Rewind to 2015 or so. I was in Las Vegas for a Hewlett Packard Co. customer conference. HTG Peer Groups CEO Arlin Sorensen also was in town. In some ways, we were both at a crossroads.
Yes, Arlin and the HTG team had built successful peer groups. Many of the members were MSPs who successfully shifted -- or expanded -- from product reselling to recurring revenue models. For many MSPs, the basic blocking and tackling work (remote monitoring, basic business automation) was done. At the time, I could tell Arlin and his team were formulating some next-generation strategies for HTG and its members.
I was in a similar boat. Amy Katz and I had co-launched, built and sold online media brands like MSPmentor, The VAR Guy and Talkin' Cloud. In some ways I was losing my hearing -- at least in terms of the IT industry. I needed silence to figure out exactly what I wanted to do next with my career. Ditto for Amy.
The 2015 Inflection Point
Gradually, it occurred to me that all of us -- Arlin, hundreds of HTG members, Amy and I -- were on similar journeys. Each of us had built our own businesses to achieve creative freedom and financial freedom; to ultimately spend more time with our families. But far too often, Arlin told me about entrepreneurs who became prisoners in their own companies -- trapped by the very walls that were supposed to set them free.
During that 2015 meeting in Las Vegas, I think Arlin realized I was lost. At least for the time being. But I hinted that I knew Amy and I would be back in some form. And I kept on saying whatever I pursued next... it would involve documenting "the journey." Yada, yada, yada. By 2016, Amy and I were back with ChannelE2E -- tracking IT service providers from Entrepreneur to Exit. (By the way, there have been hundreds of MSP exits since our late 2015 launch...)
And what about Arlin and HTG? In many ways, they've evolved to lead "the journey" as well. No longer just a "peer group" organization (though that remains a high-value service), HTG now offers coaching, consulting, life planning and plenty more.
The HTG Way for 2017
During HTG's recent Q1 gathering (in Phoenix, I think), most sessions focused on leadership planning. This year it was all about identifying gaps – both of the owner/founder in their own leadership – as well as the gaps in leadership of those who are part of the team they are depending on to help take them to the next level, Sorensen says.
"More and more of our members are connecting the dots that they have to build true leaders that can step up and drive the business in an area to help keep the company growing," he adds. "This is part of our overarching focus on “the entrepreneur’s journey” which describes how most small businesses seem to evolve. It begins with a founder who runs a company on gut feel and hard work just muscling their way through. Once that becomes too much, they hit a wall unless they have discovered how to build leaders and delegate."
Here again, everyone in the IT channel seems to be living parallel lives. We're all on the entrepreneur's journey. We automate a bit using software. We hit more walls. But we also have some awakenings. For some of us, the entrepreneur's journey evolves into a Hero's Journey, as masterIT CEO J. Michael Drake explained to me back in 2015.
The smartest among us realize hard work is not the secret to success. Instead, effective strategy and execution delivers business success, Sorensen notes. That potentially frees us up to focus on more important priorities, such as our families.
Closing the Valuation Gap
HTG's members also are working hard to close the so-called valuation gap. In short, business owners think their companies are worth X. But potential buyers think the business valuation is far lower than X.
What's the solution? Instead of pursuing revenue growth at all costs, HTG members focus heavily on EBITDA profit margin growth. Many IT service providers have single-digit EBITDA profit margins. But the best of them can push toward 30 percent EBITDA profit margins, Service Leadership Inc. CEO Paul Dippell has indicated.
The upside: Effective EBITDA growth has a huge impact on MSP valuations. While many MSPs are worth only 5X to 6X annual EBTIDA, the absolute best-performing MSPs can be worth 10X annual EBITDA or more. Skeptical? Take a look at Presidio, which is pursuing an IPO valuation of 10.5X to 12X EBITDA, ChannelE2E estimates.
Admittedly, Presidio is far larger than the typical SMB-focused IT service provider. But even small companies can greatly benefit from effective EBITDA focus. A case in point: The typical MSP within HTG is growing its valuation 2.3 percent faster (year over year) than the overall market, according to Service Leadership.
If that sounds like tiny progress... you're wrong. Think of it this way: How much bigger would your nest egg looked if your Wall Street investments grew 2.3 percent faster every year for the next 10 years?
Now, remove the HTG members from Service Leadership's overall estimates on industry valuation. The result: HTG participants outpace non-participants on valuation growth even more dramatically, notes HTG President Scott Scrogin.
Do Money, Automation Buy Happiness?
Naysayers may wonder why a blog about your life's journey focuses so much on profits, EBITDA and valuation. Money certainly doesn't "buy" happiness. But I firmly believe that money, when managed wisely, buys freedom. The freedom to spend more time with your family. The freedom to pursue your next passion. And the freedom to really think about how each step in your entrepreneur's journey must align with your personal journey.
That's a wrap on HTG Q1. I look forward to hearing about the HTG Q2 Meetings later this year.
PS: Just to make things extra interesting, HTG hosted a "Shark Tank" type marketing challenge as part of its Q1 meetings. Eight finalists shared their marketing plan for 2017, and the organization gave away $50,00 in prizes to the top three. Over 30 companies applied for consideration. (Here's a look at the highlights.)
"It was designed as an educational event with the judges offering ‘shark bites’ of wisdom around marketing as we went through each proposal," Sorensen says.
