IT Nation 2024 - Peter Kujawa from ConnectWise

• Harry Brelsford welcomes Peter to IT Nation Connect 2024 in Orlando and inquires about his tenure with ConnectWise.
• Peter explains he has been with ConnectWise for three years, following his predecessor, Paul Dippel, during his first IT Nation Connect.
• Harry confirms Peter's role as VP for Service Leadership and discusses the decision to keep the ConnectWise brand.
• Peter highlights the importance of maintaining data separation, ensuring sensitive data is kept in a separate system with limited access.

Latest Data and Trends in the IT Industry

• Harry asks Peter about the latest data from ConnectWise, noting Peter's previous involvement with studies.
• Peter explains that data is collected quarterly from partners worldwide, benchmarking 10 different business models, with MSPs and VARs being the largest sets.
• Peter shares that organic revenue growth for MSPs has slowed, moving back to historical norms after a significant lift post-COVID.
• He advises MSPs not to panic, emphasizing the importance of blocking and tackling, investing in sales and marketing, and continuing price increases where possible.

Impact of Inflation and Profitability Improvements

• Peter discusses the impact of inflation on MSPs, noting that while revenue growth has slowed, profitability has improved.
• He explains that the negative effects of higher wage inflation can outweigh the benefits of price increases.
• Peter highlights that managed service gross margins are running at high levels, contributing to improved profitability.
• He reassures MSPs to continue their business practices and not to panic, as the current trends are returning to historical norms.

Private Equity Investment in the IT Channel

• Harry expresses concerns about sectors that raise too much money too quickly, leading to layoffs.
• Peter acknowledges the influx of investment capital in the IT channel but notes that it has been positive so far.
• He explains that MSP owners have more options to sell their businesses, with private equity being one of many options.
• Peter mentions that private equity buyers come in various forms, from semi-integrated to fully integrated, offering different exit strategies for MSP owners.

Advice for MSP Owners Selling Their Businesses

• Harry shares his experience tracking private equity activity in the IT space and advises MSP owners to talk to multiple firms.
• Peter emphasizes the importance of MSP owners talking to qualified industry folks and preparing their businesses well in advance of selling.
• He highlights the value of events like IT Nation Connect and Evolve Community Day for gaining insights into the M&A process.
• Peter advises MSP owners to make changes in their businesses that will positively impact their desirability and multiples when they go to market.

Final Thoughts and Closing Remarks

• Harry and Peter discuss the importance of aligning with potential buyers and ensuring a good fit for the MSP owner's role after closing.
• Peter reiterates the value of talking to multiple buyers to find the best price and cultural alignment.
• Harry thanks Peter for his time and looks forward to seeing him next year at IT Nation Connect.
• Harry mentions the availability of ConnectWise's latest research and encourages attendees to check it out.

Transcript

Peter, VP for Service Leadership at ConnectWise, discussed the company's data collection and benchmarking, highlighting that organic revenue growth for MSPs has slowed from a peak of 25% to 10.8%, returning to historical norms of 10-14%. Despite this, profitability has improved, with average gross margins increasing to 13%. Peter emphasized the importance of MSPs continuing to invest in sales and marketing and cautioned against panic. He also noted the influx of private equity into the MSP space, offering MSP owners more options for selling their businesses, with multiples remaining strong.

LISTEN TO THE PODCAST HERE

Harry Brelsford  00:00

I'm with Peter Kujawa here at IT Nation, Connect 2024 in Orlando, Peter. Welcome Good to see you again. How long have you been with ConnectWise?

Peter Kujawa  00:14

I've been with ConnectWise, service leadership for three years. Just rolled three years, two weeks ago, actually, my first it nation connect as an employee was two weeks after I'd started, and my job was to follow my predecessor, Paul Dippel, around the event. And so I spent three days following him to all the presentations he did, all the media interviews he did, non stop back to back all day long for the week, and at the end of the week, I was questioning whether I'd made the right decision to take the job. But here we are, three years later. It's been great. It's been just an absolutely awesome week.

Harry Brelsford  00:55

And you're in the role of VP for service leadership. So you kept the brand.

Peter Kujawa  01:00

We did, yeah, leadership, yes, that was a conscious decision. We ConnectWise made a really smart decision. We kept the brand name because there was a known brand. But the other thing that we kept was we maintained data separation, so anybody who benchmarks with us on a quarterly basis puts very sensitive data into our system, balance sheet data, income, statement data, obviously, valuation data, and all of that is kept in a completely separate system, completely separate database, and only a very limited number of service leadership employees are able to get at that data.

Harry Brelsford  01:35

Yeah, yeah. That makes sense. Well, you know, I've seen you a few times. Must have seen you right when you were hired and you always had studies. So Tom, what's the what's the latest? What's the latest data on your side?

Peter Kujawa  01:49

Well, yeah, we so we collect our data every quarter, most of our data, our ongoing benchmarking data every quarter, partners from all over the world put their data into our system, and we benchmark 10 different business models and the technology space of the two largest sets being MSPs and VARs and so every quarter, we're able to see how's revenue growth going, what's growing, what's not growing, what its gross margin look like in different business units, which, which business models are doing better? What is profitability trend? What trending looking like? And so this quarter, few interesting highlights. The biggest highlight is that revenue, organic revenue growth for MSPs on Managed Services has slowed. So that's going

Harry Brelsford  02:36

to be one of my questions. Okay, yeah,

Peter Kujawa  02:38

historical, if you go prior to COVID back years and years, the growth range was typically in the 10 to 14% range plus or minus 2% of 12% Well, starting in the second half of 2020 you saw this tremendous lift that peaked about in late 2022 early 2023 at about 25% and so you see it on the chart, and it's really eye popping and kind of scary. A lot of MSPs see this coming back to Earth, and it looks pretty disturbing. What we're seeing now the last four quarter trending is 10.8% last quarter, two quarters ago, four quarter trending, and 10.3% this quarter really good. And so the message to MSPs is really twofold. Number one is, don't panic. We're back to historical norms. And so blocking and tackling becomes important again, and all the things that you were doing before COVID, keep to run your business and grow, make sure you're investing in adequately in sales and marketing, all of those things. The second is, while the revenue chart was really fun to look at, the reality of a lot of that organic growth was it was based on price increases due to tremendous inflation. So if I'm an MSP, my largest cost of goods sold input is my people, my labor and wage inflation was running six, 810, 12% during that time in a lot of cases. And so the what the MSPs have come to recognize is that the negative of higher wage inflation will whack your business faster than the benefit of price increases will lift it right? Because if I do a price increase on a managed service contract, I'm doing that on an annual basis, so but the team that's providing the labor to support that contract, I might need to do an increase today to keep somebody and that will hit my income statement starting next week right or next month. So while revenue growth has slowed, profitability is actually improved. The last three quarters, average profitability has gone from 10 or 11% up to 13% plus. Dollars, and so that's due to improvements in gross margin. We're seeing managed service gross margins running at a really high level for average. So so don't panic. Run your business, invest in sales and marketing, continue to do price increases where you can, and life should be good.

Harry Brelsford  05:20

Yeah, I always worry about sectors that way raise way too much money, way too quick. I'll give you an example, and I'm not sure it applies to us. I'll frame it up, but, you know, I play CNBC in the background of the in the day, right? My wife, yeah, I'm boring, and it scares me. This isn't my first rodeo. So it scares me when you see these deals now, some AI, you know, today we raised 200 million, you know, and another company raised 300 Well, I know what's coming, you know, not my first rodeo. And, you know, they tend to raise way too much money, way too quick. Maybe get stupid over hire, you know, and then here come the layoffs in the valley. Now, I understand this is by analogy that's different. Are you sensing that in MSP, I guess I call it a niche. You know, private equity has been pouring money. Or do we have too much money in the MSP space, and now they have to put that money to work, and that can include staff, productions and that kind of thing. Or is that not one of our Dynamics?

Peter Kujawa  06:37

It's not. Yet. There's definitely more money in the channel than ever right now. That's all positive, the and the and there's a tremendous positive from a standpoint of, if I'm an MSP owner and I'm looking to sell my business for a lot of MSP owners, you, oh, there's a still a tremendous concentration of sub five, $6 million companies in revenue size. So most of the time, this is a large part of their net worth. This is a big part of what they're going to need to retire. And in our industry today, there's more options than ever to sell. So if, if I've built a good business, I'm going to get a fair price, maybe a little more than a fair price, and I'm going to have options. And there's a lot of industries out there that can't say the same. I might have built a business. I might have owned a business for 20 years and invested tremendous amount of blood, sweat and tears into that business, and now I want to retire, and I don't have a vehicle to do it, because there's no money in it, so it doesn't mean that the owner is going to have to sell the private equity. They might sell to another privately held firm. They might choose to ease up or collecting benchmarking data, and we're seeing more MSPs going to an ESOP model. Or they might sell the private equity, and if they do, there's a wide range of flavors of private equity buyers, right? Some of them are going to do the semi integrated, and they're going to want me to stay on and run it for a while. Others are going to fully integrate, and maybe I want to go sit on a beach or golf or whatever, and I have options. And so that's a great thing for the channel. It's brought tons of investment capital in. It's brought a lot of different perspectives on how to run a business in but in our opinion, it's been all positive. We may get to a point where maybe some of the PE folks are not able to exit at the numbers that they're talking about. If that hasn't happened yet, there's been some pretty substantial exits in the past six months. If we get to that point, you may see multiples downstream start to come down a bit. But for now, it's been all good. Yeah,

Harry Brelsford  08:52

yeah, maybe the final conversation between us, I do track the private equity activity in our space, you know, that's one of my things. And what I'm seeing, it's interesting. And, you know, my business background, this is a surprise. It might be for you know Joe, the computer guy, a geek who became a business owner and now wants to sell a little bit newer to this dynamic. But I guess I would offer you welcome to a firm that you need to talk to multiple private equity firms. A lot of them have little niches. I'm aware of one out of Tampa. Well, they just want to acquire MSPs healthcare in the southeast, right? So you know my good friend up in Minneapolis. Well, I mean, I could still be as good friend, but we, you know, that's all I mean. You know what I mean? We, we can't do business, and sure, and so on. So there's those, those flavors, and I guess that's my main point. You know any, any thoughts on that? But you need to, you need to, kind of shop for. Out there all just, Oh, the other thing was they, they team, and you see that all the time on CNBC, right, where these banks come together on a deal, right? And they should be competitors, but they team IPO, or whatever. You know what I mean, and, but let's take the first one. Does your data pick up on that? Or, you know, I mean, Tom a brofo who invested in Connect wise. I mean, they're huge, you know, they're in a totally different league. I don't know any thoughts.

Peter Kujawa  10:33

We don't, we don't capture data on who the buyer is. It's not something that's important to us. What we look at every year is what's going on with multiples. And we're gonna average those out, and we're gonna look in our inputs for that that we look at our size of EBITDA dollars of the MSP, we're looking at how profitable is the business as a percentage of revenue, and we're looking at what's their revenue mix. And so that's what we're using to come up with our opinion on multiples, and are they going up or going down? Who the buyer is, who's driving it? Not as important, but to your larger question, if I'm selling my MSP today, and I we, we sold our MSP that I was president of. We did three acquisitions, so I ran an MSP for 11 years, a pretty good experience, and I'm an A during that time, if I'm a if I'm a seller, I want to talk to as many in qualified industry folks as I can, and I want to do it at least a year, ideally two to three years ahead of the date that I'm going to market, because I want to make changes in my business that are going to be important and are going to have a material impact on my desirability when and my multiples when I go out. And that that information and access to those industry folks is really readily available today. We do the it nation. Grow events. You can come to evolve community day and get M and A input and and it's truly, it's amazing. I participate in those events, but I do so humbly. There is, it's, it's the you're getting an MBA in how to go to market if you go to one of those events, and you're getting it from some of the top experts in the industry. And these are, you know, for most MSP sellers, it's a liquidity event. It's not, of course, it's they're not going to, they're not selling it because they're about to die. I mean, they're going to do a liquidity event that they're going to be able to decide, do they want to buy another business? Do they want to do? They want to do something different? Do they want to start a charitable foundation, or do whatever they're going to they're going to have a bunch of options to what to do. But for many of them, they've been running this business and building it for 1520, years. They have and they're at an age where they're probably not going to start over and do it again, so they want to get it right. So you've put all this effort into building this thing, put some extra effort into getting input from people who know what they're talking about and are going to help you get ready while you have time to get ready, what you don't want to do, that we see a lot is you get a phone call one day and you had a bad week, and you're really frustrated with the business, and you get a call from somebody who says, Hey, Harry, how would it? How would you like it if we paid you X for your business? And you say, You know what? That sounds pretty good. Put that in writing, and let's get together, right? Talk to a lot of people. If you're selling, the more buyers you can talk to, the more you're going to find, not only from a price perspective, but culture alignment, making sure that you have a good fit for your role after closing. All of these things are really important to get aligned on. So the more people you talk to, I think the better, the probability is of success. I agree.

Harry Brelsford  14:02

Well, Peter, thanks for your time. We'll see you next year. Okay, look forward to it always, Harry. Folks, down below you have a link to some of your latest research. I sure enjoy it. I'm glad you make essentially, you make it public, you put it out of the public domain. So I appreciate that. All right. Well, have a have a good show, folks. Again, we're it nation. Connect 2024 in Orlando. Wonderful time of year in November, arguably the last big show in our industry. So thank you very much. Thank

Peter Kujawa  14:33

you, Harry. It's the Super Bowl of our industry. It's the biggest, yeah, I say the Rose Bowl. I like the Super Bowl better. Perfect. It's great. I.