Inside the Industry webinar recap: Tactics for financial stability and TSP profitability

| By:
Brian Troy

Just this week, I had the pleasure of hosting four brilliant minds in the technology industry for a conversation around maintaining financial stability and profitability in a climate that is all-together uncertain. I was joined by Arlin Sorensen, VP of Brand and Ecosystem Evangelism at ConnectWise; Brad Schow, VP of Consulting Services at ConnectWise; Peter Allen, Chief Operating Officer at SMP; and Kevin Blake, President & CEO at ICS New York.

The five of us sat down—virtually, of course—to gather advice from our ConnectWise thought leaders, Arlin and Brad, and hear success stories from our partners, Peter and Kevin. I wanted to recap this webinar with a few highlights, but I highly recommend catching the on-demand recording to hear directly from our panelists.

Why should TSPs always be armed with an understanding of their financial position?

Arlin took the first go-round of answering this question, and he really put it best. “You would think we would focus on financials more than we do. It’s critical that we learn to manage our financials correctly.” It’s hard to run a company without understanding where you’re at day-to-day. But in reality, Arlin says, “it’s how we keep score.” It’s how a company gets valued and how CEOs can form contingency plans during a crisis.

How can TSPs make sure they’re set up for future success?

Peter and Kevin both have been living this daily. One of Peter’s proudest moments was the leadership his team was able to show to the employees at SMP. Their number one priority was to ensure employees were healthy. Through the use of strong communication, they were able to calm the fears of their teams and extended their newly implemented work from home policy through to Labor Day, which has since been extended to June of 2021.

As a company, they quickly went into a “cash-preservation mode.” Even though SMP deals with larger companies, they were still highly cognizant of the company’s financial stability.

They maintained transparent communication with the whole company by having weekly broadcasts to keep everyone in the loop and the SMP’s plans to ride out this uncertain wave, while also having smaller team daily stand-ups, and maintained the mantra, “We’re going to get through this together.”

For Kevin, the timing was really insane. They had just completed an acquisition on March 10th, less than a week before the official lockdown on March 16th. Not only were they going through that change, but also faced newly implemented work-from-home policies and FUD from their employees. So, their main focus was to help ease the fears of their teams, utilizing similar communication tactics to Peter, maintaining transparency to keep everyone in the loop.

They were swamped with calls from SMB customers that were also trying to find out how to safely and effectively work from home, and as a result, had a booming managed services side of their business, which is still going strong today.

Best practices for TSPs to maintain financial stability

As Brad mentioned in the webinar, it really boils down to two key things for short term financial success. Getting your margins right on your services and product and being able to manage their COGS.

“Get your margins right and control your expenses. If you do those things right, you’ll survive.”

M&A activity in the time of COVID-19

M&A is still everywhere. As Arlin has discovered, it’s unusual to talk to a solution provider today that isn’t involved in it on one side of the fence or the other in an M&A deal. The pandemic slowed things down initially, but looking at the landscape now, good companies still have a strong, and in some cases, stronger valuation than before.

The one change here is the deal structure. Before COVID-19, deals were heavy in cash, whereas now, buyers are a little more risk-averse, using less cash to purchase companies. On the other side, there has been an increase in activity on the private equity firms looking to the TSP community to buy. However, they’re looking at larger EBITA dollars, which is limiting within our industry. But the cool thing is there is creativity amongst the TSPs who are coming together to get that EBITA amount higher for more activities for the PE firms.

When relating to getting the financials stable, it’s important to note that most transactions in the M&A space are the asset transactions. They don’t typically buy the company itself, so the balance sheet isn’t purchased with the deal. However, the balance sheet does show a healthy company. The buyers want to see a history of consistent profitability, which translates into free cash flow to purchase that company over time.

What makes up that stability is customer loyalty and longevity. PE firms, in particular, are concerned with the client base staying consistent over time. Customers with contracts they can depend on to last them into the future.

So, what’s next?

The panelists’ insights didn’t stop at best practices for maintaining financial stability. They also were optimistic about the opportunities on the horizon and are already making moves to set themselves up for success. Peter and Kevin both said that talent acquisition is the biggest opportunity they’re taking advantage of right now.

They are both highly invested in providing a security offering to their customers. As we are more apt to work from home, and the threat landscape has expanded, security becomes the biggest play for TSPs.

Having these discussions with members of our community continue to illuminate the immense opportunity, and amazing creativity TSPs are able to take advantage of to not only survive during times of economic uncertainty, but to also be available for their customers to be the trusted advisor that we know they need, now more than ever.