MSP Growth | Fundamentals of M&A

Dan Astin of Ciardi, Ciardi & Astin.

by Dan Astin

 

The statistics are daunting. A great percentage of SMBs and, in particular, MSPs and other tech services firms will never reach $5,000,000 in gross revenue. As such, growth through careful acquisition of other SMBs or their assets is a great way for MSPs to increase lead gen, sales and scale.

Here are 5 fundamentals — practical keys — to increasing the likelihood of success in pursuing acquisitions:

1) Assets v. Stock

Consider buying assets only. Acquiring assets without assuming liabilities may provide the greatest ROI at the most competitive price. Many times the seller just wants out, and the tribulations that led to the decision to sell are often better left behind.

2) Acquisition Entity

The decision whether to acquire through your existing entity or a NEWCO will depend on a variety of factors, including newly-enacted tax laws. Consult with your financial, legal and tax advisors to be sure you make the most beneficial decision.

3) Due Diligence

The “opportunity inspiration” of the deal often results in a rush to get the deal done. There is no substitute for caution through due diligence in an acquisition. First up, on every deal pursuit, there should be financial and other diligence depending on the nature of the deal. Consult your professionals to assist. Even basic diligence through review of financials and tax returns can help avoid wasted time and acquisition costs when the numbers don’t measure up.

4) Term Sheet

Assuming you get past the diligence stage, work with your professionals to draft a term sheet with the core deal components. Many times, once the parties have term sheet in front of them, one of the parties determines they are not on the same page after all and at the very least disconnects may be easier to work out. Going straight to an APA may be less cost-effective if the deal is not consummated. At the contract stage, parties often become intractable when their deal term expectations are not met.

5) Just Business

Remember that it’s a business deal. Becoming emotionally attached to the thrill of the “great” deal will color judgement and lead to disappointment if the deal does not close — or, worse yet, buyer’s remorse when unbridled enthusiasm wanes after closing and it becomes clear it wasn’t such a great deal.

 

Dan Astin is a business attorney and consultant with offices in Philadelphia, Wilmington and San Diego. He’s a Managing Partner of Ciardi Ciardi & Astin.