and growing its customers.  Businesses that appear to have increasing revenue but also have high rates of churn among customers will typically be less sustainable long term.

3. Concentration. A good rule of thumb is that no single customer should account for more than 10% of an MSPs revenue.  Where a customer accounts for more than 10% of an MSPs revenue, this represents a concentration risk, which should be factored into purchase price considerations.

4. Capital expenditure. Purchasers of MSPs should consider the current useful life of an MSP’s existing IT infrastructure and whether further investment will be required to refresh ageing or outdated IT infrastructure, or increase the MSP’s capacity to meet its growth forecasts.

Acquisition funding

Macquarie Business Banking is a specialist provider of solutions to assist MSPs to grow their businesses.  Our team of specialists understand the key drivers of value in MSP businesses and can provide debt to support MSP businesses who are looking to grow via acquisition of other MSPs.

To discuss how Macquarie Business Banking can assist, please get in touch to arrange a discussion with one of our technology bankers today.

 

Additional information

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