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The Forecast for M&A Activity in the Channel Is Thunderous

Thunder and lightning

By T.C. Doyle

CHANNEL PARTNERS CONFERENCE & EXPO — M&A activity in the channel continues at a frenetic pace, though concerns about a possible economic downturn loom on the horizon.

martinwolf's Seth Collins

martinwolf’s Seth Collins

So says M&A expert Seth Collins. A former partner himself, Collins is a longtime financier who knows the channel well. Today, he serves as the managing director of martinwolf, one of the nation’s premier merger and acquisition deal-makers.

Speaking at the 2019 Channel Partners Conference & Expo in Las Vegas, Collins provided an overview of current market activity, dynamics and partner psychology. Yes, psychology. Here’s what you need to know.

  • There’s a “perfect storm” raging today, Thanks to the strong tech market, robust overall economy and availability of capital, there’s an urgency to invest. After standing on the sidelines for years, private equity firms are hungry for deals in the channel today. Last year saw one of the most active years ever. “Private equity has determined that it can make money rolling up IT services companies,” says Collins. Also fueling deal-making: partner appetite for growth. Even successful MSPs have come to realize that organic growth is talking business owners too long to achieve critical mass.
  • Concerns over the economy are mounting. Though deal-making is rampant, there are mounting concerns over the state of the economy. Rising deficits, ongoing trade wars and even lingering doubts among consumers threaten to send this booming economy over the edge. (Some people simply believe that a downturn is going to happened after a prolonged period of economic growth.) As a proof point, Collins offered the following: for the first time in years, the majority of economists now expect an economic downturn in the next two years. The impact on deal-making, by way of extension, could be significant, Collins says.
  • Valuations are based on hard and soft metrics. Looking to make a deal? Then you no doubt are poring over EBITDA, gross sales, rates of growth and bottom lines of your company and others. Different metrics matter more in different deals. A sale of an MSP if often based on EBITA plus revenue growth. Other companies are valued on other metrics. And not all revenue is equal, even recurring revenue. (Recurring revenue billed on someone else’s paper is not as valuable as recurring revenue billed on your own paper.) Collins says one metric that helps bring all deals down to earth is gross margins. They are the one metric that reveals the quality of financial success of almost any organization. That’s why distribution and VAR organizations command only modest multiples whereas professional services and managed services companies sell for much more. The highest valuations go to software and SaaS companies that have low barriers to entry, low-delivery costs and repeatable solutions that meet higher ordinate-level customer needs.
  • Psychology drives outcomes. If you’re a business owner looking to sell, don’t aim for the highest price, aim for the best price. The difference? The best price is the one that will come from the company that is best positioned to help take your company to another level. Too many channel practitioners prioritize selling at the highest price or at “the right time.” The right time is when the right buyer comes along, not when the market is at an all-time high or “later” down the road after you have had time to grow your business organically on your own. Another thing: base your valuation on something more sophisticated than what you think you need to continue to live the lifestyle you are accustomed to. “That’s no way to value a company,” Collins says. Rely on the trusted industry metrics, instead.

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