Future vision European IT M&A market

In this article, I want to give you some insight into the European M&A market for IT companies. I am in the process of creating a vision of how IT companies should be sold in the 21st century. The question I am asking myself is if the current M&A market for IT companies is efficient. Are new opportunities arising now that the available technology in the world is growing at an increasing speed? Are all the IT business owners that want to sell their company still being served in the best way? Should the formal process stay the same? Are there better ways to educate IT business owners about the process, valuations and legal aspects of a business sale? Should buyers be able to find suitable targets more easily? Is confidentiality still as important as it was in the past? What impact does this have given we see many more movements in the labor market where people spend less time at a company than decades ago? Can software help to play a role in the field of confidentiality? Can and should cooperation between IT European M&A advisors increase and if so, should this be offline or online? How can new technologies help with raising capital for software and IT companies?
A special focus here is on the annual CFIE IT M&A conference in Berlin in October 2018 where our partners meet and network. All these questions will be discussed while networking behind the scenes by the CFIE M&A team.

Buyers for IT companies in Europe

Daily, there are literally many thousands of IT buyers searching for IT companies to acquire across Europe. This ranges from the large Indian IT consulting companies to smaller more specialist software buyers or individuals working on a local scale only. I would not be surprised if there are up to a thousand advisors working more or less actively on the sale of IT companies all across Europe. However, there is very limited sharing of information about IT buyers and their requirements between M&A advisors. During a sale process of an IT company, an advisor approaches up to 10 IT buyers and often analyses many more. However, after a company is sold, the requirements and level of interest of each of these buyers remain unknown to the market. An important part of an M&A network is to share this knowledge and of course to find buyers for each other’s projects. We at CFIE think it is a shame that all this information about IT buyers is lost and the wheel needs to be reinvented each time. Hence, we have made an overview of the acquisition requirements of a large number of the IT buyers we came across. This overview of IT buyers can be found here: Online business brokers.

Our objective is to map and list all European IT/software and other IT-related buyers here so IT owners or IT M&A advisors can use it to find possible buyers for their sell-side projects more easily. Please reach out to us to list your contacts (IT buyers) at CFIE. We have clear commission sharing agreements, so everybody can only benefit from this. Buyers can also list themselves, so we can contact them once we or our partner advisors have suitable targets.
Getting access to the right, unanticipated buyer can be very meaningful. Hence, it is important to have a good understanding of the business projects your partners are working on. At the annual conference, you have the opportunity to share information about the IT buyers you are in touch with. One can go much deeper and the direct personal touch will help as well. There is a commission sharing in place between the head office and the individual IT M&A advisors. In my opinion, all IT and software buyers you know should be listed on the CFIE M&A platform.

Are there better ways to educate IT business owners about the process, valuations and legal aspects of a business sale?

I am often surprised by the knowledge or experience of IT business owners about the M&A process. As an example, I want to mention the field of company valuations. (IT and software) business owners tend to overestimate the value of their company. We see that, especially with smaller IT and software companies. Here the owners expect that profit or revenue multiples are the same as for large software companies. This is obviously not the case. Sometimes business owners start a negotiation process which is doomed to fail as the valuation demands of an owner will not be paid by an interested buyer. Having access to realistic valuations of IT or software companies would help business owners a lot. With this information, owners would know upfront if it is the right time for them to start a business sale or not.
We are also thinking about making educational videos about the process of each part of a business sale. We have already experimented a bit with videos in the past. We are looking for the right time to roll out this project on a larger scale. I am thinking about descriptions of the process. Also, simple educational movies from our IT M&A members about specific parts of the process (due diligence, legal), bottlenecks, ways to prepare, specific items for IT or software companies, etc.

Serving smaller IT companies in a business sale

Are there new opportunities now that the available technology in the world is growing at an increasing speed? Are all the IT business owners that want to sell still being served in the best way? Should the formal process stay the same? While working on a business sale with a partner in the Netherlands recently, I again realized how much work there is in the formal support in selling a company. As a result, the costs for a business sale of a small to medium sized IT company can go up to many tens of thousands of euros. For business owners of small companies, the costs related to a sale are often too high. For larger companies. the total amount can sometimes be up to hundred thousand euro or more. These services can in practice only be afforded by IT business owners that have a valuation of several millions of euros. What happens with the smaller IT companies (valuation up to 1m euro) that are looking for a buyer for their company? How can these business owners be helped in a cost-effective way? Can business sales portals like the CFIE IT company portal play a role here?

Information technology companies for sale

Using new technologies to improve the formal process

As in other industries, the M&A service market needs to make processes more efficient. Using new technologies to streamline processes can help to decrease costs and hence keep the sale process for business owners as cost-effective as possible.
New technology can help in improving the signing of documents like NDAs (example DocuSign). A question is if this makes a material difference in the whole process. The digital data room is a large improvement compared to the physical one that was used in the past (it already seems like a long time ago). There are currently service providers that provide such basic infrastructures at a relatively low-cost (like Dropbox). However, one should also take the issue of security into account compared to more formal ones (like Intralinks or iDeals) that might score better on the aspect of security. Outsourcing valuation studies (if needed) or the preparation of information memoranda to low cost outsourced providers is an opportunity to decrease costs, but the quality and possible language issues need to be managed well.
A portal like CFIE’s IT buyers list that shows a large number of potential buyers that can help in making a suitable long or short list quickly. Once the list is more complete and covers all European countries and ICT activities it can be used for finding possible buyers.

Online business brokers in ICT

What do you think? Should the formal process stay the same? Which further improvements can be made?

Topics discussed during the annual CFIE IT M&A conference

Many IT and software topics are discussed during the conference. Individual advisors present IT or software deals they are working on. The annual conference can help advisors to get input about possible new buyers, how to structure a deal or how best to position a company. This based on the latest insights from within the field. There is also time for informal one-on-one networking that increases the strength of the personal relationships. Get up to date with the latest activity of the individual CFIE M&A advisors and discuss current trends in the IT M&A market. Further, one gets an update on the M&A situation in the various European markets. In the end, there are many reasons why it is good to meet-up regularly with fellow M&A software and IT advisors.
Being a successful merger and acquisitions advisor depends very much on the network you are involved in. If you can use a broad European network of advisors among whom are many industry experts it is much easier to find the right buyer for your M&A project. In my opinion, it also depends on how you embrace new technologies. All the knowledge that M&A advisors have in their heads should be available online for all European IT business owners, so they can use it to their benefit. The informal get together during the conference helps facilitate cooperation in daily practice. We explicitly take the time to just be out together when there are no practical obligations. Taking time for personal matters helps us to develop new thoughts on how to arrange processes, with whom to network or how to adjust one’s marketing activities. There is so much we can learn from other people in the team and how processes are set-up in other firms or countries.

Conclusions about the CFIE M&A IT annual meetings

Having an annual meeting is a valuable part of the CFIE M&A community. Being together helps create team spirit. However, each advisor really needs to be convinced of the benefits of an IT M&A community and share input on current projects and closed transactions. Only then, can other partners benefit and be aware of similar transactions (SAP services, software development, hosting or document management companies) done several years before. It is important that the communication remains continuous after the CFIE M&A conference and throughout the year. The question is if the CFIE M&A IT and software advisors can live up to these expectations? What do you think?