EP237 - M&A Mastery – Part 1 – The Foundations with Ken Roulston & Ian Luckett

Ian Luckett: In this episode of the IT Experts Podcast, we kick off the first of a three part M and A mastery for MSPs.

INTRO: Welcome to the IT Experts podcast, the only podcast to help MSPs scale to 1 million, and if already there, get to five and go faster at the end of the day. Isn't it all about building a business that works for you rather than you for it? I hope you enjoy the show.

Ian Luckett: So good morning, good afternoon, good evening. Welcome to the IT Experts podcast. We have got three shows for you, a trilogy I'm gonna call it, of absolute golden nuggets coming up. And this is part one of m and A mastery. We have got one of the, I'm gonna call channel legends. Ken Ston, welcome to the Podcast Lounge.

How are you doing today, Ken?

I'm good, Ian. Thank you very much.

Ian Luckett: Over the next couple of days, we are gonna be putting together three incredible podcasts to help you understand all about m and a, whether you are planning to sell, whether you are planning to buy another MSP really understanding the landscape and everything like that.

And and we've teamed up with Ken to do that, which we've had some amazing conversations in the last couple of months. I said Ken. This has got to be a podcast, not one, but two, but three. So this is the first. We're gonna be talking about the foundations, and then in next week's episode, we're gonna be talking about the selling process.

And then finally, we're gonna be wrapping it up with the buying process. Now, just in case anybody has been living under a rock, Ken tell everybody who are you, what'd you do? Who'd you help? Why are we talking to you today?

That's a good question, Ian, but I suppose I should start off by saying I've worked all my life in the IT services industry, which is 45, 46 years now.

Perhaps what's most relevant to this is that I started in MSP in 2009 from scratch. And after six acquisitions and 13. Came 14 years. I sold it in 2023 to a larger MSP. Since that I have been working with a number of companies, both on the vendor side and other MSPs, directly assisting them with their strategies when it,

Ms. UK and wider Europe, but also indeed the states. So I've got a reasonably good feel for the industry at the moment, and I enjoy working in this sector.

Ian Luckett: A reasonably good. I love that. I love your modesty. Reasonably good. We we met with Ken a couple of months ago. Came into the boardroom here at the growth hub.

And the one thing that I that was going on in my mind was and I'm gonna ask you to. You to share the story that you that you went with, where you went from startup to kind of exit. 'cause that was a big exit and I'm sitting there going, I think this guy's addicted to m and a.

I think there must be just, there must be, I think there's a, I think not there's a problem here, when you started up your first MSP, you didn't build it from scratch, did you? You knew you wanted to start up an MSP and you just went and borrowed some money and just bought an MSP, didn't you?

That's how it all started, which to a lot of people listening to this show. Absolutely will shutter, shocks through their spine. So just talk to us about where, when you started that MSP, where was it, and then what was your thought process behind. The growth because that was all via those six acquisitions and then you had the larger AC, larger acquisition.

Was it an addiction or was it just the fact that I know damn well that if I keep adding multiples of millions onto this, my exit multiplier. Really does something special. Just talk to us a little bit around that, around your thought process on that, Ken.

First of all adrenaline is always good in business and I used to get my adrenaline in the early stages from fixing computers.

Then I got it from selling computers. And now I get it from the whole m and a daily process because it's an exciting process. But of course it's not for everybody. It does involve a degree of risk. It, it can involve, getting into debt, which a lot of people are concerned about.

It might involve losing some degree of control. So there's lot of reasons why. But I have found, and I believe that to be true, that growing A an MSP organically, it's just takes too long. It's too slow. It's two steps forward, one step back. Yeah. And you're constantly. Beating your head against the wall.

Spending lots of money on marketing sometimes to achieve relatively little movement. When I started the business in 2009, bear in mind that was the. Epicenter of the financial recession.

Ian Luckett: Yeah.

And so it was either brave or stupid. My, my wife I think, thought it was stupid, but I felt that it was a as good a time as any to start an MSP in that I was able to acquire a business at a relatively.

Good price because obviously the market was deflated somewhat at that stage. Borrowing the money was a challenge 'cause the fin financial sector was an upheaval. But yes, I put together a mixture of funding options that allowed me to acquire one. I just knew starting one from scratch was gonna take far too long.

I was 49 at that stage.

Goal in terms of the amount of money that I felt that I needed to give me the option to do different things with my life which at that stage was when I turned 60, was the target year. Unfortunately, that got pushed back a couple of years because of. Yeah. Because COVID happened exactly when I was 60, so yeah, I pushed it back until 2023.

But yes, to me. If you want a lifestyle business where you're not willing to take on much risk or much step, running a an MSP is fine. I do believe, however, in the medium to long. That it's gonna get more and more difficult for a small MSP to survive in the marketplace because the level of competition that's out there now, the breadth of skills required by customers and what could be coming down the track is more and more regulation.

Ian Luckett: Yes. Yeah,

I think being small is okay as long as it's very niche. And you've got a very controlled set of customers. But otherwise, I think there's a lot of benefit in.

Ian Luckett: It's interesting that you say, m and a is not for everybody, but the, one of the reasons why we're talking today is 'cause at the Growth Hub, we look at the word hub and we look at what does that mean in terms of bringing experts in to help our clients and the channel have a trusted place where they could go independently and get support.

Now, what we've been hearing since December is virtually probably 80% of people who've been moving towards us asking for help and support. All at some point or another wanted to exit. But no one's got a plan. At some point, I don't know many people who are who, who have an MSP who are just gonna walk away and let it fall through the drain.

So where you say it's not for everyone, at some point or another, you are either gonna be acquired or you are gonna sell, aren't you?

Yeah, and I think just, this is the two sides of m and a, whether you're buying or selling. You're absolutely right. The selling side is gonna apply to everybody.

Because at some stage, they're gonna want to exit. It could be internally to employees, it could be.

Not everybody will necessarily admit that upfront, but it is the reality. So you need to understand the process that you need to go through to maximize that exit value at whatever point in time it comes. I was referring in terms of the risk aspect of it is more on the buying side. Because it all depends on, how much you are prepared to drive your business forward, to achieve your exit sort of figure.

Yeah. The thing that I would say and always say is it's the old saying about fail to prepare as prepare to fail. If you don't put in the legwork and the groundwork, first of all for either acquiring or. Not achieve the result you're looking for the optimum result in terms of valuation or in terms of growth that you're looking for.

So you do need to give some thought to putting a plan together, a timescale, an objective in terms of valuation that you want to get to, and then you just lay the groundwork and the various steps to get you to that point in time.

Ian Luckett: Brilliant. So when you when you bought that first MSP, what was your vision?

What did you what did that roadmap look like for you? I.

Originally and some people do keep, remind me of this. It was to get to a I have a 5 million business that employed 50 people and was making double digit profitability. That was my sort of objective and it all was the fives and it was down to the fact that I was.

I said earlier that I had a long-term plan of 60, but originally I put it forward as a five-year plan to get to a point in time where at least then I could reconsider, okay, have I got to that and do I want to exit at this stage? Because I could have done at that point in time, but I still had the ambition, still had the drive to keep going, so it was a.

It was a 10 year strategy with a five year sort of review point. Yeah. But yeah, it, those numbers and I that from a.

Ian Luckett: And what did you do then with, when you've, you've obviously bought the first MSP, you've got that set up. You're working your way through. As soon as you shut the doors and you sat down and you got working in that one, there was your eyes looking around for another MSP.

Was the hunt on, or did you give it time to embed? This is fascinating. We're going way off the mark of our agenda here, but let's just keep talking 'cause this is great. But what did that look like as soon as you started the first one?

The first one was acquired at the end of May in 2009, and the second one was acquired at the end of September in 2009.

Wow. Pretty much as soon as I had completed the first one, I was looking for a second 'cause I knew I needed scale right. In order to give me the platform. And and again, the marketplace at that stage was such. Some MSP businesses were non-core subsidiaries of larger companies, right? And those two that I picked up were companies that I picked up that were, fell into that category, right?

It, I would like to say it was a very deliberate strategy, but it I'm a great believer in fit and things tended to fall into place at that stage whereby acquired the first business, got across the line and within a few weeks I happened to be at an event where I got talking to somebody who was an owner of an MSP, but was.

Considering their options. Yeah. And I immediately jumped on it and said let's try and put something together. Yes the two came together very quickly consumed quite a bit of time and yeah. And so on, but I'd already. In the nineties, done five or six other acquisitions of

Ian Luckett: Yeah.

Of what it was called in those days. Third party maintenance businesses. Break fix companies. Yeah. So I understood the process of acquisition and integration. So it wasn't that I was got running from a standing start. I had some background and some experience. Yeah. But of course this time around I was using more of my own money than I was previously.

So it was a wee bit more challenging, but as I say, it was either brave or stupid, and thankfully it worked out to be more that you did. All right. I you, so at the beginning, did you have a. Reverse engineering what, retirement or not working in the business or whatever you wanna call it. Was did you have a figure in your head on what you wanted to achieve or was it more of a case of let's just keep going like this for five years and see where it ends up?

No. I, I had a long-term desire to get to a point in my life where I could say I'm a millionaire. Okay. Jeremy Clarkton, who wants to be a millionaire. Yeah. And it was, but it was never necessarily just about the money. No. It was putting a target number there that was tangible.

Something that I could aim for. But of course the main thing for me was. Job satisfaction. It was to enjoy what I was doing and not just do it and be a slave to a financial number. But yes, sometimes I think when you put a something tangible on it, it makes it a bit easier to understand.

And so yeah, that was the goal. Fantastic. Fantastic. You said something when we met up which I thought was very profound and I've never heard before, and I'll get it round the right way, otherwise I'll look at complete planer. And it was, you can't you can't buy a business until you are ready to sell your business.

Ian Luckett: Yeah. Talk to me about the difference between buying and selling. And this isn't as obvious as you think, is it? What's your kind of thinking around that?

Yeah it's a difficult one sometimes for people to get their head around, but if you're looking to grow your business through acquisition, and you're not in the very fortunate position of having a lot of your own capital behind you, then what you have to do is to effectively go out to the wider marketplace to get investors.

To basically back your vision. Yeah. And at that point in time, you are having to sell your vision to a bank, to a private investor or some other lender. And that means that you have to have your business in the right shape. You have to have your plans in place, your process. So in reality, whether you're.

Selling equity or you're just get tagging on debt. You have to have your business in the right shape as if you were selling it down the road. Yeah. So the whole process of buying actually starts in most cases with a process of selling the vision to somebody else in order to get the funds that you need to actually then go and buy.

Ian Luckett: Very

interesting. Does that all make sense?

Ian Luckett: Abso absolutely makes sense. And the one thing I want people to really take away from this this podcast is the, just the golden nuggets of clarity that I. When we keep bleeding on about the value of your business, the automation in your business, the owner not needed in your business, this is where, we're bringing in experts like Ken to reinforce what he's done, which is I think we could probably say, king Herod was the first guy who did B.

Business development, right? And they built businesses might not have been a very good, successful business, but back in the day, this kind and it hasn't changed, right? You just, these things have, people have got no and trust you and all of these kind of great things. So I think it's interesting when when you see the application of some of these processes, like someone with yourself, so the business has gotta be attractive. The business has got to be efficient. It's gotta be worthwhile, someone putting their chips on, the roulette wheel on for you. If you're gonna, if you, if for example, you wanna get some funding or if you wanna get some money for someone to buy it what are the key KPIs in your view that, if we had a handful of them, I don't know whether they're three, four, or five, whatever they are.

What's the, when every MSP wakes up in the morning, what is the. The numbers that they need to focus on is the activity that I'm doing helping me achieve X, Y, or Z? What are those key golden KPIs for you?

The first thing is really. To put a bit of definition around what an MSP is. Yeah.

Because some people do conflict an MSP with being an IT services business and Right. The difference is that an MSP is pretty much viewed as a business that has somewhere in the order of 70% of their revenues coming from a recurring billing nature. Got it. That really means revenues that are billed.

On a monthly basis. So 70% of all of your recurring, I'm sorry, 70% of your total revenue should come from some form of recurring revenue stream. But similarly, another key metric is that 50% of your total revenue should come from recurring. Labor based services as opposed to product based services, such as support and the difference being that, you can have 70% of your revenue being recurring, but it might be very low value margin, recurring revenue, like Office 3, 6 5 license stuff.

So really to be viewed as an MSP and therefore to be valued appropriately, you need to be very careful that you are meeting those two numbers. Yeah. 50% and 70% respectfully for. Just labor based services and all recurring revenue. Got it. The other KPIs that I, I tend to look at is basically profitability.

Now if you take profitability in the form of ebitda, which is profit before interest tax depreciation, amortization, yeah. You should be aiming to be around I say aiming the market average is about 15%. If you're running below 10%, you're not running sufficiently profitable. And once that gives scope for a buyer to potentially come in and acquire you at a relatively low multiple, you as a seller are not, running the business as efficiently as you should be.

And therefore you need to be. Spending some time and energy on getting that profitability up. Now, of course there are some businesses that are. Like much higher margins, 20, 25, 30% profitability. And, that can be a sign of a very well run business. Which is good. It's almost a bit of a negative for a buyer because they're wanting to find opportunities for synergies and how to maximize the growth.

So if you're running two lane, it could also. To a buyer that the business is maybe being sweated a.

Personally think that, depending on what your plan is, what your objective is, whether it's buying or selling your timelines and so on. But you should be aiming at, for a KPI of around about 15% type number. Of course, there's lots of other KPIs that you can be looking at from an a sales perspective, an operational perspective.

But those are the sort of the big ones that kind of defines whether or not you are. A functioning MSP or whether you are an unprofitable services business.

Ian Luckett: Very interesting. I can hear the clogs go the co clogs or in Holland. I can hear the CLOs going in all of the listeners' ears right now.

Because the truth and the reality is that the multiples will go anywhere from what I hear from one all the way up to 10. I dunno if, it could go above that 10. And if you spend. Your time. If you said, look, we're at 10% right now, I'm gonna spend the next year in hankering down and getting to 15%, what would, what could the effect on the multiple be on just that extra 15%?

Could it give you 1, 2, 3, 4 times more? Because it's, it magnifies as it goes out, isn't it? As the business gets more.

Yeah, it does ramps up? There. Thumb in the industry which is again, based on averages and is can be impacted by a lot of criteria, both positively and negatively. But if you're doing about 250 k profitability, that's where.

A lot of the buyers in the marketplace look at the level that, that they're interested in, right? Potentially acquiring a business and a business that's doing about 250 K attracts multiple around about four. So that would make a million pound business.

Ian Luckett: Yeah.

Now below 250 K, there's lot.

It becomes a bit less beneficial to a buyer. But that level, because you're looking at deal cost, you're looking at levels of distraction management, distraction on the buyer side of things. Yeah. And it can also mean that the buyer may be more interested in looking at an asset purchase by buying the contracts than buying the business.

Which can lead to a longer term payout model. So there's, so I believe that if somebody is really interested in building a business for exit purposes at some states down the road they need to be aiming to get to that baseline of 250 k right of profitability. Every 250 K beyond that kind of adds another one to the multiple, right?

So 500 K adds another one, which makes it a five times multiple, seven 50, 6 million, seven, et cetera. And it does keep going up. And there are deals that have been done out there, I've seen with multiples of 13, 14, and 15 on. Wow. But they tend be very large. Businesses with, with profitability levels in the 10 of millions, not hundreds of,

Ian Luckett: yeah.

Most Ms. In. And of course the marketplace divides into sort of three sort of levels. There is those very large players that are, say, doing 50 million of revenue and above, and then there's a mid market that's 10 to 50 million. And then there is a lot of companies in the sub 10 million revenue level.

You know those companies down there if they wanna maximize their value. Down the road, they need to be aiming to be doing 250 k at least to get onto the radar of the middle-sized companies or indeed the larger players.

Ian Luckett: Got it. Got it. Absolutely. Talk to me about the the EBITDA arbitrage model.

That's really where buyers are utilizing that growth that I just outlined and the difference in the multiples. So if you were, for talk's sake a business, just take my previous business that was doing 17 million of revenue it was doing about 2 million of EBITDA and was effectively being valued at a 10 times multiple.

So that's a 20 million valuation. If I continued my journey and didn't sell at that state and say I bought a business that was doing 500,000 of profitability and therefore was worth, I was gonna be buying it for two and a half million by buying that business and integrating it into my company, that business would automatically then attract a 10 times multiple.

As opposed to the five times that I bought out. So I effectively am getting the a difference between the five times multiple that it. Worth when I acquired it and the 10 times that I get when I integrate it into my company.

Ian Luckett: Yeah. So

that's where, I'm making as a buyer money purely out of that process of buying at the smaller multiple and wrapping it into my business at the higher multiple.

And that. That game that's being played there is what's called the EBITDA arbitrage. It's really the variance in the two figures.

Ian Luckett: Excellent. And exciting as well, because it's, back in the right horses to make a, a big horse, one of a better phrase. That's gonna be even more valuable.

And that's very much your ethos, isn't it? And in kind of what you've achieved over the years around doing that.

Yeah. Look, it's. I've always said it's relatively easy to acquire a business. The real skill in many respects then comes in the integration piece afterwards. Yes. Yeah. 'cause if you don't bring that business in and achieve what you want it upfront, you can very easily.

Reduce the benefit of that acquisition because it can distract the core business. You could end up taking on a higher level of cost than you envisage. So a lot of attention needs to be paid, not just to the acquisition of the business, but the integration piece thereafter. And sometimes that's where people fall down.

There are stats out there about how many acquisitions actually succeed and how many fail. And I think that there's a core component of that which is sometimes overlooked. And that's the cultural aspect of it, is making sure that you're acquiring a business that's got similar values that you have in both how you look after your employees, how you look after your customers, to ensure that the, that integration is as easy as it is possible to do.

You can deal with the financial stuff and the strategic. And the technical, but if you don't get the cultural bit right, the whole thing can fall apart.

Ian Luckett: Music to my ears. Music to my ears. 'cause that's the love that we all have here is around the people and the culture and the really crystallizing that vision for the future.

And and just confirms while we're talking today. So we're gonna be talking about that integration, the importance part of that integration in the episode three when we're gonna be talking about buying. In the next episode, we are talking about the selling process and and what does that look like.

But just before we wrap up today Ken, I'd love for you to just to talk me through the different phases of an acquisition. Just so that we've got that clear before we go onto the onto the next podcast

from a buyer perspective.

Ian Luckett: I know you're gonna ask me that question. Let's do it from a seller's perspective first, and then we'll do it from a buyer's perspective.

I think from a seller's perspective. Going back to what I said earlier, you need to have an idea of what you want to achieve. Yeah. From selling your business. You obviously would need to have some idea about what value you need to get to realize your objectives and to allow you to either move on do something else to retire or indeed potentially to use it as an opportunity to.

Take off the table, but stay in the business and then be part of a further growth strategy. So you need to, from a personal viewpoint, what you want an A owners what want, but you also. I suspect, and I believe this to be the case that most MSP owners, if not all view their staff and their clients, almost like friends that they've built up over a period of time.

Yeah. Very much therefore, they want the business to go to somebody who is going to take care of the staff and the customers, and for it to be a positive experience for both of those groups. It's, I think it's also important to try and determine what sort of values you want in Yeah. The company that's gonna be acquiring you so that you feel comfortable with it and you know that when it does eventually get announced, whilst it'll of course inevitably be a shock for both of those grippings, that they will see a benefit.

To them in that there will be opportunities for greater career growth or there will be a bigger business to look after their IT services going forward. So I think it's about trying to visualize who is that and what's the shape of that organization? How big are they gonna be, where they gonna be located, and how do they view their staff and their customers?

Ian Luckett: Brilliant. And then what's the next steps once you've got that crystallized, what you are looking for? How do how do we what, no, let's keep this, let's keep this simple. 'cause this could rattle. What's the simple steps like for the rest of that?

That that sale process.

Again, if you've got your business into the right ship to be sold, and that's a key part, which I think we'll probably explore more in the next episode. Once you've got your business in the right ship, then. How you go to market to find a buyer can come down to being a networking thing through contacts that you have.

It can be through using a broker, which, has got a purpose and, or it can be, sometimes talking to a vendor who may have some ideas of potential partners on it or through different sort of matchmaking initiatives like something we're trying to establish ourselves with.

MSP m and a is a. Is a marketplace for services. Yeah. The biggest problem for sellers is that they don't want it to be too public about what they're doing. Yeah. Because if you once put your hand up and say, I'm interested in selling in a public context, you risk your competitors targeting your customers and your staff.

Ian Luckett: Yeah.

So it, it has to be. It has to be done in a very skillful way and with a lot of thought attached to the privacy aspect of it, the confidentiality

Ian Luckett: of it. Excellent stuff. And then I'm guessing once you've found somebody is it similar to, due diligence? What's, what does the rest of that runway look like?

Them? Yeah. Yeah.

If you find somebody and you agree with them, heads of agreement that outlines in very simple terms, the. Move forward with, then the next stage is due diligence, which is a painful process for a seller because depending on the buyer you know how painful it is.

But generally speaking, buyers will bring in accountants, they'll bring in solicitors. To do that process. And that means it gets very detailed and gets people into a lot of depth and it can go back a number of years historically. So again, that references back. If you don't have your business in the right shape at that point in time, it will only make that process more difficult then it otherwise needs to be.

But yeah, that process can take at least two months, up to six months, depending on how well prepared and how detailed it is. Excellent stuff.

Ian Luckett: Look, we'll cover off the the buying process when we do episode three. Ken, been a brilliant episode. Really enjoyed the insights and I'm sure that everybody will be inspired from your story and and hear what you've been doing.

Now, we've given you a lot of information here, but tell us about MSPM and a this wonderful thing you are doing with our great friend, mark Copeman. Yeah, it's

it started off originally just as a video tutorial on the m and a process for both buyers and sellers. It's an elongated version of what we're doing here.

These are three half hour episodes. The the MSPM and a. Site has eight hours worth of content on it. Yeah. Of course there's a wee bit of cost attached to that, but what we are doing in the process at the moment is extending it into what I believe is a wider services marketplace for people in the MSP industry who are interested in either the buying or the selling.

Yeah. Side of things with additional information, additional links, people like yourselves who can play complimentary roles to. To what myself or Mark are able to do because I'm a great believer that, not one person knows everything about the landscape of an MSP. So whether it be operations or finance or marketing or m and a or sales, there are lots of good people out there who can provide added value to the sector.

And that's what we're trying to achieve. As something, as a. A virtual idea, a bit like your growth hub, but with a little bit more around the edges. But I see ourselves and yourselves working very closely together.

Ian Luckett: Absolutely. So we're gonna drop the links into, to have a look at that course in the show notes here.

So feel free to to go and dive into that. Any last final thoughts summary, Ken, for this particular episode, all about the foundations.

No particular thoughts, but I think it goes back to that bit that we spoke about at the very start. Is what? What do you want to achieve as an MSP owner?

Is it a lifestyle business or is it a business that you're wanting to grow to maximize the exit value?

Ian Luckett: Yeah,

and I think once you get your head around which, where you are in those two mindsets then either this is for you or it's not. If it's for you, which I believe it should be, because I think the best way to maximize the value is through growth and organics to difficult.

So I would encourage people not to view it as a black art and, or black magic. Yeah. It's, but sensible steps. But, utilizing people in the industry that can. Bring to the table some experience of it that makes it a bit easier. And the first one's always the most difficult.

Once you get the first one done, it becomes a lot easier thereafter.

Ian Luckett: Fantastic. Lovely stuff. Ken, thank you very much for this one. I look forward to catching up with you on the next show and all the listeners as well. Thanks again and see you all soon.

Goodbye.

Ian Luckett: Just before you go, and if you're curious about how this episode links with the ability to scale your MSP to a million or if you are already there, accelerate to five, then we wanna invite you to come and take the MSP Mastery quiz, and in just three minutes, you're gonna get a 360 degrees scan of your business where you can identify the one or two tactics that can help you find more time.

Engage in, align your people and help generate more leads in your msp. It's really simple. Just click on the link in the show notes. And if you have enjoyed this episode, we'd love to get some feedback from you by means of a rating review on Spotify or iTunes, or your podcast platform of choice. We really appreciate every single one of them.

Now, you can go and enjoy the rest of your day, and we look forward to catching up and connecting with you soon. All the best.