What Buyers and Investors look for: Technology

Is the mergers and acquisitions (M&A) activity resurgence here to stay?

Our M&A software outlook for 2024 anticipated that after a steep downturn in deal volumes in 2023, we would see a recovery in 2024, particularly in the second half. For a long time, technology has been one of the most active industries when it comes to M&A activity, with investors and buyers being attracted to the security of recurring revenues combined with the ability to scale at pace. Despite this, the industry was not immune to the subdued global economic environment that hit the global markets in 2023, and the bubble of deal activity and soaring valuations burst.

In 2024, we expected a resurgence, and we are seeing signs of that so far this year. While we are not at the unprecedented levels seen in 2021 and 2022, UK technology deal volumes in H1 of 2024 are up almost 30% on H2 of 2023. Steadying inflation, interest costs and political stability are driving confidence, and competition for high-quality, business-critical assets is returning. Private equity is also playing a key role in driving activity. While there is pent-up demand from corporate buyers who have capital and are chasing growth, they are still waiting for greater certainty before committing. Private equity, however, remains very active – outdoing corporates in H2 of 2023 – and driving deal flow in 2024 as they seek to deploy record levels of dry powder in markets that can offer attractive returns.

With sellers still holding out for optimal pricing but buyers becoming more and more optimistic, it’s important to know the key factors to consider when you are looking to sell your software business to enhance value.

Key value drivers to consider when preparing to sell your technology business

Ensuring high-quality revenue streams

Having revenue that is protected, predictable and visible is critical for making software businesses attractive to potential buyers or investors. They will look at two key metrics, your annualised recurring revenue (ARR) and net retention rates (NRR). These KPIs demonstrate your business’s ability to retain customers as well as create organic growth from existing customers with upsell and price increases. Buyers and investors prefer businesses with recurring revenue from long-term contracts or subscription models, as these provide a steady income stream and underpin future forecasts. Being able to demonstrate buying patterns of transactional or non-recurring revenue is also important to prove that it is predictable and repeatable with similar characteristics to recurring revenue.

Boosting profitability from turnover

Generating higher profit from turnover is increasingly important to buyers or investors in the current economic climate. It indicates the efficiency and effectiveness of converting revenue into profit, reflecting strong financial health and operational excellence. KPIs such as profit margins and cost-to-revenue ratios are crucial here. Buyers and investors are interested in businesses that demonstrate a high profit margin, as it suggests effective cost controls and a solid pricing strategy. High profitability also provides a buffer against market fluctuations and economic downturns, enhancing the security of the business as an investment.

Enhancing performance metrics

Preparing for sale is an ideal time to assess your performance, including EBITDA margins and product profitability. Growth in underlying EBITDA margins showcases your business model’s operating leverage, while a scalable cost base can drive future margin expansion, enhancing efficiency and profitability. Buyers or investors will look at your historic EBITDA growth rates by considering the nature of your cost base - fixed, variable and semi-variable. Evaluating new products or projects that currently dilute EBITDA helps buyers and investors understand their future potential. Identifying and restructuring non-core or loss-making divisions can be restructured to further boost profitability, making the business more attractive to buyers or investors.

Building a strong foundation for future growth

Demonstrating that you have a strong platform for future growth is crucial when selling your business. Increasing new logo wins, which provide repeatable revenue that grows in value over time, demonstrates a strong blueprint for further growth. A robust pipeline and strong sales engine will support future wins and customer retention or expansion, making your business more attractive. Proving the key metrics of your sales team will underpin the ability to ramp up the sales team to drive further long-term and sustainable growth. Buyers and investors are also attracted to metrics like customer acquisition cost and customer lifetime value, as these help assess the business’s potential for sustained growth and profitability.

Navigating technology due diligence

We are seeing buyers and investors take more time and a deeper dive during technology due diligence. Technical debt, accumulated from quick fixes or outdated systems, can pose significant challenges during due diligence. Having a robust and up-to-date technology infrastructure is crucial for operational efficiency, reliability and scalability. These factors are key during technology due diligence, which has seen an increased focus recently and can contribute to a successful deal. The ease of integration into a buyer’s or investor’s existing systems will also be important so that the benefits of one integrated system can be realised quickly.

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This article was originally published on Nov 12, 2024.

How can RSM Singapore help?
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Our corporate advisors can support your business in the following areas:
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• Mergers and acquisition services to maximise value
• Transaction support throughout the deal journey
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