Transcript
from those who have gone through or are going through the process, and top M&A and business minds to help you maximize the value of your MSP. Whether you're buying, selling, or just trying to improve your business, make sure to subscribe to the Kaseya YouTube channel so that you know when new episodes drop, and you can even save that M&A Unpacked playlist for easy access. Today I am joined by Dustin Ballant, who is operating partner at Verde Equity Partners, co-founder, CEO at Fluid MSP. Dustin, welcome to the show. Hey, thanks Mike. Glad to be here. So can you start off by telling us a bit about your background and how you got into the MSP space? Yeah, sure. You know, I think my story is probably going to be pretty similar to a decent amount of us smaller MSP owners out there. I got my background, you know, crawling under desks, fixing computers, going up into attics, you know, running tables, all that sort of stuff, a little over 20 years ago. And you know, from there, just worked my way through kind of learning technology, getting some, you know, more complex roles under my belt. And used to work originally for a break-fix IT company and saw some of the challenges faced there. Eventually, you know, did some traveling, ended up actually living in New York City for a while, which is a phenomenal city to live. And while I was there working with an MSP, trying to bring business to New York City, developing business there as a regional manager. So I got to see the MSP model and how, you know, and I know I'm preaching to the choir, but how it functions a lot better for both the MSP, because you're not dealing with the headaches of being reactive all the time and seeing, you know, revenue spike one month when you have the hours for it, and then dip the other month when, you know, there's not a lot of work to do. Some more predictable revenue there, and for the clients, you know, I think it's a much better model. You're taking care of things proactively before emergencies and problems come up. So I kind of got to understand why I think it works better for the small businesses we support. And long story short, I ended up doing some traveling, came back to the States, back to Southern California, reconnected with a few colleagues in the space, one of whom is now my business partner, Crosby Loggins, who's an awesome person that I've enjoyed working with tremendously. And he was running a break-fix IT company at the time up in Santa Barbara called SBIT Group, which is still operating, still taking care of, you know, high-end residential clients up there in Santa Barbara. But since I had the MSP experience, I said, hey, for your small business clients, there's a much better way to do this. So we thought about spinning up a separate arm of SBIT that was going to be the MSP arm, but it's a completely different model, and it made a lot more sense to make a completely new company. So we spun up Fluid MSP in February 2020, and here we are. Awesome. So you're doing something called a collaborative roll-up. So first of all, I can't wait to dig into this because it's very interesting to me. What inspired you to pursue the idea of a collaborative roll-up, and how did you get started with this very unique approach? So as I got started with my own company, you know, Fluid MSP was my first, you know, foray into the world of entrepreneurship. And so I asked for help from those who've been further down the path than I have. One of those people in my corner who I feel very grateful to have in my corner is Gabe Galvez, who is a longtime friend. We actually, when we were still SBIT group, we were supporting one of his businesses and asked him for just some guidance and mentorship, and that has led to, I mean, Gabe and I, you know, now meet weekly, and he's a board member of Fluid MSP. We support multiple of his businesses now. And so as we kind of, so we bootstrapped Fluid MSP originally off of some existing clients that we had through some of my relationships and some of Crosby's relationships. And as we looked to grow the company, once we kind of got off of that initial conception phase and getting the company off the ground, we looked at the two traditional paths, right? There's the organic growth path, which we had some natural organic growth, and that's great. Some word of mouth stuff. No real traditional marketing at the time. And then the second route is the M&A route, which we're here to discuss today. So over the course of the past two years, I've had some outreach to other MSP owners here in Southern California that was basically saying, hey, if folks are interested in, you know, maybe an exit or a merger or a partner, even a strategic partnership, you know, I think we're kind of at least the good MSP owners and operators that I've been talking with throughout the years operate from this mentality of abundance, right? There's plenty of clients out there. There's plenty of good work to be done. And I think we have opportunities to kind of boost ourselves by working collaboratively together. So over the course of the past two years, I've now had conversations with about a hundred MSP owners and operators down here in Southern California who are at varying stages of considering an exit or wanting to partner or something to that degree. Meanwhile, Gabe and some of his partners have started a private equity fund and they've been doing a roll up in the commercial landscaping space. They've had a tremendous amount of success with that so far. I think they're looking to get to about 10 million in EBITDA and right now they're about five should be to the 10 mark in the next, I'd say, six to 12 months. So as they're kind of completing that first round of their fund, they're looking for other opportunities and what to do maybe with fund two or a special purpose vehicle. So they approached me and said, hey, we know you have spoken with these MSP owners in Southern California. What do you have there? What's in your pipeline? And so I've shared with them as I'll share with you, I've now have in the total pipeline, the MSPs that I've spoken with represent 64 million in EBITDA and that's just in kind of the Southwestern US here, of which, based on the conversations I've had, we kind of picked out a top 25 or so of folks that I think have solid businesses or aligned in values and are folks that I'd want to do something with. And so I've been working with Verity Equity Partners and their team as an operating partner working on this roll up in the MSP space. To answer the second part of that question, and I know this is kind of a mouthful, but I'm trying to give the whole origin story here. What's a collaborative roll up? So one of the challenges we've seen with the traditional roll up model is there's been a ton of activity in the M&A space for MSPs specifically. I'm sure other MSP owners out there are familiar with getting solicited to, hey, are you want to buy your company, reach out to buy other PE funds. And one thing that we've seen is because of the degree of activity in the MSP space, especially over the last eight years or so, there was a time when valuations were pretty high. There was a lot of consolidation going on in the space and that's still happening. But for companies that are above $2 million in EBITDA, a lot of that consolidation has already happened. Below $2 million in EBITDA, there's value there, but not the kind of value that one, larger funds, larger MSPs, they're going to do the same amount of work doing a deal for a company that's doing $4 million in EBITDA versus a company that's doing $500K in EBITDA. So which one are they going to choose? So for these smaller owners and operators, MSPs, of which I'm one, it's like, hey, where are we going to go if we actually want to exit our company? And a lot of these MSP owners that I've been speaking with want more than their business is worth, which is understandable and they know that, but there's still kind of this expectation that, hey, I'm going to retire when I can sell my business for $10 million. So what we saw when we looked at this is if we can aggregate these MSPs together, and what we're targeting is roughly $8 million in EBITDA, what if instead of the way a traditional PE fund works, which is you have LPs investing in the fund, the fund is acquiring companies and growing that and generating, basically doing EBITDA arbitrage to grow a larger company and then exit for greater value than they paid for it, making money for themselves and their LPs, what if we could make the other MSP owners and operators that do this with us the LPs? So essentially, we are collectively just agreeing, hey, we know we want to exit our businesses sometime in the next, for some of these guys, next few years. We know we want more than our businesses are worth. We know that there's not necessarily even going to be a buyer for us at the kind of scale that we're currently individually doing. What if we pool our resources and say, hey, we're all agreeing to exit collectively at the same point. Because we're doing that together, we're now pooling our EBITDA and therefore increasing our multiple that we're going to get at exit, we're not going to get the same kind of multiple as we would if we were fully integrated. But some of the benefit of not integrating before that ultimate sale together is we get to keep running our own ships. We get to collaborate together, I'll probably run a best practices group while we're working on increasing our respective value that's going to benefit our individual businesses and the collective as a whole. So that's the general thesis behind what we're doing. And how does that, you know, collaborative rollup kind of differ from a traditional rollup if you could? I know you touched on that, but maybe dig a little deeper here. What are the key benefits for the MSPs involved over something more traditional? Yeah. So the way a traditional rollup works is you, or typically, is you have either a fund or a strategic buyer go out and say, hey, we want to buy an HVAC company, whatever, an MSP, any company in any particular vertical. And usually there's a whole thesis behind that. They want something recession resistant or they have criteria like, hey, we want 70% recurring revenue or whatever their particular criteria is in the MSP space. We're going to go out and buy an MSP. Then we're going to add on additional MSPs that we're going to acquire over time to increase our EBITDA and, you know, benefit from scale. We don't need two separate leadership teams at that point, right? We can kind of start to reduce costs and expenses by integrating these companies together. So you're dealing with upfront transactions where those MSPs that are selling to the original platform, sometimes they have the option to roll equity. It just kind of depends on the transaction. But they're selling their business into this larger company. With what we're doing, there's no upfront transaction. All we're doing together is agreeing that, hey, we will transact together at a certain point. And we're targeting the next 12 to 18 months for this transaction. We've already been in touch with buyers that are interested in what we're doing. And retaining control of our MSPs in the meantime. And kind of benefiting from some of the things we can do together, which are, you know, for example, and I know I kind of touched on this, but for a lot of these MSPs, again, like myself, they're on the smaller side. There's not really a viable exit opportunity that's going to be attractive, at least for what I've seen that us MSP owners are trying to get in terms of enterprise value. So this is a way to increase our enterprise value, kind of inorganically, simply by doing this at scale. The other is, we're all aligned with actually increasing our value. If somebody is looking to sell their MSP individually, the buyer is going to want to pay as little for it as possible. We're kind of doing the opposite, where we're saying, hey, we want to collectively create as much value as we possibly can, because that's going to increase not only our individual slices of the pie, but the size of the entire pie in general, which we're again, all going to benefit from. Another is that, you know, I mentioned the folks at Verity Equity Partners that I'm working with. They have over a billion dollars of transaction experience between the four of them. One of whom, Gabe, who I mentioned, has extensive experience transacting in the MSP space. So there's a lot of knowledge there. You know, I'm not, though I've learned a lot in this process, I'm not a seasoned deal guy. These folks are. And like I mentioned, we're already in touch with some prospective buyers. And you know, exit for significantly more than your individual company's worth, with the potential to roll equity into the resulting entity once we exit together for that second bite of the apple. And that's where a lot of value is really created, is that second roll. And I'd say lastly, just being able to, excuse me, have an exit on your resume. You know, being able to say, hey, I started in MSP, I did this kind of interesting collaborative roll up, exited to PE. And you know, a lot of the commonalities that I'm seeing from folks in the PE space is they kind of have gotten there from one of two ways. Either there's the maybe more traditional, but it's, you know, you go to a high level Ivy League college, you know, you're in the top percentile. You start working at an investment bank as an intern. You know, you you're hopefully in the top percentile of the interns there. And then you get offered something. Then you're poached by a PE fund. You know, it's hard to get into. The other is people doing things like this, where you started a business, you exited PE, you maybe, you know, rolled some of your equity for a second bite of the apple, and now you're kind of understanding how that whole game works and can lead to, and this is my opinion, but I've seen it from the folks that we're working with, a lot greater opportunities down the road. Very interesting. Can you talk about how collaboration between the MSPs works in practice? You know, what kind of support and resources do you guys provide for to each other? Yeah, so while we're in the, so we're actually just about to kind of go into the LOI phase. So we've spoken with at this point, you know, like I mentioned, kind of took those top, you know, 20, 25 MSPs out of the roughly 100 that I've been speaking with over the past couple of years, and have approached them with this idea. So far, we have about five of us that are really interested in doing this together. It's our next phase, and that gets us just shy of halfway to our goal of 8 million, and neither does. So we're getting some really good traction on this. So our next phase is going to be getting folks under LOI and getting some structure to this. I'll be running a best practices group, where we know the directives from the ultimate buyers that we've been in touch with on the metrics that actually matter to them. And we'll be working toward respectively increasing our individual company's value in the next, you know, 12 months as we, you know, work toward this collective exit. So that'll be one aspect of what we do together is this best practices group. And the second one is going to be, you know, the benefits of scale, right? So we're now we kind of represent collectively a much larger ultimate organization, we believe that we can enjoy some collective bargaining power with our vendors and saying, hey, you know, it's not just us anymore. It's us and these several companies, which by the way, are going to ultimately be rolled into a single entity. And hey, if you as the vendor want to still be part of that, let's talk about pricing. Let's see if we can, you know, make something work a little better for us. And other ideas like that, like we might end up creating our own PEO to help with, you know, payroll benefits, that sort of thing. So there might be an ultimate, you know, PEO that we create is like a hold code, that's actually the one that's employing our employees. So we can save on some payroll expenses and benefits. So that just those kinds of ideas that, you know, we all benefit from from working collaboratively with one another. And how do you ensure that kind of the MSPs that are working with you guys together maintain their independence while working together towards a common goal? Yeah, well, you know, like I mentioned, there's no upfront transaction. So everyone is working independently. And there's no, there's not gonna be any requirement, for example, to join that best practices group. I imagine that all of us will, because it's only going to benefit each of us individually to increase our value of that respective slice of the pie, which then will, again, benefit the larger collective. But there's not going to be any requirement to do so everybody stays, you know, kind of a commander of their own ship before we ultimately exit together. So there's no, there's no change of control upfront. Interesting. Challenges? Have you guys faced any, you know, orchestrating this collaborative roll up? And you know, what have you done to overcome them? Yeah, you know, the initial challenge when we were kind of in the phase of simply looking for companies to acquire to inorganically grow the value of my business is, you know, I mentioned where MSP owners and operators are looking for more value than their company is worth. And a lot of times they know that, but there's still just kind of a, you know, hey, I got a good company here, it's generating good cash flow, I'm able to take some some money off the table as an owner, every month or every year. And so there wasn't necessarily a lot of incentive for them to want to transact until they got to some number that they had in their head and saying, yeah, sure, sure, my business is for sale, if you give me, you know, 20 million bucks, and it's like, okay, well, then your business isn't actually really for sale, or at least not yet. So that's kind of why we cooked up this model in the first place of saying, you know, okay, well, we've got MSP owners that are potentially interested in exit might be looking to, you know, do something else, or at least take some chips off the table, or whatever their personal circumstance is. But they want more than their company's worth, they know that. So what do we do with that? And so that's kind of the origin story of why we picked up this model in the first place and said, okay, well, look, this is a way that we can get them there, or at least part of the way there. And we can we can get an exit under everyone's belt, probably a lot faster than us individually would be able to do it ourselves. And then the other, you know, I think the other challenge has been a little bit of just the general herding cats type challenges that anyone would face when you're trying to get a lot of, you know, independent, smart people who have been used to doing their own things to see the value in working together. The good news for us is that the folks that we're now doing this with are interested, they do see the value, they do see how we can collectively increase our value as a as a whole by working with one another. And now that there's momentum, we're starting to see some of the other folks that have been in touch with that we're kind of waiting in the wings of saying, like, yeah, you know, I'm potentially interested, but let's see if you actually do it. So now that we're actually getting momentum and getting, you know, some folks working with us on this, I anticipate more of those folks kind of jumping on board. Because now they're going to see a real, real exit and a real timeline in place. Interesting, very, very interesting. What advice would you give to other MSP owners now who are listening to this considering, you know, hey, I might be interested in joining a collaborative roll up or looking for ways to enhance their value before exiting? Talk to me, reach out to me. I'd be happy to have a conversation about it. I can explain, you know, in more detail what we're up to, happy to set up a conversation with us and other partners I'm working with that have more transaction experience that can fill in, you know, probably some of the gaps that I'm just not going to be able to fill in here or in this amount of time. Folks can look me up on LinkedIn. I'm pretty easy to find. They can look up my company's website, contact us there. Happy to chat. You know, we're still in a phase where we're just having conversations. We're in the next couple of weeks going to start to add some structure to this, but still happy to chat and answer any questions that folks might have. Yeah, awesome. And I'll put your email address, LinkedIn. I'll throw that in the YouTube description so that folks can get that. And speaking of who should talk to you, somebody talking to you, who should talk to you? What kind of MSPs are you specifically looking for? So our ideal criteria are MSPs in the Southwestern US doing between 1 million and 2 million EBITDA. If you're not at that threshold, don't worry about it. We can still have a conversation. But that's our kind of ideal MSP that we're talking to right now. It's awesome. And I would imagine, you know, you're looking for a kind of a... I would imagine relationship is going to be important here because this is a unique... Usually. You know, collaborative means, you know, you guys are actually working together. Little bit different here. So you're probably looking for very specific kinds of folks who are a little more flexible, maybe, than the average roll-up type, if I'm... Maybe I'm off base, but... No, no, you're absolutely right. I mean, and that's kind of one of my primary roles here as working as an operating partner in this space. And then I know the MSP industry very in-depth. And I've spoken with a lot of folks now. And from those, I've kind of gleaned, okay, you know, here are some qualities and characteristics of not just the businesses themselves, but the owners and operators that we want to work with. And they're folks that are similarly minded, see the value in, hey, we can create something greater than the sum of our parts here if we work together. We can increase our value if we work together. And, you know, a lot of these folks bring things to the table that we haven't thought of. Like the idea that I mentioned of creating our own PEO, for example, that wasn't my idea. That was someone else who, you know, we've been talking to is like, oh, yeah, you know, hey, if we did that, what if we did XYZ? And I'm sure more of those ideas are going to come as we keep attracting other folks with different experience, different backgrounds to do this with us. So it's just that spirit of, you know, we're looking for folks with, you know, high integrity, kind of this mindset of, hey, there's plenty of good business to be done out there. There's an abundance mentality and really looking to work with other smart people trying to do something unique here. Well, thank you very much for all that. That's great information. Again, I'll put Dustin's contact info in the show notes on YouTube channel. And I can't thank you enough for taking the time out of your very busy day to share with the MSP community. Dustin, for everyone watching, we thank you and tune in every Monday on the Kaseya YouTube channel for another episode of M&A Unpacked. And if you're not yet a member of the M&A Concierge platform for MSPs, make sure to apply today. This is an amazing platform and it is 100% free for both buyers and sellers. See you next time, everyone.
