From The Editor | November 1, 2017

6 Takeaways From A Software M&A Expert

Abby Sorensen July 2017 Headshot

By Abby Sorensen, Editor

Ivan Ruzic

Ivan Ruzic has built and sold multiple software companies throughout his 30+ year software career, and he’s held virtually every senior executive position at both startups and mature companies. He is a VP with the Corum Group, an M&A advisory firm that works exclusively with software and tech companies. Ruzic delivered a keynote address at the ISV Insights conference in Philadelphia about building a software company with the end in mind. Here are six takeaways from his presentation.

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#1 – In the last 24 months, 89 percent of all acquisitions were by “strategic” buyers. Of these, 60% were of companies at $50 million EV or less. Strategic buyers include complementary products/services/distributors, similar businesses in different geographies, new advanced technologies, and competitors. In 2016, Microsoft bought 10 companies, Salesforce.com bought 12, and Alphabet (Google’s parent company) bought 21. That’s just the tip of the iceberg of strategic buyers – there are many more out there you might not even consider, such as a non-tech foreign company looking to break in to the U.S. market by purchasing a high-margin software company.

#2 – Parts of your company can’t be assessed by a potential buyer looking at a balance sheet. The top 10 intangible assets that add value to any software company are:

  • Intellectual property
  • User base
  • Channels
  • Leads
  • Domain expertise
  • Alliances
  • Staff
  • technology
  • Processes
  • Web-SEO

#3 – Be wary of VC funding. Large companies looking to buy are seeing less and less value from VCs and some prefer to buy before VCs invest. More than 60 percent of likely M&A exits don’t work for VCs, who on average expect a 10-30x return, a $100 million dollar plus exit range, an and exit within 9-13 years. Only 7 percent of transactions are VC-backed, and the average age of software companies being sold is 15 years.

#4 – There is a 75 percent probability that your software company will fail to secure an optimal exit even it succeeds and is valuable. ISVs need to treat the M&A process every bit as seriously as it would a software rewrite. Factors contributing to this include:

  • Missed the timing window
  • Consolidation/market shift
  • Over-investment
  • Misalignment of stakeholders
  • Improper buyer research
  • Misunderstanding buyer process/models
  • Improper due diligence preparation
  • Poor buyer qualification/orchestration
  • Deal fatigue

#5 – Only 11 percent of buyer solicitations result in a transaction. Don’t jump the gun the first time your phone rings. If you can generate an auction process to sell your company, the average improvement from the first offer is around 48 percent.

#6 – The software M&A market is healthy, and Corum Group predicts it will remain healthy thanks to disruptive trends, many new buys in the market, overall strong financial markets, and the cash strategic and financial buyers have on hand. This being said, some software executives have common misconceptions about why they can’t or shouldn’t sell, including:

  • “We can’t sell, we’re not profitable”
  • “We have conflict to resolve first”
  • “I’ll launch my next version, then sell”
  •  “We’ll raise another round then  sell”
  • “Preparation starts when you decide to sell”
  • “We have too much debt to sell”
  •  “We’re not SaaS so buyers won’t bite”
  • “I need an audit before selling”
  •  “Buyers won’t want our legacy tech”