Evergreen buys IT services firms whole and hires their managers
Evergreen is a bet that the way to compound in small services businesses is to buy them outright, leave them decentralized, and upgrade their management. It has acquired about 160 IT services companies since 2017, takes 100% of each, and recruits a senior person into every one, which Sahyoun credits for holding returns flat as prices rose. Sourcing is the constraint, so more than 40 people work on it against a database of 15,000 MSPs, which Sahyoun says is what creates the discipline to walk away.
Takeaways
- Evergreen has bought 160 businesses since 2017. Sahyoun and Jeff Totten founded Evergreen in 2017 at 25 and 27. It has bought around 160 businesses, reached roughly $1.5bn of revenue and $250m of adjusted EBITDA, and holds about 10% organic growth.
- Evergreen puts a senior hire into every deal. Evergreen buys 100% and lets sellers roll into the holdco. It recruits a senior operator into every business, unlike private equity that buys 70 or 80% and rides the existing team. The Multiplier's Club rewards doubling earnings in five years.
- Proprietary sourcing is Evergreen's core machine. The San Francisco headquarters has 40-plus people mostly on sourcing and deal execution, and 80% of deals are proprietary. The database lists 15,000 MSPs. Sahyoun was the only sourcer until Sidney Hathaway joined in 2019, and he spoke to about 10 owners a day.
- Higher prices have not lowered returns. Competition pushed prices up, and a four or five point rise in rates did not shake them. Returns held because Evergreen got better at growing businesses after close. Discipline while rates were near zero left a healthy balance sheet to keep buying.
- Postmortems show concentrated customers underperform. Across 160 postmortems, businesses with a concentrated customer base underperformed more diversified ones, and lower-margin businesses could be grown faster. Sahyoun says discipline comes less from temperament than from having many opportunities to choose between.
The 2018 MSP roll-up that failed
- In 2018 Evergreen tried rolling several smaller MSPs under a single platform instead of running them separately.
- Each branch office looked profitable on its own numbers.
- The corporate headquarters absorbed costs that the branches never carried.
- Combining the businesses cost customer intimacy, service quality fell and churn rose.
- Evergreen dropped the model rather than change its overall strategy, and has kept acquired companies decentralized since.