GreatAmerica Financial Services has quietly done a soft launch of a new financing service for MSPs – M&A financing – and rolled the service out at IT Nation Connect.
GreatAmerica has been a fixture in the channel market since the 1990s, offering many types of financing for channel partners especially solution providers. Programs include the traditional inventory and hardware financing and the more recent as-a-service programs and usage-based billing.
M&A financing is a new business for the Cedar Rapids, Iowa-based company, aimed at a specific segment of the MSP market – MSPs that want to buy other MSPs. These deal sizes tend to be smaller than private equity-backed deals and that can make things challenging when it comes to securing financial backing for these deals.
“We've been in the space for about 14 years. And we have a lot of expertise,” Lee Rozenboom, vice president and managing director of sales at GreatAmerica, told a session of acquisitive MSPs at IT Nation Connect. “We understand generally what you guys are up against. By comparison the SBA typically has limited MSP knowledge.”
Small MSP Deal Acquisition Financing from Great America
In his presentation at IT Nation Connect, titled “GreatAmerica Financial: Plan for Growth in 2025: Fuel It with Simplified M&A Financing,” Rozenboom said his company’s M&A solution brings the following value proposition to the MSP deals:
- A focus on smaller M&A deals
- An alternative to SBA loans
- A focus on $100K to $1 million EBITDA transactions
- A total investment amount by GreatAmerica of $250K to $2.5 million.
While MSP M&A saw lots of private equity involvement a few years ago, many of the deal targets that interested PE have already been bought. Private equity firms are typically looking for larger MSPs to invest in. So deal volume has slowed. But MSPs looking to acquire other MSPs is a growing area. These MSPs could potentially grow both organically and through acquisition and become of a size that would be of interest to private equity. But first they need to grow themselves, and many are eyeing acquisitions. Peter Kujawa, VP and GM of Service Leadership Inc., also addressed this group of acquisitive MSPs during the session.
Good Reasons to Acquire Other MSPs
“If you are preparing to buy over the next couple of years my first bit of advice is, think about why you are going to do an acquisition,” he said. “There’s a bunch of really great reasons to do them – for scale, synergies, building out your vendor status to get to the next tier, growth acceleration, and obviously geographic expansion.”
Kujawa also shared some not so good reasons for acquisitions. For instance, they want to get a specific employee or client that is loyal to a competitor.
Bad Reasons MSPs do Acquisitions
“These are not great reasons because an employee has no legal requirement to stay after the acquisition is done,” he said. “In fact, when you do a deal, you can expect much higher customer and employee attrition than that business has historically had, even if you do everything right, even if your culture is really aligned, even if you are not going to make any substantial changes. Deals scare employees and they scare customers, and they give them an opportunity and incentive to look around to see if the grass is greener elsewhere.”
But if you are acquiring another MSP for the right reasons, GreatAmerica is now offering an alternative source of capital to help finance the deal.
Sources of Financing for MSP Acquisitions
During the session, Kujawa provided information about the typical sources of capital for MSP M&A deals and where the new GreatAmerica offering fits in and adds value.
For instance, private equity is a common backer for MSP acquisitions, and there’s a high demand among these investors for deals. However, private equity has been looking for increasingly larger deals. It doesn’t play below $1 million in EBITDA or an all-in investment under $5 million.
Private investors are another option to back MSP M&A deals, but you need to identify them and their equity play in the deal could be significant, Kujawa said.
Other options are your own cash flow or personal wealth – like mortgaging your home, which can be limiting and carry risk.
SBA and bank deals bring investors with limited understanding of the MSP market, and they can be inefficient for those reasons, according to Rozenboom.
GreatAmerica Advantages over SBA Loans
The GreatAmerica program offers a new option from a company that understands the IT channel and has an industry presence already. Because of that, Rozenboom said GreatAmerica offers advantages over SBA loans. They include the following:
- Documentation needs can be less than SBA loans.
- Rates are comparable to SBA loans at (9-12%).
- Flexibility in process and timing.
- Ability to maintain leadership of the previous organization.
- Ability to keep banking lines open.
To work with the company, Rozenboom said there’s an initial phone call, an introductory questionnaire, putting in place an NDA, and an initial financial review on the buyer which includes three years of financials (audited or tax returns), personal financial statements if available at the time, and a third-party valuation of the buyer, if available.
“Why should you work with GreatAmerica? The main piece is just from a flexibility piece, just the simplicity of it, and how we can work through it together,” Rozenboom said.
