‘If a selling company gave [buyers] a category of AI revenue, the buyers would definitely dig in to see how much of that revenue is resold platforms like Microsoft Copilot, how much of that is actually advisory services you’re providing on top of that platform, or is the platform your IP. If it’s your IP and it’s sellable and it’s valuable to the end market, then you know you’re going to get looked at as being a lot more valuable,’ says Don Monistere, president and CEO of General Informatics.
Don Monistere knows a thing or two about acquiring MSPs. As president and CEO of Baton Rouge, La.-based General Informatics, he has overseen nine acquisitions in the last five and a half years.
Monistere’s experience with the M&A process has taught him more than a few things about how to find the right value of a potential acquisition target.
One of the keys, he told CRN, is looking for quality revenue, which he defined as the kind of revenue that matches the potential acquiring company’s needs and therefore is different in every M&A transaction.
[Related: General Informatics CEO Don Monistere On AI, Security, And The Future Of Managed Services]
“If you’re a platform MSP looking to acquire another organization, you may be looking for a very specific vertical,” he said. “And if that vertical plays into your vertical, then that’s a high-quality revenue stream. You may be looking for a very specific demographic such as customer size or customer retention. And if your sweet spot as an organization is 250 users and above, you may look at revenue for smaller companies as not high-quality revenue, whereas an MSP whose largest customer is a 50-user company might find that revenue of high quality.”
Being able to show strategic revenue is also a very important way to increase an MSP’s valuation, Monistere said. But don’t try to trick a potential buyer into thinking you have a desirable CISO or vCIO practice when instead you are selling antivirus software, he said.
“Sophisticated buyers are very keenly aware of the questions to ask to verify that that revenue truly is what I would call traditional IT revenue versus more strategic revenue like security, AI or vCISO services,” he said.
There are a lot of things MSPs should do—and shouldn’t do, to prepare for a potential sale of their business. To learn more, here is more of Monistere’s conversation with CRN.
How have the valuations of MSPs changed over the last two years?
Those who are buyers are a little bit more focused on what I would call quality of revenue and what makes up the service revenue. For instance, and I can’t say it’s changed over the year, but years ago voice-over-IP and other services that are not what you would consider to be traditional MSP services may get a little bit more scrutiny than would traditional IT support services. But other than that, I don’t know that there’s been a big change, necessarily, from a valuation perspective on revenue.
What I will say is there’s a lot more focused attention on what I would call more strategic revenue, which would include security and AI. If you have a CISO or vCIO, or you’re doing some sort of artificial intelligence data analytics as-a-service-type play, those types of organizations are getting a little bit better valuations depending upon how much of that revenue is concentrated in that area.
What if an MSP just slaps an AI or vCIO label in their marketing material?
That’s a great question, and very intuitive with what’s going on in the market. I think sophisticated buyers are very keenly aware of the questions to ask to verify that that revenue truly is what I would call traditional IT revenue versus more strategic revenue like security, AI or vCISO services. For instance, a lot of people want to say delivering MDR or antivirus is a vCISO service, but that’s really not a basis of service. It’s more about are you providing executive oversight to customers’ overall IT experience in the categories of AI and security? And if you are, then you have revenue that is a little bit stickier because you’re not just reselling toolsets, you’re actually providing an advisory service that acquiring companies value.
Sophisticated buyers can tell the difference. If a selling company gave them a category of AI revenue, the buyers would definitely dig in to see how much of that revenue is resold platforms like Microsoft Copilot, how much of that is actually advisory services you’re providing on top of that platform, or is the platform your IP. If it’s your IP and it’s sellable and it’s valuable to the end market, then you know you’re going to get looked at as being a lot more valuable. That particular revenue stream would be a lot more valuable because you own the IP.
How often do you see MSPs with their own IP?
Not often. We’re one of them, which I love. That puts us in a really good position. We have a data analytics division that has allowed us to have meaningful impact on the AI side of our business as well. So while we sell third-party applications for security and AI, we have our own IP that we developed through various back-end toolsets like .Net or Azure or what have you, and we deploy that to a certain subset of our customers. We’re a traditional IT provider, but we also have that piece of the business.
But to your point, there’s not as many MSPs doing that. I think more MSPs are trying to find ways to unlock that door and find ways to do that. About six months ago I was talking with someone about all the talk around Claude Codex and everything that would supposedly replace programmers. Well, I’ve needed more programmers recently in the MSP space than I did only two years ago, and they were really taken aback. For all the people saying, ‘Don’t become a programmer,’ heck, we have more today than we had two years ago.
What changed?
We’re becoming more integrated with our customers’ line-of-business applications. And in order to do that, you have to understand how those databases work, how the UI behaves, and what makes the UI work. Before, if you were just a traditional MSP providing IT services, you rarely got into answering questions deep in customers’ application stacks. But more and more customers are asking us to do that, and if you’re not aware of those types of things, then it’s a little bit harder to stay relevant, in my opinion.
Earlier, you mentioned quality of the revenue. Define quality revenue.
It differs between different people. For instance, if you’re a platform MSP looking to acquire another organization, you may be looking for a very specific vertical. And if that vertical plays into your vertical, then that’s a high-quality revenue stream. You may be looking for a very specific demographic such as customer size or customer retention. And if your sweet spot as an organization is 250 users and above, you may look at revenue for smaller companies as not high-quality revenue, whereas an MSP whose largest customer is a 50-user company might find that revenue of high quality.
We don’t want to be milewide and an inch deep. We really want to be a mile deep and maybe five inches wide. We want very specific subject-matter expertise in certain verticals, and we want to make sure that we’re targeting the types of clients that our services were designed to serve. We have four major verticals and a target customer profile of about 250 users, and we have customers on either end of that spectrum. But if I’m targeting my marketing to a certain demographic, for my acquisitions I’m targeting that type of customer base as well. The last two acquisitions we did, we used that as a barometer to help us with the valuation because the more customers they had in that 250-user area, the more valuable it became to us. A lot of what I call professional buyers, the PE firms that have these massive platforms or are trying to start a platform, are really getting particular about what that revenue looks like.
Would you consider yourself a professional buyer?
Definitely. We’ve done nine acquisitions in the last five and a half years, and I would say that we’ve become a lot more prescriptive over that time. And part of that has to do with the fact that we have a well-established leadership team, so there’s probably less opportunities for owner operators to come in and be a member of our executive leadership team. What happens post-transaction becomes a much more important conversation. In my last acquisition, the CEO of that company became my CIO. I had an open position there that I needed to backfill, and he was perfect for it. It made that acquisition much more interesting to us because it filled a gap we had. If I were to come across something very similar eight months from now, we may not be as aggressive on it because post-transaction the individual may not want to stay. Sometimes you have to make decisions that have nothing to do with valuation. It has everything to do with culture and what the two organizations look like integrated. But yes, I would consider us a professional buyer because we have a team that goes out there and helps us with the valuation process. And as we vet a particular acquisition, we’re looking for very specific things.
Is the private equity firm that backs General Informatics involved in the M&A process?
Absolutely. I run point on finding those opportunities. It’s not like shooting a shotgun. It’s more like a rifle. We’re looking for very specific things. The difference between us today and five years ago? Five years ago, we hired a consultant to help us market to people who might be interested in buying. We don’t do that anymore because we don’t need the shotgun effect. I’m usually pretty clued into who might be looking to sell. I’m pretty clued into what MSPs are making noise out there, doing a really good job. And I talk to MSPs all the time. I’m a board chair and on the [XChange] advisory council of [CRN parent company] The Channel Company. As you can imagine, twice a year I’m talking to 50 or 60 MSPs at the conferences. It’s really a good way for me to keep my thumb on the pulse of who’s out there growing fast, who might be looking to sell, who might be looking to merge, all that stuff.
