Within the managed services market, MSP mergers and acquisitions still occur on a weekly basis. But I think it's increasingly difficult for quality buyers to find quality sellers. And even when two quality companies enter M&A discussions, challenges like valuation, earn-out parameters and non-compete agreements can destroy the deal.

No doubt, potential MSP buyers are networking like crazy -- infiltrating the MSPmentor 100 list, checking in with coaching organizations like TruMethods, and hanging out in peer group organizations like HTG. Buy-side MSPs also work closely with advisors like Cogent Growth Partners, while sell-side IT service providers work with companies like 4-Profit.

Some key MSPs and IT service providers remain on the acquisition trail. All Covered intends to become the U.S.'s largest provider of IT services to small business, with M&A assisting the effort. And Technology Capital Investors (TCI) is hunting for vertical market MSPs. But I think it will become increasingly difficult for All Covered, TCI and other would-be buyers to find quality sellers.

The reasons:
  • MSPs generating $5 million or less in annual revenues are often considered too small for strategic acquisition -- unless they have impressive margins, vertical market expertise or a highly valued regional footprint.
  • Several MSPs in the $5 million to $10 million revenue range tell me they intend to build their businesses for at least another 2 to 3 years before seeking potential buyers. The reason: Valuations increase significantly as you scale a business and flow more money to the bottom line.
  • And MSPs in the $10 million+ revenue range? They're really hard to find.
I could be wrong but I think the second half of 2012 could see fewer M&A deals compared to the fist half of 2012. The economy is doing reasonably well. Entrepreneurial "fatigue" seems to have settled down now that we're out of the deep recession. And MSPs no longer "fear" the cloud and vendor-delivered cloud services.

Many MSPs seem to be rethinking their potential exit strategies. It's sort of like getting on a game show and holding out for the bigger and bigger prize because you believe in your current momentum.

Indeed, I think a healthy number of MSPs now believe they can pocket more money if they just... hold out... a little bit... longer...

Or am I wrong?