Who might acquire your company?

February 24, 2020 | Jani Tsui

Understanding valuation: How would a buyer assess a tech company's value?

As a tech entrepreneur, you need to anticipate what type of potential future buyer may be interested in your company early on – even if you have no immediate acquisition on the horizon.

While a target acquirer may change as the company matures, identifying buyers early will help your leadership team determine how to best position the company for increased shareholder value. 

There are two common 3rd-party buyer types in the Canadian tech ecosystem:

 

Financial buyers 

Financial buyers (typically private equity firms) are looking to acquire business’ future profit streams. Most financial buyers require a minimum growth rate and level of profitability before purchasing a company. As these firms most often have financial, rather than strategic, incentives for acquiring promising tech companies, they’re often willing to let the operation run on its own while providing valuable operational and financial advice. In short, they’re professional business builders and will commonly generate and incent more profitability while encouraging new growth opportunities. 

If you plan to attract this type of buyer, you should focus on improving profitability, demonstrating growing market interest in your product or service, and strengthening your management team.  You should be able to demonstrate critical distance from the companyIn other words, management needs to prove that the company can function on its own, independent of its founding team. 

 

💡Private Equity players are highly active in Canada, and don’t forget about US-based firms and funds.  At TechExit.io, you will hear from both Canadian and US-based private equity acquirers in order to understand what they look for when making an investment.   

 

Strategic buyers 

Strategic buyers focus acquisition activity on companies whose capabilities can fit within or enhance their own company and product offerings. In tech, strategic buyers will look at a company’s technology, customer base, and geographic markets. In one type of potentially less-appealing acquisition, a strategic buyer may consider buying a company to recruit its key employees, such as their top engineers — in these “acqui-hires“, the amount offered may be expressed on a “per head” basis. In order to achieve synergies, the buyer may also eliminate parts of the acquired business.   

Companies who want to attract strategic buyers with other objectives should focus on enhancing their technology and market share. By researching and partnering with companies who would benefit from their tech, companies can start building a working relationship with prospective buyers, achieve strategic alignment, and improve their valuations as they track towards formal M&A discussions.  

 

💡Strategic acquisitions are commonplace in tech markets and often result in higher multiples. At TechExit.io, you will learn just what you need to do in order to maximize your synergistic value to a strategic acquirer. 

 

Interested in learning more? 

Make sure to check out our session “Lessons from Seasoned Buyers” where you will hear from a broad spectrum of serial acquirers who will help you get in the mindset of active buyers in today’s market, and understand which buyers are buying, and who they’re buying and why. Register for Vancouver event on April 16th here and for Toronto, April 29th,here. 


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