What MSP Operators Overlook in Operations Before Selling—Insights from Evergreen’s Craig Fulton

[00:00:01] Dave Sobel here, reporting from the floor of ChannelCom, joined today by Craig Fulton. Craig is an M&A Advisor at Evergreen Services Group. They're one of the largest MSP acquirers in the world. 47 deals last year. Before that, 16 years at ConnectWise, Chief Product Officer, then Chief Customer Officer, and one of the people who built the IT Nation community.

[00:00:23] So this means a lot for the listeners in this, you know, of my show to understand that you'd be one of the first people that they'd meet as they're thinking about selling. Now, two quick things from a disclosure perspective up front. This was booked through Evergreen's agency and nobody's paying for this coverage. Craig's interest here is around a buyer's interest. And that's what we're going to be talking about today. Craig, welcome to the show. Hey, thanks for having me, Dave. Good to see you again, man. It's been 16 and a half years, man.

[00:00:47] I know. It's like ages. So let's talk about the state of Evergreen right now. What you guys have done in the last 12 months or so and like what's changed? Yeah. So we wrapped up last year with, you know, like you said, we acquired 47 total businesses. You know, we operate in three different IT service markets. We have MSPs, application service businesses, and then government IT, like contract, very niche in the U.S.

[00:01:15] We wrapped up last year with a total of, I believe, 135 MSPs acquired and 171 all companies. You know, close to the year, $1.5 billion in revenue and $250 million in EBITDA. It's kind of crazy to think how big it is, you know. But we love our mission and how we make it feel very personal inside of Evergreen. It's not just a big corporate machine, you know.

[00:01:42] So one of the things I talk a lot about on the show is understanding everyone's financial incentives so that we know where we're coming from. Yeah. You're not a founder and you're not necessarily the capital. So you're one of the people that an owner might need first. Like, do you have equity in Evergreen or are you compensated on a deal's close? Like, how does that push them? Yeah. Okay. I do have equity inside the company. I'm one of the shareholders there. So, yeah, it's like I truly enjoy meeting with business owners. You know, like you said, my history being at ConnectWise.

[00:02:11] I met so many MSP owners early on, watched them grow. And now I'm coming back through, talking to them, sharing this one option that they have out of many. Because I feel that MSP owners deserve to get that big financial payday. I mean, it's a hard business to run. You're supporting small business in your community. But, yeah, I mean, my job is sourcing business, you know, going out looking, finding good MSPs. Makes perfect sense.

[00:02:40] And the reason I ask you is that we baseline. We're going to have an open conversation while it's going on. So, you've been really consistent around the fact that MSPs should fix their operations, whether or not they plan to sell. It's a message you've been delivering pretty consistent. Give me your version of that. Like, what's the concrete version of your message to MSPs about how they should fix their operations? Yeah. You know, a lot of – and there's no fault at this. A lot of businesses are being read by technical people, right? These are people like, you know, you and I, back in the day, we love tech. We had some customers.

[00:03:10] All of a sudden, we hired some employees. Now, all of a sudden, we have a business. They should get focused on running it now like a business. Like, think about, you know, managing it from the financial perspective, making more financial decisions, not technical decisions. And that does come along with some operational maturity, right? Think about who's filling what role in a company. You know, a lot of these businesses, the founder is wearing multiple hats. They're the account manager. They're the business development, you know, growth leader.

[00:03:40] They're running the business. They're doing finance. When I say work on operations, start hiring and filling those roles. You should be able to point to someone and say, that person's full-time job is nothing other than finding new business for us. I would get really serious about that. Are you and your clients tired of the time-consuming ticket tennis of coordinating meetings and help desk calls?

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[00:04:34] Visit TimeZest.com slash MSPRadio and use the code MSPRadio to get 10% off your first year of TimeZest. You've sat through a lot of diligence at this point. Yeah. You're deeply old. What's the gap you find, like, most often? The thing that repeats over and over again and the thing that almost commonly kills deals? A growth leader in a company is the first gap. I wouldn't say it kills a deal, but that's the first gap.

[00:05:01] Like, you know, when you're acquiring a business, let's just face it, the founder's going to end up with a lot of money one day when the deal closes. How motivated are they going to be to keep going? They could leave. And that's the sales engine. So that could be a gap. But something that's been known to stop a deal dead in its tracks is just when we're doing a quality of earnings check, like, we're really validating the EBITDA and we start finding things.

[00:05:27] Like, maybe there's just some issues in the books that didn't get cleaned up and we start uncovering that. That can do it. And, like, look, it's more than just quantitative. There's a qualitative. We want to do customer checks. We want to make sure the customers are happy that they're going to renew. You know, we're buying companies to hold them forever. We're not flipping them. We need them growing in a compounded rate. If you lose a client because they're unhappy, that's been known to kill some deals, too.

[00:05:56] You got to have some good businesses, clients. Now, one of the things you've said is that a lower cash offer with good terms beats a higher number or the long earn out. So when you're, like, walking an owner through an Evergreen offer, like, the particular percentages that are common, like, help me through what that looks like. Yeah, deal structure, right? Right. There's a common deal structure that Evergreen starts with. We like to start with, you know, we look at what's, you know, we come to an agreement on what EBITDA is with the seller.

[00:06:25] Like, we've analyzed the books. We've had meetings. We've done all the adjustments, right? Put expenses back in. Here's the number. Okay. We're going to value it. We like to pay 90% of the enterprise value in cash at close and tie the other 10% to a one-year earn out based on 15% year-over-year EBITDA growth. That is, like, our default go-to where we start.

[00:06:51] And then depending on how things go and negotiations go from there, you know, then it's, okay, a seller might be asking for more. Then we might start adding a little more structure into the deal. And sometimes, you know, equity can come into play. We consider it the most valuable form of currency.

[00:07:11] And, you know, if someone wants to have equity in the longer run with Evergreen, like, and that could be a good way to protect your investment because time value of money, right? Inflation and everything erodes away the value. This is a good way to protect that and create that generational wealth. Now, when you're tied to a payout schedule like that, the common pushback here is the moment I sell, the seller is no longer in charge of that relationship.

[00:07:38] How do you respond to an owner who brings that up? The moment I sell to you, I'm not in charge anymore, but I'm bound to this. They like it every time. We have a great track record of paying earn outs. We're not doing earn outs to try and trick someone into holding money back. We're keeping businesses forever. We need them growing. So everyone is incentivized to make sure they hit their earn out. We want them to have their money. Plus, we want someone that's told us to be a waving fan. Getting cheated out of an earn out is not going to make them a waving fan.

[00:08:08] We have an 89 MPS with our sellers because they're happy working with us. So I do my best to ease their concerns on that. You know, we can get to that 15% EBITDA growth simply by moving them on to our pre-negotiated terms with vendors. And so much savings comes from that. We can get almost halfway to that. We have an incredible track record of paying our earn outs.

[00:08:37] It's in the high 90%. We're not doing it to play games. We're just doing it to keep a little skin in the game and make sure that this business is, you know, what the seller has said it is. The MSPs getting ahead in security aren't adding more tools. They're getting the work off their plate. Guards consolidates the stack, endpoint, email identity, and then puts an autonomous analyst on top of it.

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[00:09:36] So it doesn't exactly work that way. Alpine has the private equity fund that we invested out of. But Evergreen runs the business. They're an investor. And it's an equity fund. And one day they're going to want their return. And we're working on what that next. We're working on what that next investment is going to look like. We're looking for a long-term investor. It could be Alpine again. But we will retain ownership.

[00:10:04] And the live forever will happen. You know, we're very inspired by Berkshire Hathaway and what Warren Buffett and Charlie Munger have done there. We're very serious about that mission. So when you, and obviously I'm not asking you to do it here, but for somebody who gets into that price, are you giving them exposure into the back-end terms? Like the understanding of that? If they go that far down, do they get to understand that? We do. It's a more confidential deck. And we're happy to expose that when we're in an NDA with someone.

[00:10:32] And if anyone ever, we will dive into the mechanics of what happens behind the scenes to put their concerns at ease of, no, no, no, we're serious. Like, we own these companies. We're not selling them. And while we do have capital backers, we still call the shots. I noticed I didn't ask it for me. I'm saying, is that part of the process there? It is. It is. Absolutely.

[00:10:57] When we're in the offer stage, before they sign, we're exposing that information. Makes sense. Now, back in 2023, you told sellers to ask any buyer three things. Yeah. Right? You said, what's the long-term plan? Yeah. Do you have a playbook? And what changes in the first 60 days? Yeah. Yeah. What's Evergreen's answer to those? Okay. Yeah. I mean, our long-term plan is to grow our businesses. We want to double our businesses every five years.

[00:11:28] And, you know, what we're looking to do is if we can get 15% yearly growth on EBITDA every year, that'll double in five years. So, I'm going to make a little bit of an argument against Evergreen. Yeah. Hold on. I want to hear your take on it. So, when Evergreen buys, like, the best MSP in a mid-sized market, right? That firm then is optimizing for bigger customers. Yeah. Right? And its community relationships may fall down, like the smaller customers.

[00:11:55] Then three techs and a salesperson go off and form an MSP. Yeah. So, in a way, you may not necessarily be consolidating a market. You might actually be refreshing it. Right. Like, so, in a way, does this model manufacture its own competition at the small end? Like, give me your thought on that. I guess it could. I haven't heard any stories where that's happened. Okay. But, yeah, I mean, hearing that, I guess that could happen.

[00:12:22] Um, in a very similar way of answering this, I get asked all the time, like, Craig, you're here in Cleveland. You guys are already in, like, three companies here. What are you going to do? You get a fourth one. I mean, we've got four in Chicago, three in Pittsburgh. And it just seems to be the same answer we've always had in this industry. There's plenty of business to go around. We find that they rarely run into each other.

[00:12:46] Um, even when they're very close, like, that just hasn't really presented itself. I do think there's just so much business to go around. Now, you're a guy with a ton of experience in this industry. And I want you to actually, like, take off your M&A hat for a moment. Yeah. And put your industry advisor for the owner who's not selling. The owner who's like, you know, because best-in-class independents have cleared 19% EBITDA. Yeah. Six years running.

[00:13:12] So what do you think that, looking at the market, what should that owner do different in the next 12 months? That owner should be leveraging AI to scale more. I'm sure there's always room for improvement, right? There's always some manual process. There's always some blind spot in the business that could be exposed with AI. I would enable my account management team with it.

[00:13:38] Like, we've been talking forever, the VCIO role, the true advisor role. At the end of the day, I mean, I meet companies of all sizes, all numbers, high percentile EBITDA growth. That VCIO is always tough because you've got 50 different clients of 50 different verticals. How can you have a meaningful conversation with every single one of them? AI is going to enable the account manager to have a better discussion.

[00:14:04] And that discussion is going to be more, we're enabling technology in your business so you can grow and compete and be resilient. And here's what we're going to do instead of, hey, we enabled you with this technology and we did this and we charged with this. Like, is there anything we'd be doing better? Like, that's what I would tell that company. Like, there's still probably room for growth there. And that's where AI is going to be that thing that kicks them into that. Well, that's the action.

[00:14:34] Craig, always fun to catch up. Really appreciate you joining me on the show. Thanks, Dave. The hardest part of running an MSP? Doing it alone. The Small Biz Thoughts community has been the room where independent operators compare notes for nearly 20 years. Real peers, real numbers, real answers from people running businesses just like yours. Pull up a chair at smallbizthoughts.org. Interested in advertising?

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