Types of Buyers for Technology Companies

Types of Buyers for Technology Companies

The software and technology industry is a fast growing, fertile industry saturated with buyers. Due to the amount of funding supporting this market and the large number of executives seeking to sell their businesses it is necessary to identify and understand the types of buyers and their motivations. When it comes to M&A activity, understanding these buyer motivations gives you a deeper understanding of how to best work with the buyer during the transaction process, as well as an understanding on the company may be managed going forward.

Buyers can be broken down into four major categories; strategic buyers, financial buyers, financial buyers with a strategic vein, and individuals with backers. Each type of buyer brings their own unique skillets and benefits to the transaction.

"When you have mergers and acquisitions that improve the quality of your product, the ability to grow and bring better efficiency, it's good for all."         – Roger Agnelli

Strategic Buyers:

Strategic buyers are more often than not core industry players in the tech world. They are looking to expand their businesses or are seeking companies that would compliment their existing business; the companies they desire are generally aligned with their existing business. When seeking new opportunities, these buyers measure the deal & valuations by what they’d gain strategically through the acquisition. Reasons for acquisition could be anything from an increase in market share, incorporating a new technology, gaining access to a wider customer base, growing a tangential market, or growing their business vertically in the supply chain.

For example, in 2014 Google acquired Nest, a smart thermostat company, for $3.2 billion. After a few rocky years, Nest was fully incorporated with Google in 2018. At first glance this transaction seems out of character. Diving a little deeper this was one of the first moves toward Google building smart home products, allowing Google to not only bundle their services and shift years of mistrustful consumers but to also gain more insight into behaviors in the home and business to position Google for more growth and innovation.

 Financial Buyers:

Financial buyers' interests are strictly in growing their financial position. When examining a company they focus on operational efficiency, market stability, and growth potential. These factors can determine future success, and give indication of a solid and profitable company.

These types of buyers are generally private equity groups or family offices. Since they have obligations to individual investors (the PEG's funders), they seek out different success metrics targeting annual returns on their investments. Private Equity Groups operate with a buy, grow, sell, philosophy, intending to sell following a 3-7 year hold period filled with growth and a strong return. Family Offices focus on similar values but often have no obligations for an annual return on investment or a sell time frame. Their intent is to preserve and grow family wealth under a specific value philosophy.  Positively, these buyers provide financial oversight but continue to rely on existing (or new) management to run and grow the business. Business owners are often kept on for a period to run the company under new ownership, carrying the business post sale for a share of interest.

For example, a private equity firm may have expanded its holding base by acquiring both an auto parts manufacturing company and an oil & gas services company. This allows them to be stakeholders across the several disparate industries, investing in sectors they know and in companies which have a solid value base, thus allowing them to diversify their holdings to mitigate risk exposure.

Financial Buyers with a Strategic Vein:

These buyers operate with a philosophy that is a mix of both financial insight and strategic business. Often they are private equity groups or investment firms that take a stronger initiative in growing and building the company. Strategic financial buyers understand it takes time and capital to aggressively grow a business. Through a platform company, they grow organically and acquire based on strategic synergies in market expansion, technology, or vertical integration. Financial backing through an investment firm makes this growth possible.

The objective for these buyers is to grow for mass, focusing not on short-term annual return metrics but on building overall revenue & market share. This growth can happen through additional ‘add-on' acquisitions as well as inserting aggressive capital supporting organic growth. Often the process entails running at a financially break-even pace to grow market share and revenue, then transforming the company to one that is highly profitable (through operational efficiencies) and positioning the company for sale to next level of investor.

For example, Greater Sum Ventures, a private equity group, acquired a company founded in 2013 as TheraNest. Through the process the company was rebadged as Therapy Brands and acquired over a dozen 'add-on' companies (including a company marketed by principals of TKV6). By focusing on acquiring behavioral therapy technology companies with strong synergies the company expeditiously grew through market acquisition & cross selling services among the add-ons, ultimately boosting revenue & customer reach. In 2018, Lightyear Capital announced a majority investment in Therapy Brands inspired by their growth, retaining Greater Sum Ventures as a minority investor.

Individuals:

Individual buyers are backed by small groups of targeted investors (often referred to as Search Firms). These firms search for small businesses within their industries of expertise to team up with and grow. The buyer then purchases the company with financial partners with the intent to later exit.

In the search to sell your company, particularly in software and technology, it is imperative to be cognizant of the types of buyers, why they buy, and what it means for you and your company. It is imperative to not rules out one type during a sales process, allowing your advisor to vet out the opportunities, as they may come from unexpected angles. This streamlines conversations with M&A advisors, easing stress and promoting a common language as you navigate these rocky waters together. With the right advisor and right buyer, you’ll be set for success.