Josh Kotler | The Private Equity Secret that Reshaping the MSP Industry

[00:00:09] Hey everyone, welcome to the latest installment of MSP Business School. As always, I'm Brian Doyle and we've got a returning guest joining us today. We've kind of hit that point now where we've done so many episodes, we have to invite people back and that's fun for me because sometimes I get to catch up and find out what they've been up to since the last time we got together and how things have changed. So I'd like to welcome everybody today to our guest, Josh Koulter. Josh, how are you today?

[00:00:37] Josh Koulter I'm doing great, Brian, and it is great to be back. It's fun to catch up with you and I love the format, right? We're sharing some good information. It's conversational. I think you do a great job with this. I'm happy to be back. Josh Koulter Listen, I will say this. We all got to be a little jealous of Josh today because he just got back from some European vacation time and there's nothing better than being in Europe in the summertime.

[00:01:02] Josh Koulter Except we did catch that heat wave and a lot of hotels with no air conditioning. It was a little rough. Josh Koulter I didn't think of that. My daughter did some time in Barcelona last summer for school and that air conditioning was the thing she complained about every day and it wasn't nearly as hot as it was this summer. Josh Koulter But no, it's been terrible over there. I think they're going through like a second wave right now.

[00:01:27] Josh Koulter Anyway, I capped off my vacation with some extra time in San Diego. So that was a nice climate reset for me. Josh Koulter Very happy to be back though. Josh Koulter Yeah, 100%. Josh Koulter Actually, as we're recording this, I head out there next week for Channel Con, which will be in the rear view listener by the time you get to hear this. But I'm excited to go out there. It's such a fun city, especially from a kid from the East Coast. It's a totally different world over there versus what we have over there. Josh Koulter It's awesome.

[00:01:57] Josh Koulter It's awesome. Josh Koulter But anyhow, Josh, for listeners that may not know you, why don't you share a little bit about your background and then that'll lead up to what you're doing today? Josh Koulter Sure. So I am a longtime MSP operator, just like most of your audience. I built an MSP in Miami, which is where I am today, with an office in Tampa. I built what used to be, and I think still is, a best-in-class $7 million revenue.

[00:02:26] Josh Koulter And in 2019, I made the decision to partner up with Compass MSP and sold Western Digitech to Compass. We closed at the very end of the year, took a few different roles at Compass, including interim CEO for a while, but really focused on M&A, growing the business through acquisition.

[00:02:52] Josh Koulter And while there, I led four acquisitions. We tripled the size of Compass MSP. Josh Koulter And I left in, I guess, mid-2022. Took a little time off and enjoyed the sort of fruits of selling your MSP and 20-plus years of running my MSP. Josh Koulter But I found out that I've got MSP in my blood, and it's a tough habit to shake.

[00:03:18] Josh Koulter So later in 2022, I ended up buying, along with a partner, a Washington, D.C. MSP. Josh Koulter And we ran that for a few years, improved that MSP before we eventually sold that. Josh Koulter Now I'm partnered with Axel Reed Capital, which is a great private equity partner, and we're building a new MSP brand, largely through mergers and acquisitions. Josh Koulter So we've acquired four MSPs on the East Coast.

[00:03:47] Josh Koulter We're about to close on our fifth. Josh Koulter And, excuse me, expect to do two more by the end of this year. Josh Koulter So we're really starting to scale. Josh Koulter Yeah, it's, you know, M&A isn't always the right way to grow, but it's the fastest. Josh Koulter So we try to grow acquisitively, and we really lean into organic sales investment and results.

[00:04:15] Josh Koulter And, you know, happy to say that our organic sales team is driving a lot of growth now, so very exciting. Josh Koulter And that's such a critical part. Josh Koulter You know, I've had Abe Garver on the show a few different times as well, who I know you know very closely also.

[00:04:30] Josh Koulter And, you know, Abe's talked about how that organic sales team, if you're an MSP that can show that you can grow sales beyond owner-led and have that engine, there's a valuation multiplier that comes with that, because that's really what the, you know, where the M&A excels, right? Josh Koulter Sure, I mean, look, they're a lot Josh Koulter But it's bolting on and then expanding. Josh Koulter There are a lot of things that contribute to the way we value the MSPs that we acquire.

[00:05:01] Josh Koulter The right customers priced. Josh Koulter I won't say priced the right way, but priced in a way that aligns with how Canyon Point goes to market. Josh Koulter That's really important. Josh Koulter Great people, right? Josh Koulter A passion for the business. Josh Koulter At this stage of our growth, we're really focused on acquiring MSPs that are, you know, led by great operators that want to stay in the business and want to lean into Canyon Point. Josh Koulter Maybe two, three years of participating in the Canyon Point journey.

[00:05:32] Josh Koulter That's important to us. Josh Koulter At this stage, later, maybe four or five acquisitions from now, we'll start to acquire some businesses with owners that want to just more or less exit and take six months, transition and exit the business. Josh Koulter Other valuation levers are, right? Josh Koulter Obviously, you know, repeatable high EBITDA business is something that we value. Josh Koulter But yeah, organic growth is great.

[00:05:59] Josh Koulter It's nice to know that you're acquiring the right customers at the right price and, you know, a company that can deliver even more in the future. Josh Koulter It definitely tamps down risk, right? Josh Koulter However, if you're not growing, which is sadly, I suppose, the case with most MSPs, we still offer excellent valuations.

[00:06:23] Josh Koulter Because we believe that and I think this has proven that we can inject organic growth into the businesses that we acquire through our process and our leadership. Josh Koulter I think that's, you know, a critical statement because a lot of MSPs look into themselves and say, am I even acquisition worthy, right? Josh Koulter Do I have the stuff to attract the right buyer and make the kind of exit that I may want? Josh Koulter And obviously, everybody has a different idea of what the right exit is for them.

[00:06:52] Josh Koulter But I think there are some folks that are wary when they get to that stall point. Josh Koulter And stall point listener, from my perspective, is the owner-led sales has reached the end of the Rolodex and we haven't figured out how to grow a new salesperson. Josh Koulter Yeah. Josh Koulter And most of our customers have now taken on the broad, you know, portfolio that we provide to them. Josh Koulter So where do we see the growth coming from at that point?

[00:07:14] Josh Koulter And I've heard some MSPs when I speak to them at like conferences and in different places that I attend say, you know, I'm afraid that if I stall, I'm not going to be looked at as valuable and it's going to cost me money. Josh Koulter I'd love to get your take on that, Josh, of where, you know, a company like that, which is probably more the majority than the organic sales engine ones. Josh Koulter Yeah. Josh Koulter You know, what does that mean to an owner who might be contemplating an exit? Josh Koulter And what's that look like in the world of Canyon Point? Josh Koulter Look, it's better if you're growing.

[00:07:41] Josh Koulter But I think it's important for MSP owners to really assess where they are, how they got there, and whether their current approach or strategy is likely to yield more of the same or result in actual improvement. Josh Koulter And I got to tell you, you know, you've seen this too, I'm sure. Josh Koulter Everyone is going to do great things over the next year.

[00:08:11] The thing you hear over and over is, yes, this is our performance, but next year is going to be different. Josh Koulter Yep. Josh Koulter The reality is, right, it's not probably going to be different. Josh Koulter And that's not a knock on the MSP operator. Josh Koulter We all get to a point where, you know, our skill set and our experience no longer allows us to grow.

[00:08:33] Josh Koulter The thing about owner-led sales, you know, if you have a growing MSP, let's say you're able to add, I don't know, $40,000 a year in recurring revenue through new clients. Josh Koulter You know, in years, one, two, three, four, five, six, that's great. Josh Koulter But when you get to, say, $3.5 million, $4 million in revenue, there's some natural churn that happens, right? Josh Koulter Customers get acquired. Josh Koulter Customers go out of business. Josh Koulter These things happen.

[00:09:02] Josh Koulter You know, you drop the ball from a service standpoint once or twice, you lose another customer. Josh Koulter Now, all of a sudden, you're still selling $40,000, but that's just allowing you to tread water. Josh Koulter You're no longer growing. Josh Koulter 10K, 20K, whatever the number is there. Josh Koulter So, and it also becomes a lot of larger numbers. Josh Koulter The annual year-over-year increase becomes diminished at that point. Josh Koulter 100%. Josh Koulter And, you know, so now there's a new requirement.

[00:09:29] Josh Koulter The MSP has to bring in professional salespeople and run a process, Josh Koulter A department that they've never run before, and that's got risk. Josh Koulter So, the thing that I think MSP owners need to balance is they've got to be realistic and just say, hey, is my company today the thing that's going to grow and, you know, create enterprise value for me?

[00:09:54] Josh Koulter Or am I better off taking my equity and making it a part of another business that is growing, that has professional, proven MSP management at the helm, and then just sort of attach my equity to theirs and enjoy the ride? Josh Koulter And I think for most MSPs, and you maybe have seen me say this at events or on LinkedIn or other podcasts, I'm someone who believes that most MSP owners should consider selling in the near term, right?

[00:10:24] Josh Koulter There's a lot of change happening in our industry right now. Josh Koulter There's a lot of change happening. Josh Koulter 100% and a lot of MSP owners are in their 50s, early 60s, and it's just like, you know, are you sure you can adapt? Are you sure you can make it through the next five years? And are you sure it's going to be meaningfully better? Josh Koulter And I think if you take a sober look at your business, in a lot of cases, the

[00:10:49] answer is going to be, no, it's time to hitch my wagon to a larger scaling platform business and de-risk, right? Take a bunch of cash at close, right? Sort of set yourself up for retirement, but also share in the upside because I'm going to roll some of the sale proceeds into this new company and really be an investor. Josh Koulter An active investor in that business.

[00:11:17] That was the right answer for me, probably. I mean, I guess we'll never know. I made the decision to sell. My business was growing, healthy growth rates. I had no doubts that I would have a $15 million revenue MSP in a matter of years, but I assessed the risk. I felt like there was some risk, economic risk. You know, there was some tax risk.

[00:11:45] There were risks around employee retention, key employee retention. So I made the decision to sell and it worked out really well for me. You know, when you consider the tax efficiency of a sale versus ordinary income derived from running your MSP. Basically, I got paid for 12 to 15 years of my current level of success in a lump sum. Right. It was pretty exciting. And going back to the demographic you were outlining a few moments ago that, you know,

[00:12:15] that MSP owner that's in his 50s, maybe early 60s. Yeah. I was 50. So in my mind, I did the math and I said, this is basically like getting paid at a very high level for the next 15 years kind of takes me to my retirement. But you don't have the risk of downturns. You don't have the risk of, you know, the employee losses. You don't have the risk of... You take that money, you diversify it. I bought, you know, real estate. I bought equities.

[00:12:43] As the owner, you don't have to stay as on top of all the winds of change that are happening too, because now you're part of a bigger group where you'll have your part you got to stay on top of, but you don't have to stay on top of it all. You don't have to stay on top of it all. You don't have to deal with the, you know, the financial ops, right? The billing, the collections, the... You don't have to, you know, it depends on the role you want going forward, but you get to focus on the thing that you love.

[00:13:12] And in my case, I found something totally new. I'd never done M&A. Yep. Right. Actually, I did acquire two small businesses along the way, but not real M&A. And I found that, you know, I had this passion. I still had a passion for the MSP business. I just wanted to go at it from a slightly different place. So it's been nothing but positive for me. And, you know, one of the things that drives me nuts, you know, you see this on LinkedIn

[00:13:41] more than sometimes in conversation, but there's this antipathy in the industry. Not by everyone, but by a pretty loud and fairly large group around private equity in our space. And I just shake my head because private equity, private equity is not perfect, right? We know that.

[00:14:04] But private equity is the reason that we have this tremendous liquidity and this exceptional enterprise value in our industry. And without private equity, I mean, look, private equity has injected billions of dollars in the form of enterprise value into this industry. It's made most MSPs much more valuable in the process.

[00:14:29] Yes, it's made it a little bit more challenging for those that were hoping to buy on the cheap and do it more private. You know, and that's where I think some of the, you know, that comes from because it's definitely changed the game for those that had good, you know, good borrowing power or leverage, you know, in their own MSPs. And were able to, you know, buy out their competitors has changed that game. And I think some other people are just not sure where they fit within it, too. You know, it's a much different beast than saying, hey, I'm going to go sell to this guy.

[00:14:58] I've known through the industry for the last 10 years and will join forces and move forward. It's a lot more unknown, at least at the onset, you know, when you start looking at it. It's funny that you say that because the first company that made an offer to buy Western Digitech was exactly what you described. I don't think we knew each other for 10 years, but, you know, we knew each other. They were based in North Florida, very big, successful, privately held MSP.

[00:15:28] And they made me an offer. And frankly, the offer kind of blew me away. It was unsolicited. They just one day pushed an envelope across the table at lunch. And, you know, I was it really got my wheels turning. But what I realized is that they made me a good faith offer, but they they offered me half of what I eventually sold for.

[00:15:53] And not because they were bad people trying to take advantage of me, but that's all that's the only way they could or that's all they could pay for for the business. I mean, there's only so much that they can pull out and still be able to operate and then operate and integrate effectively. And, you know. So you're right. I mean, private equity has created a much more competitive market for MSPs.

[00:16:18] And, you know, I got to tell you, whether you run a process or hire a banker, which is probably the right decision for some people. The offers you're going to get from private equity backed brands are all going to be very close. Right. And but also very high. Right. Right now, the market is quite healthy. I don't think it will be. All that much longer. Right. I mean, we see like interest rates are not coming down.

[00:16:49] So there's like entrenched high interest rates are not good for valuations. We are seeing some brands that are struggling. You know, they've grown to 150, 250, you know, 400 million. Now they're struggling today. So I think there's a chance that investors, you know, maybe let a little air out of the balloon.

[00:17:15] And then we have this demographic thing where we have, you know, thousands of MSP owners that are at retirement age and they're looking to transact at more or less the same time. So right now, like this is a great time to sell. Right. Because it was only going to get more crowded over the next five, six years just naturally because of, you know, if you started your MSP in 2000, you know, we started in 2000 when we had our MSP. So you're 25 years later now. Yeah, exactly. It's just the time is there.

[00:17:43] And, you know, the other, you know, then there's the other forces. You know, there's new evolutionary processes that are being built into the MSP fabric, right? AI is an interesting animal without getting on the hype engine. It is going to fundamentally, though, change kind of the approach model. And a lot of MSPs will not be able to adapt. I think it's going to separate the wheat from the chaff in a bunch of unexpected ways.

[00:18:10] I think we're going to see some really good MSPs today, true best-in-class MSPs today. They can't make the transition. And this is going to be, you know, if you can't make the transition, you're going to lose a ridiculous amount of value.

[00:18:32] And we'll see some small MSPs that we never really thought of as being potential best-in-class businesses that are going to make a huge leap. But very few. Very few. Another thing that, you know, to go back to the PE story a little bit, I think it's also a lot of the noise that you hear on LinkedIn and all that is coming from the MSPs that are not separating themselves from the pack as well.

[00:18:56] You know, the one challenge in this industry, from my viewpoint, has always been, you know, the lady that cuts my hair needs to get a license. But to be an MSP, all I had to do was give $150 to the great state of Connecticut. And now I can touch anybody's data. And, you know, it allows for many people that probably shouldn't be holding themselves at as MSPs. And I know that'll come with some criticism to all of a sudden become MSPs.

[00:19:22] And it's tough to compete sometimes when you don't have the skills of some of these larger, you know, enterprise MSPs when you're going after the same customers in your local hometown. When I was competing, leading MSP, rather leading Western Digitech in 2019, 2018, you know, the old days in Miami, major metro area, there was no private equity platform in my market.

[00:19:52] Not a single one. And so I was competing against lesser MSPs in almost every case. It was easy. If I had to compete in Miami today, geez, Miami, there's like seven private equity-backed brands operating in Miami. And because of their scale, they can offer more. They could charge a little bit less. Not much less, but they charge a little bit less. They've got 24-7 nailed.

[00:20:22] They just have so many more capabilities. Their marketing, their sales is all professional. And it's just a tougher. Like, it's going to get tougher from here for independent MSPs. Some will carve out great niche positions, and they're going to do just fine. So I'm not trying to scare everybody away from operating independently. I think it's the realities of where we are in a maturing industry.

[00:20:47] You know, when you think about it in the big picture, the MSP industry really, I mean, we all have different target numbers. But I bought my first monitoring system in 2002, so it's the one I use at that stage. You know, it's only a quarter century old. It's still kind of finding its way. You know, you think about how long the automotive industry has been in play.

[00:21:05] And, you know, that comparison of people are coming into it and this evolution, it's becoming one of those adapt or die situations more so than ever because the adaption is much faster than it was earlier in our cycles. I think early on in the automobile industry, I may be off by some degree here, but I think there was something like a thousand companies that were producing automobiles in the United States in like 1912, let's say.

[00:21:34] Again, could be off. And then the industry consolidated to what, seven or eight companies? Yeah, I mean. And then the consolidation continued, right. And if you're looking for imports and everything, you're probably still talking about under 15, 20 labels, right, that you can choose from. And it happens in every industry. This is a natural sort of progression, and it's happening in the MSP industry.

[00:22:00] Now people need to decide, hey, do I want to sell to Ford or GM and be a part of that success story, or do I just want to sort of peter out? Exactly. And, you know, I think that's, you know, we're getting near the end of our time, but I do want to spend a little bit of time of, you know, I'm an owner, I'm considering this. What are some of the opportunities for an owner coming into a PE-backed organization? Because I know a little bit of it is timing, you know, where their seat at the table can be.

[00:22:30] But there is opportunity even for owners to kind of grow within this process as well. Well, look, I certainly did. I think, so at Canyon Point, we have, we're relatively early in our journey. So, you know, the positive there is there are some nice roles that are available. That's always exciting for MSP owners that really want to participate.

[00:22:56] And it's, you know, that's where the best opportunity for a strong second bite comes from, right? The earlier that you are in a strong strategy, the better off you're going to be. Eventually, those executive tables, our leadership roles will be filled. But at the same time, Brian, look, the cream rises to the top.

[00:23:17] So depending on where you are in your journey, I mean, we have a couple of our partners at Canyon Point that, you know, became a part of our company that are in their 30s and early 40s, right?

[00:23:33] Their plan is to hit a home run at Canyon Point and move on to another probably private equity backed brand or maybe stay with Canyon Point as it eventually is acquired. And now sort of follow a bit of a corporate path. But that one loaded with equity, you know, equity in the form of options. And that's exciting for them. Private industry can provide. Some just sort of find their sweet spot.

[00:24:03] Maybe it's maybe they just want to deal with high end security from an engineering standpoint. They get to do that. Maybe they want to lead AI enablement teams. They want to leave all that other stuff behind. Right. And just focus on what their passion is. So I think different MSPs have different roles available. And, you know, it's you sort of go out there and you find the MSP brand.

[00:24:29] It's led by people you like and trust and, you know, has the strategy that matches your own sort of worldview for the industry. And then you find a role. Hopefully all that stuff lines up and it's a great landing spot. Well, I want to give you the opportunity to share any other closing thoughts you have before we wrap up today. So I will pass the torch to you. And if you've got any message you want to share, I would love to hear. Look, I'd be negligent if I didn't put in a plug for Canyon Point.

[00:24:56] We will be putting your URL in the show notes as well as your direct LinkedIn listener. Appreciate that. And any listeners that have an interest want to know more. Look, I've been in your shoes. I've been doing this big brand thing for about six years now. I'm happy to share what I know and sort of no strings attached. I can help you understand your valuation, give you some advice on what to do next. Happy to do it.

[00:25:22] But specifically at Canyon Point, we continue to look for eastern time zone MSPs between three and, say, 12 or 15 million in revenue. You don't have to have a great organic growth story. You don't have to have a great net income story. But we are looking for MSPs that, generally speaking, have good customers.

[00:25:48] They go to market at a price point that would be considered strong. And they've got a great team of people that can be a part of the Canyon Point team and help us drive success. So if anyone out there has an interest in learning more, please reach out to me. I could have a conversation and see if there's a fit. Awesome. So, you know, listener, if you're definitely curious, I suggest you do that at a bare minimum. Follow Josh on LinkedIn so you can get kind of some insights into what that world looks like through his natural posts.

[00:26:18] You know, that's how Josh and I met each other. And, you know, it's a really great way that you can, you know, kind of learn a little bit about what this feels like before you, you know, before you may be ready to dip your toe in the water. Certainly if you're at that stage, reach out to Josh. Josh, even if you think you're a couple years away, that's a great point because, you know, some people legitimately should take a couple years to get their business ready or even get their personal sort of financial framework built and ready.

[00:26:48] But, you know, it's more time you have to plan, the better exit you'll have. Josh. Happy to help. I really appreciate you joining us again today. You know, I always say this. There's some folks that I love to have come back at least once a year and share kind of the changes and updates. And I think you fall into that category. So hopefully we'll be able to do this a third time. I enjoy this. It's always great to talk MSP.

[00:27:15] So and you get it as much as anyone else out there. So this has been great. I think it's the gray hair, Josh. You know, we both lived in some format. We were both operators in our world. And then I took the vendor path. So, you know, I'm on the dark side. You're the one helping give money. You're not on the dark side. We need vendors. And, you know, I wouldn't complain about that gray hair if I were you. No, no, it's nice. Could be worse. All right, Josh. Well, really appreciate you taking some time, sharing your wisdom as always.

[00:27:45] And I look forward to seeing you out on the road and doing this again in the near future. Absolutely. And enjoy San Diego. Will do. Take care. See you, Brian. Yep. Bye.