The New Way to Be Acquired Through Equity Partnership, With Dan Ruhl & Mitch Morgan

Welcome to the connecting it podcast. I'm your host, Dan Thomas Shefsky. And with me today, uh, we're today we're talking about the M and a and the MSP space, and I've got with me CEO, Mitch Morgan of new charter technologies and Dan rule partner of oval partners, guys. Thanks for being on with me today.

Yeah. Thanks for having us join. We appreciate it. Thanks Dan.

Yeah, guys, this is a great topic, you know, M and a, I mean, we're hearing it all the time now in the space. Um, but I want to get to know a little bit about you guys. So, um, Mitch, let's start with you. You're the CEO of new charter technologies. That's go through you a little bit about yourself and, uh, what, what you're doing today.

Yeah, thanks Dan. Um, so, uh, new charter technologies is a private equity backed, uh, organization that has been around for a year and a half. Now, now we did our first transaction, brought the first company into the mix in September of 2019. Uh, subsequent to that, we've added nine additional companies and we have one more company that we think we're going to bring into the, to the, to the mix, um, next month. So, um, we've got 10 companies with a total revenue run rate of almost$70 million in MSP top-line revenue. And, uh, we've been able to put together, I think, a scenario where, um, the B the business owners or the leadership team, um, and we're, we're, we're building out something that the industry has not yet seen. And we'll talk about that today in terms of what we think some of the unique aspects are, but we're well on our way toward building add, we think a very solid national platform of MSPs.

Great though. That's this is going to be a great topic. And Dan wants you to talk a little bit about, I know you're the partner at oval partners. Uh, why don't you tell us a little bit about yourself in oval partners?

My name is Dan role. I'm a partner at oval partners, and, uh, my background is in private equity and investment banking. And, uh, also in running a business backed by private equity for a while. So I think, um, you know, I've been able to kind of cover all basis that, uh, surround, uh, the investment side of this. And, you know, I've learned a lot about what, uh, really resignates when an investor partners with a business owner and, you know, th the difficulties of that partnership, if, uh, interests aren't completely aligned. And so we're, we're thrilled to be partnered with Mitch and partnered with a new charter and building out what we believe is, uh, a very unique way of approaching the, the MSP market.

Yeah, that's, let's get right into this. I mean, that's, that's this, this has got everyone probably wondering, like, what are we going to talk about? How is this different? Uh, so let's get right into that. How is your guys's solution, uh, different from other investors in buyers in the MSP space?

Absolutely. Um, so what we do completely differently, I'll separate into two areas first, the financial side, and then the operations side. So on the financial side, when we look at investing in a business, we, we have two steps to our transaction. Step one is similar to most transactions where we look at putting a value on the business. And, uh, we go ahead in, and we, we, we pay that business owner that valuation, but step two is where we're different. Uh, the business owner has the opportunity in our initiative to reinvest a substantial portion of that, if they would like into the new Treader holding company and most differently into the exact same class of shares that we have as investors and in doing so, the business owner, um, fully participates in the equity appreciation that's associated with the growth of our business. So as we, um, bring in new partners, as we, um, build the size of the business, we build the value of the business over time. Um, there is, uh, that business owner fully participates with us as the investor in that financial transactions. So, you know, most of our owners that are considering this, um, are aren't even sellers. They see this as a better financial alternative for them, um, in staying in the business on the second side, um, on the, on the operation side and Mitchell get into more of this later on the operation side, uh, we believe in an equity partnership in a service industry like this versus a buyout. And again, our investment philosophy of having that owner reinvests directly aligns with that partnership where that business owner, uh, continues to run the business. They're running that business name stays the same, the, the way people are paid, the, um, culture of the business and the way they handle their customer relationships does not change in moving into this initiative. So, um, you know, all the owners share best practices. Um, you know, new charter will share a lot with the business owners and bring value, but the fundamental premise of this is nobody knows how to take care of their people or their customers in that local market better than that business. And that's what we're bringing into the partnership.

This, it sounds like a great, uh, a great organization that you guys have got going in a great way. I mean, I like what you said. Um, you know, it's not like an MSP owner that's just looking to get out. I mean, it's an investment for them, and I think that's a really cool strategy.

Thank you. You know, w you know, again, we, we, we see this, you know, many of the owners that we work with in the MSP market, you know, are in their thirties, forties, fifties, um, these are, these are individuals that fully believe in their business fully believe in the industry, do not want to do something else. Um, but they, they see the opportunity here to participate in this consolidation and partner with other business owners in quite frankly, just, you know, they're, they're more invigorated and see it more as

The beginning than the end with, with our initiative.

Yeah. So let's, let's get into this. I mean, we talk about the new charter side of it. So what new resources and ideas does new charter bring to the MSPs that they don't already have?

Yeah, that's a great question. Um, you know, th th there are a number of dynamics that play here, um, you know, first, um, this is a very thin holding company structure, um, not a big corporate ivory tower. There's not a big business that people are kind of getting merged into. There's Dan mentioned that they, they, they continue to operate and run their business as they have before. Um, as you know, and as I know from our work within the MSP channel, is there a places where a lot of MSPs could use help or could work together, um, to be able to, to build some scale benefits? Um, one of those is, is sales and marketing. Um, as an example, we've hired a director of digital marketing. That's probably more senior than any individual MSP would hire on their own. And, um, she is implementing a enterprise wide instance of HubSpot for inbound marketing to generate leads. Um, we also have a pretty sophisticated SEO approach that we take to generate leads as well for a lot of MSPs growth in and top of funnel and generating leads is really important. Um, we have a sales cycle huddle every other Friday with sales reps, 18 of them from all across the platform, and we share ideas and practices and processes. And so it's been a great way for us to ring the bell together and celebrate success and, and, and build additional top line revenue. Um, we've also hired a dedicated recruiter for a lot of MSPs. You'll finding those resources as they grow is, is really a critical success factor in is really at a premium. And so we think it's a nice cost savings vehicle from going outside recruiters, but we could also have a volume of, of those placements that we take care of internally. And as a result of that, we're able to bring in the right type of people to fit into the culture of these organizations. So those are some examples of some centralized services, and there's other things that we'll talk about as we go. But what we're trying to do is, is bring to bear, um, centralized resources that offer opportunities on an opt-in basis, um, for these operating companies, which is what we call it, the, the businesses, the, the, the operating businesses for them to be able to participate in achieving some benefits from those kinds of those scale opportunities. So,

So as an MSP, you know, I, I come in and I'm a part of the new charter. Are you finding that the owners that are leveraging like the, the recruiter or like the centralized marketing, are they finding now that they're, they're able to scale faster? And like they're seeing more growth inside their MSP. I liked that they get to keep their, what makes them unique, um, and all of that, but are they now able to see success even faster with these, you know, shared resources that you guys are able to bring into them?

Yes. Um, you know, we've, um, each of our companies that has come on board is growing at a faster rate than what their historical levels have been, um, in terms of MRR last year, going to COVID year. Um, we grew our, our MRR based by 21%, um, the first quarter of this year followed suit and was even at a, at a higher clip than that. So, you know, we think the benefits from being able to utilize those centralized services and some of those practices that are time-tested and, and work, um, have been able to come through with the platform.

Oh, that's great. Yeah. So, I mean, obviously, you know, 2020 was a unique year. Uh, I mean, obviously everyone it's like every conversation we have now, we talk about, uh, you know, 2020 and what the year it was, uh, but looking at 2021, and what's the rest of 20, 21. What are your guys' predictions in the MSP industry? I mean, I know you guys are out here looking and, and trying to build your MSP as well, uh, in doing this, but what are your predictions that you guys are seeing?

Yeah, I'll, I'll start. And then Dan, I'm sure we'll want to also provide his, his input based upon, you know, the view of the investor. Um, you know, I think we're at the end of what I'll call the operating model, um, aspect of the MSP business, you know, for the last, you know, six, eight, 10 years, um, good MSPs have gotten better at being able to patch and update and monitor and manage and support customers in a predominantly, historically a server-based environment. Um, and, and they built phenomenal business models that have been fueled by some really good consulting organizations around the industry. And they, they kind of know how to operationalize a contract and, and make good money at it. Um, and so I think we're kind of coming to the end of that organizational operational maturity model, and what's going to be successful in 2021 and going forward is going to be the ability to successfully enter new markets. Um, security is a perfect example. Um, it's not an easy proposition to stand up a security practice as a lot of MSPs have found over the course of the last 12, 18 months and longer. But once you get that done, then you've got to focus on cloud, and then you've got to focus on data. Then you've got to focus on IOT or vertical markets. And so it'd be, it's going to become extremely difficult for the standalone MSP to be able to do all of those things, to be successful cups and customers are going to spend more money in the future on technology. They're just going to spend it differently and success going forward. And in our opinion is going to be on the basis of being able to enter into new markets successfully. And that's one of the advantages that we see from our model is that, you know, we do have scale and we do have companies that come in with specific expertise that others can benefit from, you know, security and cloud are two great examples of that, that we're able to take across the platform. But then as we enter into new markets that we haven't been into before, you know, we'll be able to pilot that within a particular location and find out what the elements of success are and be able to take that across the platform and every individual operator won't be having to invent everything on their own every single time out. So we think that's a real benefit of our platform.

That's great. Dan, how about you? Is there any predictions you're seeing in this industry that you're thinking that are going to happen the rest of this year?

Yeah. So I'll move over and talk about it a little bit, you know, more from the M and a, and from the investor, you know, side of it. And, you know, the, the, the MSP space, um, was impacted, but not as impacted as many other industry sectors in, uh, during the pandemic during 2020. So, um, transactions, uh, still did close, um, within this industry during 2020, um, unlike many other industries that are out there, but, um, looking forward to 2021, um, that pace is definitely going to continue because, you know, there were in, in 2020 customers lost, um, due to, you know, the COVID situation. There were situations where projects and, you know, the sale of equipment and et cetera, was postponed, you know, during the pandemic period and as a result, you know, the, the, the impact, um, to businesses, uh, wasn't always easy to value or easy to see. So, um, there were a, still a good amount of transactions in this space during 2020, 20, but, uh, during 2021, I think you'll see a lot more, um, because of, you know, again, more consistent performance, at least through the first quarter of this year. And then secondly, everything Mitch just mentioned, you know, we talk about our businesses being decentralized and the owners wanting to opt into new services. We don't have to work very hard to get them to opt in. Um, they are opting in as fast as that new service becomes available. You know, these business owners want to grow. They have a lot of opportunity, but they can't do everything. And, and, and again, that's why this model, um, type of model works for them. And I think you'll see a lot more activity in 2021. And another unique aspect that we see, um, is the business owners continue to have their entrepreneurial focus and that's what makes it magic. Um, they, they, many of them are more invigorated and excited than they were before the transaction. In fact, all of the business owners have stayed in her highly engaged, um, and over has been great. I mean, they they've kept governance. They have the capital, they can great industry resources and know how to make things happen and get deals done. And in see to the, you know, the enterprise value elements that we're all seeking. Um, but Dan and his partners have said, you know, Mitch, you and the leadership team, the owners, the business operators understand the industry. You guys develop the strategic plan. And we came together as a group of leadership team members. And my, and our leadership team is the business owners and me, and we developed our strategic plan for where we're trying to go in one year, three years in five years. And, um, and it's been, it's been a great opportunity for all of them and me to participate in building something that individually wouldn't have been able to do on her own.

Well, this is, this is really informative. And I think there's a lot of MSPs that just don't understand the M and a, like they hear M and a, and they think, you know, I'm only I'm gonna acquire it and I'm out. So I kind of want to ask you guys, what does the channel or me as an MSP owner, that's listening to this need to know about M and a, um, you know, as we look at 20, 21 and beyond, like, what is it that I need to understand about M and a, because I think a lot of people are, are hesitant or they don't know enough about it. Uh, what would your, what would your advice be, you know, in the knowledge we should know.

Yeah. So I'll answer that first and that's, uh, you know, that's a fantastic question. Um, so, you know, business owners spend a lot of time understanding, you know, their, their vendors, understanding their customers, working with their employees, but they also have, uh, another big piece of their life that's tied to their business. And that is, you know, they own it. So there's a big financial, you know, transaction, that's going to be involved someday for their business. And so I would encourage business owners to truly understand, um, all, all the aspects of M and a, and I'll give a few examples of that, um, that you, you could have three situations that couldn't be more different. You could have an M and a transaction where a strategic buyer is acquiring another company. You could have an M and a transaction where a private equity firm is backing a business as a platform company. And they're expecting that company to go out and acquire other companies. You could have an M and a transaction where a private equity firm is buying a business. That's going to fold into a platform company that they already have. So those are all transactions that work, uh, differently for different business owners and might be the right transaction for a business owner. If they fully understand the benefits and the costs of doing that type of deal, our deal is a deal where, you know, things stay more the same, uh, where, uh, it's a deal that tends to work for that business owner that wants to stay in because they're re-investing, and they're going to continue to run their business. That, again, it's, that's a much different transaction and there's, there's good things about it. If you want to stay in a new, you're excited, it's probably not what you want, if, if you're retiring. And so, you know, each, each of those options needs to be fully understood, um, by the business owner it's worth taking the time. So you don't get to that point in your life where you're, you're, you're going to do something, and you don't fully understand, you know, the subtleties of all the alternatives that are available to you. Yeah. And I, you know, one of the things that I think is important as any MSP is looking at the alternatives that are out there, maybe entering into some discussions. Um, when I first put together the transaction that became new charter, um, I actually met with 14 different private equity firms from around the country, um, and settled on oval as the clear favorite. Um, and for a couple of reasons, one is Dan referenced and, and, and it needs to be discussed in a little bit more detail is, um, the, um, the, the

Essence of the upside economics is for the business owners, that second bite of the apples, where it's often referred to, they're going to take some cash off the table. They're going to reinvest in the platform. And, um, the private equity world oftentimes, um, puts the structure together. And it's not necessarily advantageous to the investor, um, to the, the company rolling their equity in, um, in ovals case, it's exactly the same class of shares. They're investing side-by-side with Dan and his partners, and there's no preferences, there's no tricks. It's, it's all straight up on the table and everybody's on the same side of the table. Um, you know, dance partner, John Knoll's favorite word is alignment, and these, these situations are structured so that there's complete alignment with everybody that's participating. You know, another important aspect to what I have found in our relationship with oval is that, um, Diana and his partners, John Dolan, Jake, Ms Rahi, or all seasoned investors that have tremendous decades of experience in the private equity world. Um, when I was talking with some other private equity firms that are a little bit more institutional, um, you know, I couldn't get an appointment with somebody that is as senior as John and Jake and Dan are that handle, that level of experience. And these guys are hands on with our business, offering us advice every month, participating with our partners in, in quarterly planning sessions. And so we're able to really access a high level of expertise about how to build out an enterprise to be able to maximize, you know, the, the success of the business and ultimately the economic impact for all of the investors.

It's is Dan, I want to, I want to go back to you for a second. You know, I know you were talking about, Hey, this isn't for someone who's looking to retire, this is someone that's looking to kind of reinvest in that. So from an overall partner standpoint, is there a certain thing you're looking for in an MSP that, you know, would be looking to be acquired?

Yeah, we, we, we, we do, uh, you know, we really have certain things, everybody likes certain things, but we have certain things that we, that we, we really care about. Um, you know, the first one is, you know, that the reputation of the business, you know, in the industry overall, um, because again, this is going to be a name and a company that's going to be staying. Um, you know, we, we are looking for companies that have, uh, have continued to grow organically. Um, we're looking for companies that are in, in general, you know, 5 million or more in revenue, um, characteristics of the companies that we're looking for, um, you know, higher, uh, MRR, you know, in that MRR growth that, uh, Mitch mentioned earlier, you know, is a Testament to the business, their customer retention rates, um, you know, over time is a big component of, of what we look at and then, you know, as we're going through it, um, we've done this for a long time. So we can, we, we, we get a great sense for is that business owner, someone who is going to be excited and somebody who's going to thrive in this partnering,

Or as the business owner, somebody who, um, just has a difficult time, um, you know, understanding and, and that other people have a different philosophy. And, you know, some things are going to be done differently across the different companies. And so that, that fit, you know, where the business owner wants to stay and invest where they have a personality where they're saying all the time, I just want to get better. I want to learn more. Those are the type of people that really thrive in, and in our environment, we've been able to put together a group of our initial companies that, um, are highly collaborative communicate with each other often. It really is a team with a great culture. And in addition to that, um, high performance, um, you know, our, our average EBITDA across the platform is, is more than 20%, which as you know, from being in the industry is considered best in class. Um, w our, our companies are very well run and, and are led by very good leaders that they collaborate very, very well and share practices with each other.

Oh, this, it sounds like a really amazing opportunity. And I think it's something that it's nice to hear that there's options for MSPs that are looking to go into the M and a process. And it's not always just selling you're out, uh, this really, you know, like I love the fact that you guys are like letting people reinvest, you know, into this and allowing them to grow and it's, uh, allowing them to keep their culture and what's made them successful. I think that's what a lot of people fear. I mean, I guess, is there things that when you guys are sitting down with an MSP, that's maybe looking at it that maybe I hear from MSP is like, I don't want to change my culture and I hear it from you guys. No, we don't want you to change your culture. We want it to stay the same. Is there any common objections or fears that you hear from MSPs that are maybe looking into this process that once they talk to you, they, they feel better about the process overall?

Yeah. You know, when we first got started, um, this, this was definitely an operating model that was very specific and very intentional. And, um, at the very beginning, it was, I don't believe it, it, this is too good to be true. Um, you know, I, I, I get to take some cash off the table, continue to run my business, work together with some other really smart entrepreneurs. And I get to do reinvest into a platform where I'm being treated equally. Um, but what has happened in the 16, 18 months since we first got started is we're, we're implementing exactly what we said we would. And so now people are able to see and talk to the business owners and the operators and see what it's like on the other side. So, um, really the only thing that we've been able to accomplish or that they had to overcome is what's the experience going to be like, what's it going to be like day one, day 30 day 60, and we're day 500 and now, and so people can see what that experience is like, and they can talk to people they're living in every day. And I think that's been beneficial for them as they come in. Yeah. And speaking from, from my end, because I have, you know, the same sort of situation, you know, occur over

And over with the business owner, you know, we're looking for business owners that want to stay are bullish on their business. Their business is growing. So the most difficult part of this is that business owner is always saying tomorrow is going to be better. So it, you know, um, um, it's difficult today for me to move forward with the transaction. So, you know, what, what we're able to do because that owner is reinvesting heavily is show that owner that, um, their, their partnership with us will grow faster and value than, than even their specific business over the next couple of years to come. So that that's for me, the, you know, and working with the business owners that is, you know, sort of the most difficult hurdle to get over is, you know, we are looking for the businesses that are growing are bullish, are excited about the future. And by very nature, you know, that makes it more difficult for them to, you know, make a change and move into a team, you know, and, and partner with a partner with us at new charter.

So I want to ask you guys a question around this is, you know, what's something that you guys are seeing in a successful MSP that maybe someone that's not as successful, or maybe they're struggling, they could utilize to improve their business.

Yeah. That's a great question. Um, you know, obviously good operators in this industry are pretty metrics oriented. You know, we've got a pretty good handle on what we think are the most important success metrics, um, you know, revenue per, per seat, um, seats per contract engineers, or seats per engineer, and some of the surface metrics, you know, typically, um, if we're an MSP they're going to spend 20 to 25% of their revenue in sales general and administrative expenses, it's kind of just fixed. Um, but th the real opportunity for uplift is in service margins. And the other opportunity for uplift is being able to organically grow MRR and, and also to be able to onboard new clients successfully. And some of those processes that we, that we've built, some of the metrics that we've built around that allow us to know what good looks like, and also be able to incorporate processes to automate, um, not just taking care of a client, but getting the client onboarded. So those efficiency metrics are some of the things that we think are important and going after the right type of contract and the right size of contract, and being able to organically grow the top line are probably the three biggest elements that we see.

That's really good information. Um, you know, this has been a really good, I, I'm glad we got to have this conversation. I think that, uh, a lot of our listeners, it's something that I was talking to you guys about in the, in the green room before this is, we hear this conversation all the time. And, uh, I think this is a really cool option. So as we kind of round this out guys, like, what would be your, I always ask someone for their final thoughts and in the final thoughts, if I'm an MSP, that's like, I went through and I listened to this and they're like, this is something for me. Or I want to explore this. How do they get ahold of you guys?

Yeah. You know, I I'll, I'll, I'll, I'll start. And then Dan, I'd like for you to finish, um, my recommendation is take a call, take a meeting with Dan rural. Um, he's got tons and tons of experience in the industry. Um, and it doesn't mean that you're, that you're considering yourself positioning your business to be part of this, but it means you're able to educate yourself. And, um, and it doesn't mean right now either. It's just, it's good to educate yourself on what the options are and what some of the advantages might be. And, and Dan quite frankly, will give you every, every entrepreneur advice on whether or not it's a good idea for them. And so I, I think the next step would be to talk with Dan rule from all the partners, and he can have good direct conversation, 30 minutes or so in length, and, and, and help you to determine if this is the type of thing and what type of thing is best for you. Thanks, Mitch. And, you know, again, um, you know, again, I would, I would echo that, you know, the, the, the key to all of this, um, for business owners is to be educated on alternatives. And our alternative is truly different than any other one that is out there today for the MSP. And so, um, you know, I would love to have a conversation with business owners that have interest in this and business owners just, just want to understand it. You don't even have to have interest in it today, but to understand what we're doing, to understand this reinvestment in these different classes of shares to understand what does it really mean to reinvest in what, how does that reinvestment grow each year and, you know, to really kind of get this and fully understand it as an alternative to staying on there, you know, saying completely independent. So they're informed in their, in their thinking and in their decision-making over the years to come. That that that's really the most important thing. And, and like Mitch said, when we have those conversations, if it's the right time and it's the right fit, that falls out of the conversation. Um, so, you know, my hope is that business owners that have an interest in having a conversation, uh, don't hesitate to reach out to me. And, um, you know, again, we can, we can make sure that if we're the right fit for the, the, the owner that, um, that we move forward with them

Guys, is there a certain site or a website they should go to, uh, what's, what's the best way from that standpoint?

So for, for me, um, it's my email address addresses dan@ovalpartners.com and the best, the best thing for me is if, uh, if a business owner, you know, just reaches out by email and gives me a few dates and time that would work for them, and I'll get right back to them and schedule that time. And Dan is very responsive. And if they want to look even further at some of the, um, operating elements to it and case studies of the companies that have come on board, I'm sure they may know some of them, they're pretty high profile in the industry. It's a new charter tech.com.

Great guys. I appreciate it. Mitch, Dan, you know, this has been a really informative for myself as well. I mean, I know our listeners are going to get a lot out of this, and, uh, I'd love to have you guys back here later on this year, and to see what happened in 2021, and like how this year kind of exploded for you guys in the growth that your partners are seeing as well. So I hope you guys would be willing to

Come back. That's great. Dan, we'd love that. We'd love that. Thank you so much.

Appreciate you guys. And look, this is, that's the kind of thing I T podcast for today. So we appreciate you taking your time to listen. If you would go on iTunes subscribe, and if you get the opportunity to give us five stars, uh, we appreciate it. Uh, this podcast is designed to help you in the channel, the MSP, uh, we're always trying to bring you the new, latest, different trends and things we're seeing in the industry to help you grow and continue to see success in your MSP. So until next time everyone have a great day.