Episode 15 we talk to Peter Duflo Managing Partner with Strategic Ventures who provides strategies on how smaller Managed Service Providers (MSPs) can scale up to become highly valued acquisition targets. For the past 14 years Peter has been a leading executive search assignments for MSPs throughout North America. These companies and their investors engage Peter to help them hire key MSP leadership such as CEO’s, Presidents, COOs, CROs, and VPs of Sales and Services.
About Strategic Ventures:
Strategic Ventures is a retained executive search firm that helps IT Managed Services Providers hire executive leadership to achieve rapid revenue growth.
The clients of Strategic Ventures are typically providing IT managed services around public, private, and hybrid cloud services on various platforms, including Amazon AWS, Microsoft Azure, Google, Cisco, VMWare, etc. Their IT services often include IT Planning & Strategy, Comprehensive IT Support, Security & Compliance, Unified Cloud Management, Backup & Disaster Recovery, and IT Systems Integration.
Today's podcast is sponsored by OMI the company that makes CRM work. And my guest is Peter Duflo the managing partner for Strategic Ventures for the past 14 years. Peter has been leading executive searches for MSPs throughout north America. These companies and their investors engage Peter to help them hire key MSP leadership, such as CEOs, president, COO, for the C-suite and he's gonna talk about various strategies that smaller MSPs can use in order to scale up and become highly valued acquisition targets. So Peter, you are in kind of a, a specialized line of work here. Tell me how you got into got into it in the first place.Peter Duflo:
Okay, Great. Hi George. And thanks for the introduction. Well, I didn't start my career in executive search. Instead, I spent the early part of my career scaling to it services companies, much like our audience today. One was ultimately sold to a private equity firm and the other, I sold to a public company after going through the second sale, I decided to transition into providing M&A advisory services because I wanted to help other founders like myself enjoy the benefits of selling their companies to monetize their hard work. So after helping the owners of, many companies, uh, sell, I was retain to by Price Waterhouse, or what we know is PWC these days to help them acquire an it services company. I manage that M&A process and successfully wrapped up the acquisition for them just as wall street was collapsing in 2008.Play the King:
Oh yeah. That was kind of a, kind of a crazy time to be alive.Peter Duflo:
Yeah, it sure was. And I was in a boardroom at PWC in Manhattan and said to the head ofM&A Steve, I don't know what I'm gonna do now is M&A advisory opportunities going forward. Look like they're just gonna be limited to selling collapsing it services companies. And that doesn't seem like a lot of fun in reply. Steve said to me, Hey, you seem to know everyone in the it services sector and PWCs looking to hire practice leaders to rebuild the it services division. We had previously divested to IBM five years ago. Why don't we retain your firm to help us find, you know, leaders who rebuild that it services division? So that's when I took transition from providing M&A consulting over to providing executive search consulting. PWC ended up being my first client and when those search assignments wrapped up, I shifted over to providing executive search services to the smaller it services companies that I helped build ones in the 5 million to 250 million revenue range, George.Play the King:
Oh, thanks, Peter. Um, so how do smaller MSPs scale up and sort of become, you know, acquisition targets?Peter Duflo:
Yeah. Well, today in today's economy, there's, there's three challenges. Small MSPs need to overcome in order to, to scale into highly valued M&A acquisition targets, one, they need to build like effective sales teams, two, they need to hire enough technical resources and three, they need to quickly expand through acquisition. Those are the three main challenges today, um, to scale up to, to bigger MSPs.Play the King:
Could you, could you dive into that a little more and you know, what are, what are some of the, the challenges, I guess, that, that smaller MSPs have, um, you know, when they, when they're trying to build an effective sales team?Peter Duflo:
Yeah. Well, let me start by saying founder who can build MSPs are truly amazing people because getting one of these MSPs off the ground and establish can be very difficult. Uh, however, at the risk of ruffling, some feathers of perhaps some of our listeners, uh, I need to point out smaller MSPs often have difficulty building sales teams because many of them are founded by engineers and these engineers usually know how to hire and lead great technical teams, but they frequently hire very weak salespeople. Now. Now, why is that? Well, it it's really simple. Would you want a VP of sales to hire and lead an MSPs technical team? No, of course not. It might very well end a disaster using the same logic, the typical engineering founders of MSPs often tell me they lack the ability to hire the right sales people. One, uh, engineering driven MSP founder, I spoke to a few ago, told me that he hired four sales leaders over the past three years and they all flamed out. And what did those miss hires cost? This company? They cost them a lot.Play the King:
So this is a pattern that you're seeing sort of over and over in your field. How, how do, how did the people who do it right in sort of break, break that mold? How do they, how do they do that?Peter Duflo:
Well, um, I would first suggest the founders of these companies personally handle the sales regardless of their gifting, uh, until they fully establish the company, if it's a new MSP. Um, they may also think about engage in MSP specific marketing for firm like Robin Robbins, um, who has a technology marketing toolkit, which does a great job of helping smaller MSPs build a predictable flow of sales leads to drive their new logo sales. But when the MSP grows to around 5 million in revenues, they're ready to hire, uh, an executive per, uh, so professional like me to help them hire a proven VP of Sales. Usually they should consider first hiring a player coach sales leader from the MSP industry who can both sell new deals while building a successful sales team. When the MSPs hired these types of gifted leaders, they often start growing at over 25% year over year, within 12 to 18 months. Then when the MSP grows past 20 to 25 million of revenues, they often engage me to help them hire a chief revenue officer to maintain the rapid revenue growth.Play the King:
So can you take me through the differences there? Um, why would someone consider, uh, hiring a VP of sales versus a, you know, a CRO?Peter Duflo:
Well, that's a great question, George, at an MSP, the VP of sales job is usually focused on just building a sales team to drive new customer sales or logos as mentioned. This role is usually added once an MSPs over 5 million. On the other hand, the CRO is responsible for all processes that generate revenue for an MSP. This usually includes sales, marketing, customer success, pricing, customer contracts, as a result, the VP of Sales and marketing and customer success. Those leaders usually report up to the CRO. Again, the MSP usually hires a CRO only after the revenues exceeded 20 or 25 million.Play the King:
And how did, how does the compensation differ for those two roles?Peter Duflo:
Uh, another good question. Um, well, the compensation with these two roles of course is subject to the size maturity and geographic location of the MSP. For instance, a hundred million MSP in Metro, New York pays executives much more usually than a 5 million MSP in Baton Rouge, Louisiana, for VP of Sales. I often see my MSP clients offering salaries that range from 1 75 to 225,000 plus an opportunity to earn up to, or, or more than an equal amount in commission plus an additional opportunity to earn equity based on their performance. And that's a key point as I suggest to most smaller MSPs. Uh, I suggest them don't immediately grant equity to a VP of sales or rather tie the equity grant to achievement of sales targets. And these sales targets can be tied to, uh, achieving annual sales or gross margin, uh, targets yearly over a four to five year period for CROs chief revenue officers. I see clients offering salaries in the 2 25 to 2 75 range plus an opportunity to earn a hundred, 250,000 and bonuses. And, and they're a little different. Um, they're usually granted a certain amount of equity based on performance or tenure, and that equity also has a four to five year vesting period.Play the King:
All right. So we've talked about how smaller MSPs need to, you know, sort of beef up their, their sales operations in order to grow, you know, and part of the challenge there was that engineers are not necessarily great at hiring sales people, but I presume they are better at hiring engineers. Can you talk to me about, uh, you know, how MSPs go about hiring, you know, the technical technical roles that they need to, to succeed?Peter Duflo:
Sure. Um, many MSPs find it challenging to hire enough technical staff these days that is no secret to your listeners. And here are seven tips that I see my clients using to address, you know, the demand strong demand for technical resources. The first tip is potentially embracing a remote workforce. Many at small MSPs have been built at a local office and their workforces from that same geographic area. And the idea of remote employees seems at odds with the tight face to face teamwork that contributed to making their company successful. However, it's Bob Dylan saying the time's already changing. Boy, are they? For many MSPs, there are no longer enough local candidates to meet their increased hiring needs. In the current economic climate companies willing to embrace remote workers of all levels, often gain a competitive edge when they start sourcing their canidates from other areas of north America and the, and further on from Latin American countries that have similar time zones, uh, maybe like Costa Rica and many of my MSP clients also source candidates from Europe and Asia, you know, in particular India or the Philippines. The second tip is to consider cross training, uh, your listeners' existing technical staff to fill no new technical roles in the MSPs existing technical employees have a leg up on the learning curve by already understanding the MSP operations, the service models being used to members and the customers. Most importantly, they're a known commodity that have already proven that they fit within the company's unique culture and culture fit is always so important. These existing employees are often worth the additional investment necessary to train them on new technologies. This is a challenge. These employees usually embrace because it's a way for them to enhance their job satisfaction, employment security in their careers. Now, the third tip for finding technical resources, third tip is, uh, to make sure your candidate referral bonuses that you offer to your existing employees are large enough, many MSPs offer their employees, bonuses for referring candidates, which they hire. However many of these companies could benefit from dramatically increasing the amount of these bonuses. This is because your employees are often a great source of candidates. Uh, why is it that a company, an MSP will offer its employees just a few hundred or a few thousand dollars to incent them to produce candidate referrals, but when no flow of candidates materialize, they often turn around and pay a recruiting firm, a much larger amount to find these candidates, your listeners should consider offering their employees much larger candidate referral incentives, because these employees have a personal network of like-minded technologists, who they know in many in many cases, working at other companies and the employees social networks today often reach out to a little large universe and potential candidates. So that's the third tip. The fourth tip is improving compensation. Now I can hear some of our listeners going, ah, but yeah, it it's important. Many of the MSPs which are struggling to hire resources have been frankly, slow to recognize the tightness of the tech labor market and how, uh, recent inflation has eroded their employees, earning power. The MSPs that have accepted and adopted to the new compensation reality are the ones who are finding it much easier to hire the technical resources, h ire these resources, u h, MSPs must offer their candidates a competitive comp package. And the most appealing packages are those that o ff that often include greater, u h, employer contribution to h ealthcare premiums and some type of profit sharing or even equity participation. I was recently speaking, u h, with two technologists w orking a smaller it services companies. A nd i n both cases, the employers c overed, u h, the majority of their h ealthcare premiums. And they also participated in e quity. I think the, the premium one employee was paying for h ealthcare was 150 dollars a month. Um, so the fifth tip for presenting how your MSP is for recruiting technical resources for your MSP is presenting how your company is helping our society. For instance, when my client serves healthcare industry and they present how their services are contributing to improved people's health, it's very common for millennials and other recent generations to really want to feel they're working at a job. That's contributing something to society. A relative of mine in his early thirties, who's a technologist recently declined two enticing job opportunities b ecause he cound not see how working a t those companies would be doing something valuable for society. He ended up accepting a position from a company delivering healthcare services to an underserved portion of the u s population. And I'm seeing that more and more, my clients a re positioning their companies, as doing something meaningful for society. I have a new client this week to bring in a COO to an MSP. And, uh, that's very much part of how they position their company. The six step is increasing the velocity of the recruitment. Unfortunately, too many MSPs fail to understand their Banton death March interview process, which once worked very well is now a real handicap in this hot labor market. Uh, the companies that are successfully hiring enough tech employees are often those who have figured out how to condense the comprehensive interview process and get a candidate off to an offer stage in less than 10 days. And I'll repeat that in less than 10 days now, to be very clear, I am not suggesting cutting corners on the candidate interview process. Instead I'm saying successful MSPs are finding to increase the velocity of the candidate interview process, as they recognize that the tortoises are no longer winning out against the hairs.Play the King:
All right, you have given us six of your seven tips. I know that everyone is waiting to hear the seventh. Uh let's let's just imagine that, this MSP or client of yours has tried all of this stuff. They've, you know, they've got a remote workforce, their cross training staff, they're, you know, they've sent referral bonuses to the moon. They're improving compensation, you know, all, all, everything you just mentioned, what is the last thing they can try? One of that is, is moving the needle for them.Peter Duflo:
Okay, sure. Um, oh, the seventh and final tip is to engage a recruiting firm that specializes in filling technical roles for MSPs. Now, since I only lead executive searches at the upper CXO and VP level, I can't help with lower level hiring needs, but if your listeners contact me, I can point them to, uh, recruiting firms that specialize in filling both, uh, lower level tech and sales roles, sales rep roles for MSPs,Play the King:
You know, that, that seemed like a, a, a pretty good hack if all of you above do not work. Um, all right. So, so we talked about the challenges of hiring a sales force, a challenge of hiring, uh, your engineering team. Um, let's talk about the third and final challenge that, you know, smaller MSPs tend to face, um, which is, uh, you know, for them to, to make M&A acquisitions, um, of other MSPs, so they can, you know, gobble them up and, and grow into a highly valued acquisition target themselves.Peter Duflo:
Yes. Um, well sometimes founders of MSPs think they have to wait until they're large enough to raise investment funds on a favorable valuation basis before the ready to make an acquisition. George, I think that approach can be risky because the current strong demand for MSP services will eventually cool off all economic cycles do. And the resulting lower industry growth forecast will eventually depress MSPs valuation. I believe MSP founders are better off leveraging cashflow or a piece of equity now to acquire small MSPs to quickly scale up is the right strategy. Um, they do this with the understanding that the valuation of the remaining equity we'll grow with the larger size of their MSP with the addition of acquisitions. And this is because multiples, uh, this is because, um, the multiple of EBITA, the private equity firms and strategic strategic buyers use to value MSPs increases as the MSP grows in size. For instance, today, an MSP generating 5 million of revenues may be valued at an EBITA a multiple of five to six while an MSP generating 10 Million of revenues may, uh, be valued at unable EBITA multiple of seven to eight. While when MSP generating 20 million of revenues may be valued at an EBITA multiple of eight to 10, and an MSP generating 80 or a hundred million of revenues may be valued at an EBITA multiple of 14, of course, this valuation multiple all. So depends on many things such as the market focus of the MSP, the size of their customer base, the terms of their contracts with customers, their average MRR per client, their growth service margin, their service level agreement, times the amount of churn they're having in their customer base and any potential threat litigation. Finally, most importantly, the experience of the executive team and the pipeline of the sales organization will have also a significant impact on the valuation of that MSP.Play the King:
Okay. And so the, the ones that you've seen that, that are successful, how are they identifying targets?Peter Duflo:
Well, George, you put your finger on the most difficult part, having done it myself earlier in my career, um, to find targets for them to acquire. Um, I suggest they start by asking their contacts at their technology partners for referrals. You know, if they're a Microsoft partner, I ask the Microsoft reps say, Hey, listen, I'm wann to grow larger and I want to make some acquisitions. Can you refer me to, or suggest a few companies or also Microsoft partners I should reach out to cuz it's in the best interest of these tech partners like ConnectWise data, Microsoft, Amazon, and others, to have their MSP customers growing as fast as possible. Additionally, our listeners, they can reach out to their smaller, local MSP competitors to see if the founders are interested in merging their resources. Uh, also you can contact me and I'll be happy to introduce any of your listeners to M&A advisors who specialize in helping MSPs find acquisition targets.Play the King:
All right. Well, Peter, thank you for sharing all of this today. We've talked about building effective sales team. We've talked about hiring, you know, your, your technical, your technical teams, um, and you know, the some of the difficulties of the opportunities of expanding through acquisitions. I wonder if you could just wrap up for today and, and, you know, mention anything that, that you might have as a sort of a parting thought, and maybe also tell people how they can learn more about what you do and, and, um, know anything else that they you'd like them to know.Peter Duflo:
Sure, sure. Well, I appreciate the opportunity to speak on Brad Banyas popular podcast. Uh, again, I just specialize in leading high level CX O and VP level searches for MSPs, but I'm very well networked in the MSP world having been here for literal decades now, and I'm in a good position to refer your listeners to specialized MSP technical and sales rep recruiting firms. If you need referrals to firms like that, I can also refer them to good M&A target acquisition firms. I know, um, sometimes finding both recruiting and these and a firms that just specialize in the MSP world can be difficult for them because frankly there aren't that many. Uh, but so if anyone asks questions regarding these three growth strategies that I discussed, um, or, or need to be pointed in the right direction, or if you need a CXO or a VP for your MSP, you can find my contact information. I believe Brad said it would be included on the invite to this podcast. So Brad, George, and the listeners, thank you for the opportunity to meet today and have a great day, everyone.