For most software entrepreneurs, the path to liquidity is acquisition: Find someone who wants your company or product or customer list, or all three. But in this economy, selling any large asset is a tough nut; just ask all those underwater homeowners.
Does that mean you need to forget your retirement dreams? Not necessarily.
We recently spoke with Ken Bender, managing director of San Diego-based Software Equity Group, and he offered some great insight about the current technology M&A market, backed up by SEG's extensive research.
Founded in 1992, Software Equity Group has brokered deals for both privately-held and publicly-traded technology companies in the United States, Canada, Europe, Asia Pacific, Africa and Israel. The firm is ranked among the top 10 investment banks worldwide for application software mergers and acquisitions.
The research that SEG performs is formidable: You can download their Quarterly Reports and Monthly Flash Reports for free; you simply need to register on their site. In addition, SEG publishes an Annual Report for $595; it's 95 pages of stats, data, and detailed analysis.
From his years of experience and most up-to-date M&A research, Bender offers this advice to software CEOs:
Tip #1: It's a good time to be a seller -- if you're the right target.
We don't need to tell you that the last couple of years have been tough, and the last 10 years have seen massive changes in the software industry landscape.
"In a lousy economy, with lousy growth, you get modest M&A activity," Bender says. "Median public performance -- growth -- went from 14.3% in 2008 to negative 1.4% in 2009 -- that's a decline of $75 billion in IT spending.
"In 1999 there were 336 public software companies, all of which we tracked. In February 2011 there were 151. Think of the implications of that for someone who as a $30 or $50 million software company: There's less than half as many buyers out there."
But, given the M&A activity in 2010 and buyers' attitudes, Bender is positively upbeat. "In 2010, IT spending went positive, 2% over the previous year," he says. "There were 1,586 deals last year, and the median multiple has actually gone up a little bit, to 2.2 for the year."
Translation: At the median, buyers paid 2.2 times the acquired company's revenues for the past 12 months -- aka "trailing 12."
Those 1,586 M&A transactions in 2010 were worth a total of $51.9 billion, and the deal count is a 19% increase over 2009, when there were only 1,329 deals. So, Bender says, there's definite upward movement that's should make sellers feel better. "By historical standards, we're at or above median," he says.
Before you start celebrating, however, keep reading: Bender and SEG have a number of compass points to keep you on a realistic exit route.
Tip #2: Forget about a quick turn.
"Buyers are out there, and they have money -- almost record amounts of cash -- but there's no pressure to spend that money or do it quickly," Bender says. "The average deal time has changed drastically. Instead of nine to 12 months, some are taking 15 to 18 months and even longer."
What's causing the drawn-out deals?
"Ongoing discussions, due diligence," says Bender. "because of the shift to consensus-driven mentality on the part of buyers It's become a consensus-driven environment: Everyone has to buy in, or there's no deal. No longer is a deal driven just because the acquiring company's CEO likes this space.
"Companies are definitely selling, even for reasonable multiples, but the huge multiples we saw during the internet bubble are few and far between. Sellers are going to encounter a very different buyer mentality."
Tip #3: Time your exit to market adoption.
"Exit timing is everything," Bender says. "You can wait and miss the boat, or go too soon and devalue the sale.
"What we know now is that market adoption drives M&A activity. When market adoption hits about 20% to 50% of the available market, we deem that the premium exit window.
"Some software companies might get there as quickly as two or three years, if it's a well-defined vertical space. With cloud computing it's a much steeper curve, because buyers are delaying placing their bets. But when the adoption is steep, there's a lot of M&A activity.
"At 20% to 50% penetration, when buyers are placing their bets, it's a wake-up call. It doesn't matter if you're growing 20% or 200% percent per year. Buyers know that IT spending will come back, so they're building or buying someplace else. Sellers who wait are waiting at their peril.
"In 2002 to 2003, we saw 19 deals in a 12-month period in the security space: antivirus, malware, and the like. And it's happening now in cloud computing.
"Buyers will still have a checklist. Did you do it the way they want it? Did you write it in the right language, on the right platforms, reflect their way of going at it? You have to be a fit for that buyer.
"But if you wait, you will turn down opportunity. The buyers during this adoption period will have placed their bets elsewhere."