The tech sector is one of the most targeted for M&A activity, attracting a wide variety of cross-industry buyers. For entrepreneurial tech businesses operating in fast-developing areas such as artificial intelligence (AI), blockchain and cloud computing, this presents an opportunity. But what can they do to attract a trade buyer and optimise their market valuation?
Research has revealed that around 48 per cent of M&A activity in the UK is driven by non-tech companies seeking to acquire next generation technology. A further 39 per cent are seeking to acquire new digital capabilities.
With so much attention on the sector, tech business owners are aware of the importance of making the right impression from the start. Gone are the days, when they might launch a new product onto the market before it has been properly tested in an attempt to gain traction and attract investor interest. Today, tech businesses must be able to demonstrate that their product is fully tested and scalable at the point of market entry.
One of the key factors behind the tech sector’s M&A boom is the drive towards digital innovation, across a range of industries. The demonetisation of tech has led to a rise in businesses looking to expand their product or service offerings and add value for customers by forging links with technology-rich companies. Tech innovation is also in high demand, with many original equipment manufacturers (OEMs) looking to acquire tech companies to bring new generation solutions to market more quickly.
For tech companies interested in realising value through a potential sale, it’s important to start preparing at least seven to nine months beforehand. This will allow time for the business to ensure its financial management data, reports and accounts, and sales figures, are in order and ready to be presented in the best possible light.
Understanding the target market of a potential buyer is crucial and a tailored sales pitch will be most effective. There are many platforms, on and offline, which provide information about latest technology news, so it is wise to make use of them. It is also worth bearing in mind that in order to proceed, a potential buyer will need a strong business case, so anything that can be done to support this will be helpful. For example, the target business may be aware of an existing problem, such as low sales or revenue, or an existing product that is need of refinement. It is important that enough groundwork is put into researching this idea and presenting the case as clearly as possible.
While having confidence in the brand is key for potential buyers, a business that has confidence in its management team will be more attractive still. Investing in and proving that a company has a strong growth story is key to attracting buyers and securing their investment. By demonstrating the significant improvements that have been – and continue to be – made, including new product lines and flourishing partnerships, potential buyers are more likely to buy into the business; increasing the chance of securing a deal.
In order to stand out from other players in the market, it’s also important that a business is familiar with its unique selling points. This should include an assessment of how much traction it has secured in the market, whether there is room for a competitor, and how it aims to differentiate itself. As innovation and technology are growing at an unprecedented rate, ensuring that ideas are protected with the right intellectual property (IP) rights, such as trade mark registrations and patents is essential. IP can be shown on a balance sheet as an intangible asset (as long as it meets certain conditions), which could help to attract investor interest.
There are currently numerous cash-ready investors in the market, who are keen to take advantage of tax relief options such as the Enterprise Investment Scheme (EIS), in exchange for an equity stake in a growing tech business. As such, consulting a third-party adviser is important to fully understand the value of the company and its potential development options. Getting the right expert advice is also vital with regards to best practice around compliance and governance, ensuring that all the appropriate corporate documentation is in order well ahead of going to market and helping business owners to avoid any potential pitfalls.
Along with advice from experts, business owners should be aware of potential risk areas and put mitigation strategies in place. For example, risks could include overvaluing or undervaluing the company, underestimating the other competition in the market or giving away too much equity. Another common pitfall is failing to understand the type of investor that the business is seeking and targeting them specifically.
Before sealing the deal, careful consideration must be given to the post-deal integration process. This should involve an assessment of the buyer’s business in advance, based on their culture and values. Consideration should also be given to how well they will complement the business. Similarly, the collaboration of management teams is vital to guaranteeing the success of a merged company. A settling-in period, consisting of open and honest discussions, is a wise first step, ensuring that all parties are satisfied with the deal on the table and any issues can be dealt with sooner rather than later.
In one of the most targeted industries for mergers and acquisitions, it is important that companies put themselves in the best possible position to maximise their chances of attracting a buyer and, ultimately, take advantage of an opportunity for the business to continue its growth journey. Putting a detailed plan in place well ahead of going to market and seeking the right expert advice will allow them to drive business value, find the right buyer and capitalise on the tech sector’s M&A boom.
Alex Duffy is a corporate finance director at top 20 accountancy firm, Menzies LLP.