You can’t sit down to catch up on IT channel news without reading about a new merger or acquisition or an upstart company getting an infusion of private equity. The managed IT services space is growing up, and investors are snapping up partners left and right.
Combine this with the vast number of channel firm owners heading into retirement, and you’ve got a perfect storm of M&A. Forrester’s Jay McBain says the average channel-partner owner is in their late 50s. There are 162,000 channel partners in North America, McBain says, and 40 percent of owners plan to retire in the next six years without a succession plan.
In other words, it’s a good time to be a buyer of IT service providers.
But it isn’t always easy to decide how a channel shop should set its price. Investors in any market tend to look for the same business health markers: a solid recurring revenue base of clients, healthy margins, steady growth, and a lot of cross-sell and up-sell opportunities. But Ian Kieninger, CEO of distributor and master agent Avant, says if you want the highest valuation, you can’t think like a traditional agent or reseller. You have to think bigger.
Running a channel business on a resale revenue model carries a hefty upfront cost that can weigh down valuations. Kieninger says that traditional VARs, MSPs or SIs have had to invest heavily in infrastructure, logistics, inventory management, people and expensive certifications from OEM providers as a core part of their value proposition. The costs are neither scalable nor sustainable.
“With such a heavy load to carry, we are seeing the epic rise of the ‘trusted advisers’ who have built business models that are asset-light and use information and experience as their value proposition,” explains Kieninger. “The accelerating rate of change in IT is only increasing this value that nimble trusted advisers are bringing to their customers.”
Kieninger is keen on emphasizing that successful channel firms with the potential for high valuations have to have evolved into that trusted-adviser role as opposed to a pure-play resale model. The upside to the “as-a-service” paradigm shift is that it’s forced many channel partners to run their businesses based on a resilient recurring revenue model, which tends to grow in both up and down markets and has sky-high retention rates. It also carries low customer support, infrastructure and logistics overhead, giving service providers a great deal of flexibility in terms of the emerging tech it wants to focus on or the vendors with which it wants to partner.
“[These partners] can pivot supplier options overnight because they are less beholden to recouping investments or rebates for a big brand manufacturer or the leads that are sometimes associated with those relationships,” he says. “They can be the agnostic industry expert that today’s IT consumers need in an ever-changing and accelerating IT landscape.”
So what does all this mean in terms of the managed-services market? It’s in high demand both from end customers, outside investors and even other channel partners hoping to get a boost into new markets or new customer bases ripe with cross-sell opportunities, not to mention those resellers and agents desperate to establish a recurring managed services revenue stream — and looking to acquire MSPs to help them scale.
As investors pay more attention to the channel, they’ve spurred a debate about how to place a definitive valuation on managed IT service providers and their attractive recurring-revenue streams. Kieninger says he’s seen a big difference in valuation between small firms without much potential to scale, which run in the 6X EBITDA range, and partners with their own process and repeatable sales model, which often come in much higher, around 9X EBITDA.
“In either case, there has never been a better time to be a trusted adviser,” says Kieninger. “In fact, we have entered into the golden age of the trusted adviser.”