Future Challenges and Opportunities for MSPs: A Discussion with Ramsey Sahyoun

[00:00:02] Building an exit strategy for MSP, it is important.

[00:00:05] So who do you sell to?

[00:00:06] Evergreen, one of those companies that's been buying MSPs.

[00:00:10] Ramsey Sahoon joins me to talk about their strategy

[00:00:13] and he plays ball answering some great questions

[00:00:16] on this bonus episode of the Business of Tech.

[00:00:20] You're looking for security solutions for your MSP

[00:00:23] and Bitdefender is new ones for you.

[00:00:26] With advanced protection, simplified management,

[00:00:28] 24x7 analysts led security,

[00:00:30] threat hunting and end-end protection options,

[00:00:33] it's time to check out Bitdefender's new offerings.

[00:00:37] With the ability to customize the security solution

[00:00:39] for what you and your customers need,

[00:00:42] you'll find a cost effective selection

[00:00:44] with adaptive and scalable security.

[00:00:46] Want to check it out?

[00:00:47] Bitdefender would love to schedule a demo for you.

[00:00:51] Just visit bitdefender.com or the link in the show.

[00:00:57] Well Ramsey thanks for joining me.

[00:00:58] Thanks for having me.

[00:01:01] Excited to be here.

[00:01:02] We were kind of laughing that we hadn't actually crossed paths

[00:01:05] before this despite being in the MSP space for a little while.

[00:01:09] Tell me how you got interested

[00:01:11] in the managed services space.

[00:01:13] Yeah, yeah.

[00:01:14] So kind of the origin story of Evergreen

[00:01:19] actually started in Omaha, Nebraska

[00:01:22] with myself and my co-founder Jeff.

[00:01:27] We went to Omaha for the Berkshire Hathaway

[00:01:31] annual share holders meeting, which has kind of become a big deal.

[00:01:34] I think 40,000 people go to Omaha every year for it.

[00:01:40] And we kind of came away from that really inspired

[00:01:43] to start something like a Berkshire Hathaway,

[00:01:46] a holding company that holds businesses indefinitely,

[00:01:50] but for smaller businesses.

[00:01:52] So that's what kind of kicked off our search for industries

[00:01:57] that we thought would be conducive to that kind of business model.

[00:02:02] And pretty shortly thereafter,

[00:02:05] we were very intentionally looking through

[00:02:08] a bunch of different industries

[00:02:10] and discovered the MSP niche

[00:02:14] within the broader category of IT services.

[00:02:18] And we sort of discovered,

[00:02:21] it was kind of old news, I guess by that point, this is 2017.

[00:02:25] We discovered that

[00:02:28] the managed services model had made MSPs much better businesses.

[00:02:34] Like they were more recurring, they were more profitable,

[00:02:38] they were sticky, they were growing quickly.

[00:02:41] All the things that we didn't normally associate

[00:02:44] with IT services became apparent

[00:02:46] when we looked at our first MSP,

[00:02:50] which is a company called Executech in Utah.

[00:02:54] Then we talked to another MSP Wolf Consulting in Pittsburgh

[00:02:57] and we started seeing a pattern of

[00:03:00] these are really good businesses.

[00:03:02] And yeah, then kind of the rest is history from there

[00:03:08] was really those two companies opening our eyes

[00:03:10] to kind of the transformation and shift to managed services

[00:03:14] that had occurred prior to our arrival.

[00:03:19] So you dig into this space,

[00:03:22] start working with some of the customers

[00:03:23] and obviously a thesis comes out of.

[00:03:25] So can you outline for me

[00:03:27] what Evergreen's investment thesis is

[00:03:30] and how you identify the right opportunities

[00:03:32] based on that thesis?

[00:03:34] Yeah, yeah, so the thesis of Evergreen was simple.

[00:03:38] Again, just going back to the Berkshire thing,

[00:03:41] it was build a long-term home for businesses.

[00:03:45] So instead of buying companies and flipping them,

[00:03:47] we could be a true long-term owner of companies

[00:03:52] and operate those businesses independently.

[00:03:54] So those are kind of the two core tenants,

[00:03:56] long-term ownership and decentralized operating model.

[00:04:02] And we felt like those things

[00:04:06] were really conducive to the MSP space.

[00:04:09] There's a lot of intimacy with the customer.

[00:04:12] And a lot of times when you integrate businesses,

[00:04:14] there's a lot of customer churn as a result of that.

[00:04:17] So it was kind of conducive to

[00:04:20] a decentralized operating model

[00:04:23] where we could get the companies together

[00:04:24] and share best practices

[00:04:26] and be better for having all the businesses together,

[00:04:30] but still operate them independently

[00:04:33] where they have like really close relationships

[00:04:35] with their customers and they can keep that stickiness

[00:04:40] and maintain that autonomy.

[00:04:42] So yeah, that's kind of the core of the thesis

[00:04:48] and that's been really unchanged for six years

[00:04:52] and 70 MSPs.

[00:04:54] So those were kind of the core tenants

[00:04:59] that emerged once we discovered the MSP space.

[00:05:04] Now, as an investor, you've taken two routes

[00:05:08] to you making money

[00:05:10] and the organization making money off the table.

[00:05:12] By saying you're gonna hold on to it for a long period of time

[00:05:15] and that they're going to operate independently.

[00:05:18] You've taken a couple of things off the table.

[00:05:20] You've taken off the ability to sell it,

[00:05:22] somebody else pay for the asset

[00:05:24] and you've also taken off that typical

[00:05:27] like hey, we'll integrate

[00:05:28] and we'll save money through cost production.

[00:05:30] You've taken those strategies off the table.

[00:05:33] So tell me what you view as the key strategies

[00:05:37] for creating additional value through Evergreen or?

[00:05:42] Yeah, so a few things come to mind.

[00:05:48] The first is more, maybe the first is more

[00:05:51] like investing oriented and finance oriented

[00:05:55] and then I'll maybe touch on some of the operational side.

[00:05:59] I think on the investing side,

[00:06:01] if you look at the way massive wealth has been created,

[00:06:09] it has been through long-term ownership of companies

[00:06:13] that compound in value over time

[00:06:16] and reinvest their profits

[00:06:19] whether it's into new business lines or into acquisitions.

[00:06:24] So you look at all the biggest companies

[00:06:27] all the richest people,

[00:06:29] they're single company operators that

[00:06:34] own their businesses for a long time and reinvest in them.

[00:06:37] So you don't find when you look at the biggest

[00:06:42] wealth creators, a lot of people that just flipped

[00:06:45] businesses like flipped their way to the wealth

[00:06:48] because you miss out on the compounding nature

[00:06:51] of wealth creation.

[00:06:53] You instead sell, you pay taxes

[00:06:56] then you need to find something else to reinvest in

[00:06:58] that does well, then you need to sell that and pay taxes.

[00:07:02] So just compounding is a big part of our kind of ethos.

[00:07:08] So that's how we view the idea of making money.

[00:07:14] We view it as creating wealth over time

[00:07:16] versus a single event.

[00:07:20] On the business side,

[00:07:23] there are still opportunities from a vendor standpoint

[00:07:29] to leverage our collective scale to reduce vendor costs.

[00:07:33] So we do that, but I think the bigger thing is talent.

[00:07:39] So a lot of MSPs that we acquire

[00:07:41] don't have a succession plan.

[00:07:44] And so we are often bringing executives

[00:07:50] into these businesses to both help them get to the next level.

[00:07:54] So like a $5 million MSP,

[00:07:58] what additional kind of horsepower can we bring

[00:08:00] to the management team to help push that business

[00:08:03] to 10 million at revenue?

[00:08:05] And that person can eventually be the successor to the founder.

[00:08:09] So I think that those are kind of the two things.

[00:08:12] There's like the scale with vendors

[00:08:15] and there's the talent that we deploy into these

[00:08:19] businesses both to help them with succession

[00:08:22] but more importantly to kind of turbo charge their growth.

[00:08:25] So I think those are the main things.

[00:08:28] I know it's maybe a bit of a rambling answer,

[00:08:30] but I hope that answers.

[00:08:33] I like the ramble there actually

[00:08:34] because it helps me understand like

[00:08:36] not just the thought, but you also put them in an order.

[00:08:38] Right.

[00:08:39] It actually helps.

[00:08:40] So tell me what's the approach to deal sourcing?

[00:08:43] How are you out there?

[00:08:45] I mean at some level, I'll say you have a reputation

[00:08:47] for like blanketing the market and everyone has an offer.

[00:08:51] Yeah.

[00:08:52] Like what is your approach to deal sourcing?

[00:08:55] Yeah, it's very rigorous.

[00:08:59] We have a team of about five people here at Evergreen

[00:09:07] that I lead that are responsible for sourcing our MSP

[00:09:13] acquisition.

[00:09:14] So we try to have in our database every MSP there is

[00:09:19] and we try to get in touch with as many MSPs as we can.

[00:09:26] But we have a pretty clear set of criteria like we don't go below

[00:09:32] 500,000 of EBITDA and 3 million of revenue

[00:09:35] and 50% recurring revenue.

[00:09:38] And then there are a whole host of other factors

[00:09:40] why an acquisition might not make sense.

[00:09:44] So it is a real funnel.

[00:09:46] I think we have maybe a perception that yours going on

[00:09:51] and buying everybody, it's a very low converse.

[00:09:54] I mean we probably buy like 1% of the companies that we talk to

[00:09:59] and we bought 70 companies.

[00:10:01] So it's a very kind of comprehensive process like that.

[00:10:09] There's definitely a funnel that emerges.

[00:10:13] But as far as how we go about sourcing,

[00:10:16] there's just no replacement for getting out and meeting people

[00:10:20] where they are, whether it's conferences or just stopping

[00:10:25] by their city and meeting them in person for coffee

[00:10:30] and just reaching out and being a real active participant

[00:10:35] in the industry I think is kind of the approach that we've taken.

[00:10:40] So yeah, that's kind of how we think about it.

[00:10:44] So walk me through the due diligence process.

[00:10:47] Like how are you assessing the viability and potentials

[00:10:50] of the companies that you're looking to invest?

[00:10:52] Yeah, yeah.

[00:10:54] So usually we have an initial, like a typical process

[00:10:58] is an initial conversation with a business owner

[00:11:01] and we screen from a size and revenue mix standpoint,

[00:11:05] is it a fit?

[00:11:07] And does our strategy a fit with the owner?

[00:11:11] From there, we get an NDA in place

[00:11:14] and they share financial information.

[00:11:17] Then we have another hour long call.

[00:11:20] And at that point, we can pretty confidently get

[00:11:25] to a letter of intent.

[00:11:29] And then if we get under a letter of intent,

[00:11:31] it's a 60 day due diligence process that's more rigorous.

[00:11:36] The most rigorous part of that is what's called

[00:11:39] a quality earnings analysis where basically the

[00:11:43] financials are being validated.

[00:11:45] It's kind of like a mini audit.

[00:11:47] So that's kind of the most intense part of that

[00:11:50] two month diligence process.

[00:11:52] Is that quality earnings process?

[00:11:54] We do a lot of meeting with the owners,

[00:11:58] next layer of management to the extent that we can.

[00:12:03] And then the other big part of diligence is we do customer calls.

[00:12:07] So we engage a third party to reach out as if they're doing

[00:12:11] a customer satisfaction survey on behalf of the company.

[00:12:15] And so through that, we get a sense for how satisfied

[00:12:21] and how stable the customer base is, which is critical.

[00:12:24] One of the big ways you can screw up these acquisitions

[00:12:27] is if you have a lot of churn.

[00:12:29] So that's a big part of the diligence process.

[00:12:33] And then there's legal, which is more about the transaction

[00:12:38] execution.

[00:12:39] We often don't find a bunch of skeletons in legal diligence.

[00:12:45] But that's kind of the overall process.

[00:12:50] We can start to finish, get it all done

[00:12:54] and probably under three months if everyone's marching ahead.

[00:13:01] Right.

[00:13:02] So how do any environmental, social, and governance factors

[00:13:05] influence your investment decisions?

[00:13:08] Yeah, it doesn't.

[00:13:09] I mean, so we're backed by Alpine Investors,

[00:13:12] which is the private equity firm that I used to work at

[00:13:14] that backs us.

[00:13:16] And there's a, in the system that we use to manage our deals,

[00:13:24] there is a field for whether something is red, yellow,

[00:13:28] or green on ESG.

[00:13:32] Basically every MSP we've come across has been green.

[00:13:37] Things that can be more like things that could come up

[00:13:44] would be like if you serve an end customer that is controversial,

[00:13:51] like cannabis or something that has to do with weapons or defense.

[00:13:59] We've never had that come up in the MSP space,

[00:14:03] and we invest in a few other industries where it's been a consideration,

[00:14:08] mainly around the customer that you're serving

[00:14:12] and that being controversial in some way,

[00:14:16] usually around a little bit of oil and gas

[00:14:21] and then defense and then cannabis is the other one

[00:14:27] that I've seen kind of pop up as a consideration.

[00:14:30] Yeah, that's one of those interesting areas where I've actually seen a lot of

[00:14:34] interesting stuff happening in the managed services space

[00:14:36] in a very small section of cannabis tech.

[00:14:39] So it would be interesting to see if that changes over time.

[00:14:41] Very interesting.

[00:14:43] I want to get a little bit now, not asking about any specific deal,

[00:14:47] but what I want to actually get is because you don't have a strategy,

[00:14:49] you're at anxiety.

[00:14:51] I want to actually get a little bit more insight into kind of what's the perfect sense of the way

[00:14:55] a deal would be structured for your,

[00:14:58] looking from Evergreen's perspective of how that value and investment

[00:15:03] will return back from a cash and from an ownership perspective.

[00:15:06] Can you give me a little bit of the perfect version so that we don't have to describe a specific deal

[00:15:11] but kind of the structure in your head of the way you want that to work?

[00:15:14] Yeah, I think the perfect Evergreen deal is one

[00:15:21] and the first company we acquired, I will get specific,

[00:15:25] the first company we acquired, Wolf Consulting,

[00:15:29] has been just an amazing acquisition

[00:15:33] and I think been kind of in the benchmark against which we measure

[00:15:40] all of our other acquisitions.

[00:15:42] So it was a really solid operationally mature MSP

[00:15:48] doing a lot of the right things.

[00:15:51] Lloyd Wolf was the founder, really strong operator.

[00:15:55] He wanted to sell and transition out of the business,

[00:15:57] but he cared a lot about the business operating independently

[00:16:00] and about it having a long-term home.

[00:16:03] We put Elliot Hyman, who actually is now the CEO of,

[00:16:09] oversees all of our MSPs, all 70 of them globally,

[00:16:13] but we put him in as the director of business development at Wolf Consulting for a year

[00:16:19] and then he succeeded Lloyd as CEO and Lloyd transitioned out.

[00:16:25] Wolf is more than triple in size since we are all organically like no acquisitions,

[00:16:33] is tripled in size since we acquired it

[00:16:38] and now that Elliot has hired his successor,

[00:16:43] a guy named JB Lamb that runs Wolf Consulting today,

[00:16:47] Elliot's elevated to oversee all of our MSPs.

[00:16:51] So that was kind of when it felt like we just got everything right

[00:16:56] as far as the quality of the business,

[00:16:58] the quality of the person that we partnered with and Lloyd,

[00:17:02] placing a leader, the succession plan going really well,

[00:17:05] that leader having bigger career opportunities within Evergreen

[00:17:10] as they grow in their career.

[00:17:13] So I think that's kind of what it all goes right.

[00:17:22] I mean, is the way that this works,

[00:17:24] you guys are taking dividends out on a,

[00:17:26] like as the older percentage ownership,

[00:17:28] just give me a sense of the way that that works from the cash flow perspective.

[00:17:33] Yeah, yeah.

[00:17:34] So yeah, we've more with the growth in the business,

[00:17:37] we've more than paid back.

[00:17:40] So every company sweeps the cash flow that it generates

[00:17:44] on a monthly basis up to Evergreen.

[00:17:48] We and Wolf has swept now more than the original purchase price

[00:17:54] of the business back to Evergreen.

[00:17:57] So we're kind of like in the money on just cash sweeps on that business.

[00:18:02] And then the big part about our strategy,

[00:18:05] it kind of goes back to what I said about the idea of compounding.

[00:18:09] We take that cash flow and that cash flow

[00:18:13] and cash flow from all our other businesses and that gets redeployed

[00:18:17] and that funds our future acquisitions.

[00:18:20] So instead of raising more outside capital

[00:18:23] and more outside capital, you're able to internally fund your acquisition.

[00:18:29] So you're not diluting shareholders,

[00:18:32] bringing in more capital to fund acquisitions.

[00:18:36] So that's where it really gets exciting

[00:18:38] and you can compound in a tax-efficient way.

[00:18:43] You're redeploying cash into your businesses.

[00:18:48] So that's the core of the strategy.

[00:18:53] And the goal is if you have investment opportunities

[00:18:59] that you think generate sufficient returns,

[00:19:03] you'd always be redeploying.

[00:19:05] And I see that as a big part of my role here at Evergreen

[00:19:09] is to make sure we have opportunities to redeploy that capital

[00:19:14] because we don't want to be paying it out as a dividend

[00:19:19] if we have a better returning opportunity within the business.

[00:19:23] Now, I think you started during a timeframe where money was,

[00:19:27] if not totally free, close to free, right?

[00:19:30] Yeah.

[00:19:31] Because of rate levels.

[00:19:32] And we're now operating in a position where money is not free.

[00:19:36] Now, neither one of us is going to try and predict the Fed

[00:19:39] and we're not going to play games with thinking where this is going.

[00:19:43] But I think it's safe for me to say,

[00:19:45] I think the days of free money are behind us.

[00:19:49] And whether or not they have a couple of percentage points

[00:19:52] or they're higher, there's probably a cost to it.

[00:19:55] How has that shift changed your thinking

[00:19:59] on the way that you're building the business out?

[00:20:02] Yeah.

[00:20:03] It hasn't changed our thinking all that much.

[00:20:08] I think we, like I started my career in buying businesses

[00:20:16] at a time where money was not quite free.

[00:20:19] It was on the path to becoming free.

[00:20:28] And we always would kind of underwrite deals

[00:20:32] assuming a more normal level of interest and interest expense.

[00:20:40] So that period of time where debt was really cheap

[00:20:49] was tough in a lot of ways because there were some bigger businesses

[00:20:55] that we pursued and just couldn't be competitive on valuation.

[00:21:01] And now today, I feel like our valuation framework hasn't changed

[00:21:04] but we're winning a lot more deals.

[00:21:08] So I think, yeah, that's kind of been the journey over the last six years.

[00:21:16] We've been pretty consistent on our valuation framework.

[00:21:20] It's gone up over time, but that period of like 2021, maybe 2022,

[00:21:28] you saw some really high valuations being paid at the top end of the MSP market.

[00:21:35] And we just couldn't get those done and I feel like we're more competitive now.

[00:21:41] So that's been kind of the biggest change.

[00:21:45] We've worked to kind of be pretty steady in our valuation framework

[00:21:49] and not just react to the wins of interest rates.

[00:21:55] So you're one who's got your fingers in a number of different businesses across this space.

[00:22:01] You're looking at it very much from the investment perspective

[00:22:04] and trying to make sure these businesses return.

[00:22:06] What's the biggest headwind you're thinking about right now

[00:22:11] as you think about the next, say two to four years?

[00:22:14] Yeah, yeah. I think there are two things.

[00:22:24] I mean the first I think is just what is going to be the impact of AI on these businesses

[00:22:30] and depending on what side of the bed I wake up on,

[00:22:37] I can paint a really glorious picture of how much more efficient we're all going to be

[00:22:42] and what that's going to mean for margins and growth.

[00:22:46] On the other hand, I could see it commoditizing some of the lower end MSP work

[00:22:53] and being disruptive to the industry.

[00:22:56] So I think about that a lot more big picture and then more zoomed in.

[00:23:06] There's been a lot of I think harvesting of existing customers through upselling cloud

[00:23:12] and cybersecurity and all these add-ons.

[00:23:15] I don't know that the industry as a whole has done a great job of adding new customers.

[00:23:22] So I think organic growth, not just from getting more from the existing customer base.

[00:23:31] I think that's the more near term saying I think about that I think MSPs are really enough to invest in

[00:23:40] because a lot of the growth historically has come from the existing customer base.

[00:23:45] Well, I think that's the question that we're all sitting up thinking about.

[00:23:49] Ramsey Sayoun is the co-founder and chief technology officer of Evergreen Services Group

[00:23:54] before founding Evergreen, hailed roles at Alpine Investors and Revolution Capital Group.

[00:23:59] Thanks for joining me today.

[00:24:01] Thanks for having me, Dave. Appreciate it.

[00:24:05] This episode sponsored by SkyKick, new sponsor for MSP Radio.

[00:24:10] SkyKick has been helping over 30,000 MSPs for the past 10 years be more successful in the cloud,

[00:24:16] migrating, protecting, securing and managing their Microsoft 365 customers.

[00:24:21] A highlight in their offerings is their Microsoft 365 Data Protection solution, Cloud Backup.

[00:24:27] They've recently enhanced it with a new feature called Smart Insights.

[00:24:31] This feature delivers visual insights and powering partners to engage more efficiently with customers on Microsoft 365 Data Protection.

[00:24:39] And MSP Radio listeners get a special offer.

[00:24:42] Get a free 2M365 email migration for a customer when you bundle it with backup.

[00:24:48] Visit skykick.com slash MSP Radio to learn details.

[00:24:54] The Business of Tech is written and produced by me, Dave Sobel,

[00:24:58] under Ethics Guidelines, posted at businessof.tech.

[00:25:02] If you like the content, please make sure to hit that like button and follow or subscribe.

[00:25:07] It's free and easy and the best way to support the show and help us grow.

[00:25:12] You can also check out our Patreon where you can join the Business of Tech community

[00:25:17] at patreon.com slash MSP Radio or buy our Why Do We Care Merch at businessof.tech.

[00:25:25] Finally, if you're interested in advertising on this show, visit MSPRadio.com slash Engage.

[00:25:32] Once again, thanks for listening to me and I will talk to you again on our next episode of The Business of Tech.