[00:00:00] Carrie Richardson: Good morning, everybody. My name is Carrie Richardson and I am your host of what's important now. With me today is Josh Kotler. Josh is an investor in the managed services space and a partner at Axial Reade. Josh, thanks for joining us today.
[00:00:15] Josh Kotler: Oh, I'm glad to be here, Carrie. This is great.
[00:00:18] Carrie Richardson: So tell us a little bit about what you've been up to lately.
[00:00:22] Josh Kotler: Okay, so first of all, define lately, because a lot has lots gone on in the last few years. Happy to reset it all the way back to Western Digitech when I built an MSP. You tell me,
[00:00:36] Carrie Richardson: let's start there.
[00:00:37] Carrie Richardson: What year did you found your MSP?
[00:00:39] Josh Kotler: Western Digitech was actually founded by my partner in 1994? I joined in 1998. It was literally a little garage based company. John had 1 employee who was doing some programming for him for some custom software project and a high school kid who worked in the afternoons.
[00:00:59] Josh Kotler: [00:01:00] Together we built the business through 2014 started it as a break fix. IT services company morphed into an MSP around 2009. At the end of 2014. I bought John out. He stayed as an employee at Western Digitech and actually stayed with it through our acquisition by compass MSP in 2019 and just retired last year at I don't want to give his age, but he was in the 60s.
[00:01:27] Carrie Richardson: And you're not quite there yet.
[00:01:29] Josh Kotler: No, I'm not quite there. I'm a youngster.
[00:01:32] Carrie Richardson: So tell us a little bit about the M& A process for you. You exited to Compass, a well known empire builder in our space. How did you make the decision that Compass was the right home for Western Digitech?
[00:01:45] Josh Kotler: At Western Digitech. We grew from about 2.2 million to about 7 million on a run rate basis. When I exited and with a great team. The best team, [00:02:00] everyone kind of feels this way, but really an incredible team that was building the business.
[00:02:05] Josh Kotler: We were executing at every stage on our growth plan. Profitability was best in class. So really last 4 years, we had 20 percent every year. Never worse. Sometimes a tick or 2 better and I had no intent. To sell the business going into 2019. Early in 2019 first quarter I got an unsolicited offer from a peer who I had established a great relationship with another Florida MSP.
[00:02:38] Josh Kotler: And, we had lunch one day and CEO of that company just slid a number across the table. And I looked I was shocked what I had built. Was worth what they were offering seemed crazy to me. The business was earning in [00:03:00] excess of a 1, 000, 000 dollars a year at that point. But it still seemed like a kind of a crazy offer.
[00:03:07] Josh Kotler: And so I said, thank you, but no, thank you. And then over the next few months started walking around. With the idea, maybe I should do something here. I've got an asset. That's worth an incredible amount of money. I've done pretty well investing and saving on my own and knew that a transaction would put me in the financial end zone where I wouldn't have to worry about money again.
[00:03:36] Josh Kotler: And that's always been a big motivator. So as the idea bounced around, I noticed that there are a couple of other companies that were interested. Of course, I was getting calls from private equity backed companies and I started to take some of those calls. I met with Compass MSP but just didn't connect for me.
[00:03:58] Josh Kotler: It didn't seem like the right the right [00:04:00] opportunity. Compass was a small company at the time 12 million in revenue. And I just put them to the side. In the summer of 2019, I said, okay, let's do this.
[00:04:11] Josh Kotler: I reached out to a handful of buyers that I thought would be in a position to do well with the asset with my team with my clients. And, I thought had the the right incentives to make a strong offer. So I reached out to them, brought those deals to fruition, got offers at about the same time.
[00:04:35] Josh Kotler: And was considering those when compass MSP reached out again. And I told the the CEO of compass at the time Hey, look, I am literally holding a pen in my hand rereading an LOI before I sign and they said, stop. Don't do it, give us 2 days and they flew down the next morning. We spent a full day. [00:05:00] Meeting had a dinner, got to understand the people involved, the strategic vision, the criticality of the acquisition from their perspective. And, over the next week or so, we worked out a deal and I'm happy to say that it was a very good financial deal for me.
[00:05:22] Josh Kotler: And I think it was a game changing deal for for compass for reasons that we'll get into. And yeah, December 23rd of 2019, that deal closed, the wire hit. I rolled some equity into into compass. I had a job with compass and we rolled into that just as the pandemic was starting.
[00:05:44] Carrie Richardson: Excellent timing. Yeah.
[00:05:46] Josh Kotler: Oh, it actually worked out pretty well.
[00:05:48] Carrie Richardson: Tell that wire hit your bank account. What was it like?
[00:05:51] Josh Kotler: When you close, It's anticlimactic. It's all lawyers and you're signing a thousand times. [00:06:00] Several agreements are getting executed and then somewhere in the process
[00:06:04] Josh Kotler: your lawyer just says, okay, we're done. You've sold your company. Wire should hit the next several hours. And for me, that was a work day. We actually closed remotely. And so I just wandered around through the office. Hadn't told anyone yet. I'd given my team leads and really given the company some heads up that I was looking for investment.
[00:06:35] Josh Kotler: I was looking for ways to achieve scale so that we could drive the brand ahead so that we could improve the career options for. For everybody at Western Digitech. My controller knew. She didn't know all the details, but she knew what was going on.
[00:06:51] Josh Kotler: And was very helpful in executing the transaction. But it was weird, right? I'm walking around the halls. People are working. [00:07:00] Phones are ringing. And Projects are being executed, all the normal things that happen in an MSP and yeah, I just went in the kitchen.
[00:07:10] Josh Kotler: I got a cup of coffee. I said I guess that's that happened and walk back into my office and started dealing with some clients on some issues just weird. And then in the afternoon um, Veronica, our controller, her office was next to mine, the doors are open, and she says, Josh, can you come in here a second?
[00:07:33] Josh Kotler: I walk in and she turns, twists her monitor a little bit, says, is that, that just hit our account? Is that? I said yeah, that's the right amount. Once I saw that happened. That's when it hit me. I wasn't one of those people hitting refresh, watching the account. I only looked at it on her screen that one time.
[00:07:59] Josh Kotler: I never [00:08:00] went back and looked at it. Never took a picture. Never did any of that stuff. But I did, that's when I knew it was done and I could, there was a, I actually felt light, like, I was floating a little bit because all the weight was coming off my shoulders. And I didn't realize how much stress that I carried operating and owning that business.
[00:08:26] Josh Kotler: I would have told people, nah, I don't feel any stress. It's a great company, runs really well, no stress. But the truth is, I was pretty stressed about it. We had a data center component, and you know how that goes. One, one mouse click and The whole thing can come apart. Security was a growing concern.
[00:08:50] Josh Kotler: 2019. It was nothing like it is now. But yeah, so it, it felt amazing. I didn't feel any, what is [00:09:00] it? Cognitive dissonance, right? Buyer's remorse or seller's remorse. Didn't feel it. I was happy about where we were heading. I was nervous about it. I didn't know what to expect. .
[00:09:11] Josh Kotler: But I thought, okay let's find out. Yeah, really big moment.
[00:09:17] Carrie Richardson: And were you obligated to stick around for a little while, or were you just free and clear?
[00:09:22] Josh Kotler: I was obligated to stick around. I never considered the earn out component of the deal to be part of the deal.
[00:09:28] Josh Kotler: It was just an opportunity. But I had, to earn out and had an employment agreement and my role was going to be to build the Florida business, particularly inside the legal vertical. Compass already had an office in Jacksonville. There was an existing presence in Miami. Western digital tech tripled the size of what was in Miami.
[00:09:53] Josh Kotler: That took us from 12 to 19. Over the 1st, month or 2, I settled in. I started [00:10:00] working with the folks in Jacksonville but our CEO at the time wanted some help understanding how the M. S. P. business really worked and compass was pivoting the way the company worked around the way Western Digitech worked. So really, we spent a lot of time together
[00:10:17] Josh Kotler: He reached out 1 day and he said, hey, maybe we can make a change. Would you take the COO role?
[00:10:25] Josh Kotler: So I thought, okay, this will keep me busy. We made a lot of progress. Started getting involved with M& A for Compass and, within a couple of months, I ended up swapping the CEO and COO role. I became the interim CEO of of Compass and started executing add on deals.
[00:10:52] Josh Kotler: The in 2020, we purchased mother G in Chicago. Then we purchased it direct in [00:11:00] Hartford, Connecticut, which was a big MSP. Those are both. Peer group members of mine at True Methods, and when we purchased IT Direct, Ari Santiago took the CEO role, and I moved into a purely M& A role.
[00:11:17] Josh Kotler: In 2021, we added Terry tech, which was based in Terry town, New York, just north of New York City and M. R. W. which was a Baltimore based M. S. P.
[00:11:28] Josh Kotler: Between that organic growth.
[00:11:30] Josh Kotler: The company was three, four times the size as it was the day we met. So really exciting.
[00:11:38] Carrie Richardson: And what was the decision process like for you to move on from this organization that you'd invested so much time in
[00:11:46] Josh Kotler: it wasn't an easy decision. There were things happen when you sell your MSP and when you hit your financial goals.
[00:11:54] Josh Kotler: You have an ability to make different decisions and one [00:12:00] of the things that, our growth did at compass. Is it really increased the value of the equity that I had rolled into the compass business? And I realized that. The main driver of my compensation was just the increase in the equity value.
[00:12:20] Josh Kotler: And my salary for where I was financially, I didn't need it. I didn't even really know what it was half the time. So I thought geez, I'd rather have the time back. And I figured compass will continue to do. Some deals and the share price will continue to rise and I just, I don't need to be an active part of it.
[00:12:45] Josh Kotler: So one of the things you and I were talking about earlier, sometimes you just pivot to being an investor and you let your money work for you. And so compass has gone on and the company continues to get better [00:13:00] and, the value of the equity continues to go up. And so it's working out and it's created more time for me to do other things.
[00:13:09] Carrie Richardson: And 1 of those other things just happened to be investing in another MSP.
[00:13:13] Josh Kotler: Yes.
[00:13:14] Carrie Richardson: After all of that,
[00:13:15] Josh Kotler: I've got mental problems
[00:13:17] Carrie Richardson: and the no stress and now the stress again. So tell me about that.
[00:13:21] Josh Kotler: Yeah, so in February of 2023, Dave Davenport and I, we started a little fund called Sansom Street Capital, and we bought an MSP together, and a company called Elevative Networks in D. C., and we've been working with Elevative over the last year to improve that business, and that's been fun, but I gotta tell you, there's a certain kind of crazy required to go back into the MSP business. Once you've gotten out successfully
[00:13:55] Josh Kotler: so I've been doing that. I spent some time investing in a few [00:14:00] channel companies, that's been a lot of fun. I've seen a different side of the business, the channel side, and I've learned a lot. I don't know that I'm going to get, any huge paydays as a result of doing it, but it's been a lot of fun.
[00:14:14] Josh Kotler: And then about a year ago, I joined a private equity firm, Axel Reade. =Out of New York as an operating partner and we're building some great MSP brands, but I'm doing that from a board and an advisor role. So we are backing, great leaders and using our capital to scale great products.
[00:14:38] Josh Kotler: That's been exciting. I think that's probably the right fit for me at this stage.
[00:14:43] Carrie Richardson: You don't want to do tickets anymore.
[00:14:45] Josh Kotler: I never did tickets. I'm not technical at all. I, once I installed a wireless printer, that was super exciting. I still brag about that.
[00:14:55] Carrie Richardson: So how do you delineate between opportunities for yourself personally?
[00:14:59] Carrie Richardson: [00:15:00] So for example, your investment in Elevative and your MSP channel investments and the opportunities that you pursue on behalf of the private equity firm.
[00:15:09] Josh Kotler: That's a good question. It certainly came up in our negotiations when we were establishing the operating partner role. We created a set of criteria with a little DMZ in between and and it's been pretty easy.
[00:15:24] Josh Kotler: The reality is, elevative keeps me. Busy in the small amount of time that I have for it, and I'm not really looking to acquire any more directly. I'm much more excited about the equity appreciation model and the value creation model. The math just is undeniably better and the ability to act, with so much capital behind us is powerful.
[00:15:50] Carrie Richardson: What is the ideal acquisition for Axial Reade?
[00:15:54] Josh Kotler: We're really focused on being a family of strong MSP brands.[00:16:00] Those brands could be regional brands. They could be vertically developed brands. We have one that's operational now that we're driving tuck in acquisitions into.
[00:16:13] Josh Kotler: We think that this year we'll acquire two more and we may, that might be enough. But I think we have room for at three to four strong brands with great leaders that we have confidence in great subordinate leadership teams and conceived mature businesses.
[00:16:36] Josh Kotler: One of the things that's a little different about what we're doing is that we're working. In this lower end of the market, right?
[00:16:44] Josh Kotler: We're starting to see private equity get involved in big transactions. Consolidators are getting purchased, like the purple guys was recently purchased by Ntiva.
[00:16:54] Josh Kotler: We're starting to see more of that. But we're also seeing companies that are [00:17:00] willing to go down to 6, 7, 800, 000 in EBITDA. To execute a transaction, and, those are a little harder to do that are a little, there's more risk for the buyer the multiples are a little lower. With actual read, we're going as low as.
[00:17:17] Josh Kotler: 500, 000,
[00:17:18] Carrie Richardson: Is that for a tuck in?
[00:17:20] Josh Kotler: Small end of that is for tuck in. Opportunities, right?
[00:17:24] Josh Kotler: We're redefining what a platform is, but you have to have a level of maturity and a level of experience, let's say to absorb another company, right? Brands are larger , but the Tuck-ins will go will go down to the four and 500,
[00:17:43] Josh Kotler: thousand dollar EBITDA level.
[00:17:45] Carrie Richardson: So let's talk about those tuck in businesses.
[00:17:48] Carrie Richardson: That is the majority of the market.
[00:17:50] Carrie Richardson: There is only a small percentage of MSPs that will ever reach that million dollars in EBITDA. So if we're looking at the organizations that are smaller than that, [00:18:00] aside from there being an amount of EBITDA available, what are you looking for in that business?
[00:18:08] Carrie Richardson: What is the. What is the owner need to look like? Do they have to stick around? Tell me about a tuck in for Axial Reade.
[00:18:15] Josh Kotler: We can accommodate owners that want to stay and owners that want to leave. Obviously, it's dependent on the business. Some businesses require the owner and we can suss that out through the diligence process.
[00:18:29] Josh Kotler: But, you nailed it.
[00:18:31] Josh Kotler: Very few businesses are going to reach the level of a million dollars in EBITDA.
[00:18:37] Josh Kotler: owners that get to four and five hundred thousand dollars of EBITDA have to make a decision. And by the way, that's an incredible accomplishment. The decision is do I want to do the really hard work that can take a long time and involve a lot of risk to try to get to a million?
[00:18:57] Josh Kotler: And improve the enterprise value of my [00:19:00] business before I exit, or do I want to take this equity and roll it into a larger organization? It's gaining scale faster, right? It's a better equity appreciation vehicle and do it as part of a team. With less risk just more security, right? I think that's a decision.
[00:19:22] Josh Kotler: A lot of owners have to make.
[00:19:24] Josh Kotler: I've got a question for you. I just I'll give you an idea that I've been walking around with and you tell me if you think this holds up when I met. I just got back from connect. I'm at a lot of conferences when I look around. At the attendees, what I see are a ton of older owners who are incredibly stressed out, probably not taking good care of themselves. And they have to make a decision.
[00:19:58] Josh Kotler: They're going to transact in the next three or [00:20:00] four years. And I think there's 10, 000 of them in the U. S. alone. So what, what's going to happen when they all look to transact at the same time? It's going to depress price for those sellers. That's a supply and demand situation, right? If I'm on MSP owner, I'm thinking about, I have to make a decision.
[00:20:27] Josh Kotler: Am I going to get ahead of this bubble? But here's what's going to happen. If you wait for the bubble I'm going to be able to pay half all day long and buy as many as I want.
[00:20:35] Carrie Richardson: You're a patient man, Josh. You're a patient man.
[00:20:37] Josh Kotler: This is what all buyers do.
[00:20:40] Josh Kotler: So if I'm a seller, I either want to get ahead of that bubble, or I'm going to recommit to 10 years, 8 to 10 years, and let the bubble work its way through.
[00:20:51] Carrie Richardson: So much can happen in 10 years.
[00:20:54] Josh Kotler: I know, a lot can happen. One of the things that can happen is you can build a better MSP. You [00:21:00] can continue to distribute cash to yourself and get it out of your business.
[00:21:04] Josh Kotler: It's not all bad.
[00:21:05] Carrie Richardson: Your entire client roster could disappear due to a PE acquisition in your space. I'm going to take the money and run if I'm given the option.
[00:21:13] Josh Kotler: Aside from my role, I think all MSP owners, almost all of them should sell. This is a risky business. And unless you have scale, you cannot manage that risk effectively. You might think you can, but you can't very few businesses are getting compensated for the amount of risk that we carry very few.
[00:21:38] Josh Kotler: The bottom line is look MSPs have to get scale. They have to get scale, so you're either going to do that.through a sale by just selling into a larger entity. You can do a cashless merger with friends.
[00:21:52] Carrie Richardson: Frankenstein arbitrage.
[00:21:54] Josh Kotler: Yeah, you can do some of that stuff, but there's this bubble is an issue. This [00:22:00] demographic bubble is an issue. And that's. That's something that I think isn't being discussed enough.
[00:22:07] Carrie Richardson: I think there are a lot of interesting opportunities for smaller MSPs to have a successful financial exit from their business without having to take the risk, roll the dice, and spend five years trying to double in size before they exit.
[00:22:23] Josh Kotler: Yeah.
[00:22:23] Carrie Richardson: There's plenty of ways. To exit from your MSP that aren't to private equity that aren't to an empire builder that aren't arbitrage.
[00:22:33] Josh Kotler: That's right.
[00:22:33] Carrie Richardson: And everybody who's of retirement age has got to be thinking about it.
[00:22:38] Josh Kotler: This is the biggest asset that most MSP owners have.
[00:22:42] Josh Kotler: It's their MSP. And it's basic financial planning, closer you get to needing the money, the more critical it is to de risk.
[00:22:55] Carrie Richardson: Just thinking about our database, there's about 45, [00:23:00] 000 MSPs in it. Only 8, 000 of them have more than 2 million in top line revenue. So what's going to happen to the, the 40, 000 MSPs that aren't ever going to crack that million in EBITDA.
[00:23:15] Josh Kotler: Yeah. A lot of them are going to just wind down,
[00:23:18] Carrie Richardson: turn off the lights and walk out.
[00:23:21] Josh Kotler: Markets are efficient. They'll figure it out, but it's not going to work well for the seller. That's my prediction.
[00:23:28] Carrie Richardson: Every time I go to an event now, I see an M& A event. I see a lot of buyers who've never transacted and who believe that growth through M& A is going to be easier than growth through organic.
[00:23:41] Carrie Richardson: I don't see a lot of sellers.
[00:23:43] Josh Kotler: I think you're right. It's buyer heavy. The sellers are out there, but no one's quick to raise their hand and say I'm a seller, especially in a room full of peers and competitors and things like that.
[00:23:54] Carrie Richardson: All right. How are we going to go find them, Josh?
[00:23:58] Josh Kotler: Look, [00:24:00] I'm out there as much as I can. I'd love for people to, if they have any questions, please I'm happy to talk with them. Frankly this podcast helps. So yeah, we'll find them.
[00:24:12] Carrie Richardson: They're out there. I've got to figure out how to manage all those half million dollar EBITDA MSPs that I have to call now to sell to Josh.
[00:24:20] Josh Kotler: There are a lot of ways to exit, but you got to make a plan. Don't let the bubble hit and cut your value out from under you.
[00:24:27] Carrie Richardson: That's actually something that's come up regularly when we're talking about M& A. You cannot continue to stagnate and hope.
[00:24:34] Josh Kotler: A hundred percent.
[00:24:35] Carrie Richardson: Thank you for joining us today, Josh. We'll we'll catch up with you again, I'm sure.
[00:24:40] Josh Kotler: All righty. Carrie, this is great. Have a great day.