Ever think about buying a business? Ever wonder what is hidden behind the scenes, waiting to bite you down the road?
We review M&A deals occasionally. A recent small one was the worst we had seen in a while, and it makes a good example of a bad deal that looks like a good one if you do not know anything about technology.
The presentation
- Steadily growing year over year, projected EBITDA of $300k on gross of $1M
- 90% of clients on contract, no concentration by size or industry
- 3,000 sq ft of datacenter space at 60% capacity
- Fully trained staff run everything; management hands-off; growth to date strictly word of mouth
- Selling for personal and family reasons, priced for a quick sale at $500k
A CPA looks at the books and everything appears normal. Every KPI you would check for a managed service provider looks good. Low staff turnover, high client retention year over year. They are on the outskirts of a major city and it would not take much to turn the marketing up. It looks like a great deal with plenty of untapped opportunity – or simply a revenue stream you could leave running as-is.
Then you start on the technical detail. This is an MSP, so the technical detail is not a footnote. It is literally the business.
Red flag #1 – the remote management platform
Their RMM system is known to be woefully insecure, and their cybersecurity implementation – which could potentially have offset that – is ten years out of date.
MSPs are always a target, because breaching one breaches its customers too. With what they had in place, there is a good chance they had already been penetrated and did not know it. There is often a three-to-six-month lag between an initial breach and the attacker actually doing anything with it.
Even so, the price was low enough that the cost of fixing it was not a deal breaker. So we opened the next door.
Red flag #2 – the arithmetic in the datacenter
The datacenter space had three 75kVA UPSs. That is nowhere near enough for 60% capacity of a 3,000 sq ft space unless the racks are very sparsely populated and there is no redundancy. That turned out to be exactly the case.
It gets worse. There was a single 250kW backup generator. It at least matched the UPS sizing, but in neither case was there any way to service the equipment without a real risk of downtime – in Texas, a state with a certain reputation for reliable power.
The only fixes are to spend a great deal of money, or move every customer to a better facility. So: a large reduction in the customer base – call it 50% – or zero-to-negative margins for several years.
The conclusion
And who knows what other decisions of the same quality are waiting to surface later.
This opportunity is a trap, technically and legally. It could be free and it would still arguably be a bad deal.
Itwerx Corp is a service-disabled veteran-owned small business providing IT services across Seattle, Bellevue, Everett and Snohomish County. This is the kind of thing our vendor management work deals with – talk to us about yours.
