Buyer search: How do I find the right buyer for my software company?

Why is this topic relevant to me as a software entrepreneur?

The decision to sell a company is a very important step in an entrepreneur’s life. This process is somewhat similar to the beginning of a marriage, as it can be complex and emotionally charged, from the initial encounters with various potential partners to the final selection of a buyer.

By developing an understanding of the purchasing rationale of different buyer groups for their company, a potential sales process can be structured in a targeted, quick, and efficient manner – and typically, a high purchase price can be achieved.

While today’s article covers many aspects that apply to transactions in all industries, in the final section we will examine possible specifics for finding a buyer in the software sector.

What do I need to know about this?

To identify the optimal buyers, it is essential that you, as the seller, develop a clear picture of potential buyer groups before beginning your search. In M&A transactions, two main types of buyers can be identified:

  • strategic investors, such as competitors, customers, suppliers, and market participants, as well as
  • financial investors, which include private equity firms, family offices, and investment companies.

Finding a Strategic Buyer

To identify the right strategic buyer, it is important to understand their strategic rationale. Strategic rationale typically includes:

  • Expanding the product range,
  • Taking advantage of revenue and cost synergies, or
  • Improving the competitive position and gaining market share.

Strategic investors typically pursue a long-term investment strategy in which the acquired company is permanently integrated and retained. Therefore, they often strive for a 100% acquisition.

In addition to the strategic orientation, financial firepower also plays a key role. To be considered as a potential acquirer, the buyer should typically be several times larger than your company. However, the buyer’s size is only an initial indicator. Whether a transaction is financially viable for the buyer can be determined, for example, from the current debt ratio and the potential for raising additional debt. For publicly traded buyers, the question also arises whether authorized capital is available to issue additional shares as acquisition funding.

Finally, decision-making ability plays a decisive factor in the selection of potential buyers. This aspect is typically difficult to assess as an outsider, but there are various indicators that indicate a willingness to acquire companies:

  • Past Transactions: Has the company made frequent acquisitions in the recent past? Does it perhaps have a proven M&A growth strategy?
  • M&A Expertise: Does the company have an internal corporate development or M&A department?
  • Parties Involved: How is the company structured? Are there many decision-makers and committees that must approve an acquisition? Direct and short decision-making processes with fewer decision-makers often indicate greater decision-making power.

However, the latter aspect in particular can often only be determined through previous transaction experience. Based on this, we have developed our own assessment of many market players.

Searching for a Financial Investor

Investment by a financial investor occurs through one of two paths: as a direct acquisition or as an acquisition by an existing company owned by the financial investor (so-called portfolio company).

The latter constellation, in particular, has the advantage of combining the greatest advantages of both types of buyers: the decisiveness and speed of a financial investor and the synergy potential of a strategist.

For the discussion of buyer identification, we will now focus on the direct acquisition route. Whether a financial investor is suitable for your company depends in particular on the following factors:

  • Investment criteria: Many investors specify certain industry and size criteria for the companies they prefer. Does my company, at least roughly, fit these criteria?
  • Industry expertise: Does the investor have suitable industry knowledge from previous investments? Do I trust the investor to further develop my company?
  • Holding period: Is it a “closed” (5-7 years) or “open” fund (unlimited)?
  • Share and reinvestment: Is the investor typically interested in minority or majority investments? Is there a possibility (or the investor’s desire) that I reinvest in my company for the holding period?

The last aspect in particular can be interesting for you as an entrepreneur, allowing you to continue to hold a minority stake in the company and participate in the increase in value when the financial investor exits after the holding period.

Special Features in the Software Environment

In addition to the generally discussed factors, there are some sector-specific aspects that we would like to consider in conclusion.

In the strategic environment, several M&A rationales have emerged that are often found in the software sector. Horizontal integration often plays a key role for software companies. In this case, a strategic buyer acquires another product to complement their own product range and leverage cross-selling potential.

For example, IT software management (ITSM) providers are frequently purchasing HR and document software management providers in order to develop into a general provider for enterprise software management (ESM).

Due to the high attractiveness of the industry, individual financial investors have also established themselves in the German market who focus exclusively on the IT and software sectors. You can count on these investors in particular to have a high level of industry knowledge and a deep understanding of your business model and the relevant drivers.

How can I use this information to my advantage?

In summary, identifying the right potential buyers requires market knowledge, extensive research, and an understanding of the seller’s individual goals. This aspect is an essential contribution of an M&A advisor like Loy & Co, which we offer our clients.

As a software entrepreneur, you should consider the following aspects when preparing for a sale:

  • A sufficiently detailed and careful buyer identification prior to approaching the buyer saves time, money, and frustration in the further process.
  • A strong preference or a blanket exclusion of a specific buyer group can have a negative impact on the sales process, depending on your personal goals. Financial investors often enable a quick process, whereas strategists can often offer higher purchase prices.
  • Based on your knowledge of your own business model, you can develop hypotheses in advance about the context in which a merger might make sense and what synergy potential exists.

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