At Eaton Square, we regularly speak with both buyers and sellers of services firms. One thing is clear: the features that sellers believe are valuable are not always aligned with what buyers are actually looking for.

Here are seven buyer priorities that sellers of services businesses often underestimate—and how to better prepare your firm for a successful sale.

1. Recurring Revenue Over Project Work

Buyers love predictability. A firm built on long-term contracts or recurring revenue models (like managed services or retainers) is typically valued higher than one relying on ad hoc projects.
Tip: Highlight contract terms, renewal rates, and the percentage of revenue that is recurring in your financials.

2. Strong Client Retention and Diversification

Having a few high-value clients may be profitable—but it can also raise red flags for buyers concerned about concentration risk. They want to see long-standing relationships and a diverse client base.
Tip: Show client tenure and satisfaction metrics. Prepare for questions about what would happen if your top one or two clients left.

3. Documented and Scalable Processes

Is your business built around you—or a repeatable, scalable system? Buyers want to know your firm can continue to operate smoothly without heavy reliance on founders or a handful of senior team members.
Tip: Invest in documenting standard operating procedures (SOPs), workflows, and training materials before going to market.

4. Proprietary IP or Tools

Intellectual property—even in the form of frameworks, databases, software, or methodologies—can be a key value driver. These assets make your offering more defensible and difficult for competitors to replicate.
Tip: Catalog and explain any IP you’ve developed. Be clear about ownership rights and legal protections.

5. A Capable, Committed Team

People are your greatest asset—but also a potential risk. Buyers want to understand whether key staff will stay on post-transaction, and whether there’s a leadership bench ready to step up.
Tip: Outline retention strategies, team structure, and succession planning. Have employment contracts and incentive plans ready.

6. Clean, Transparent Financials

Service firms sometimes underinvest in robust financial reporting. That’s a mistake. Buyers want to understand the true earnings power of your business—free from one-time expenses or owner perks.
Tip: Work with your accountant or advisor to present adjusted EBITDA, normalized costs, and a clear picture of cash flow.

7. A Growth Story

Past performance matters—but buyers are really buying the future. They want to see a credible path to growth, whether that’s through new services, markets, geographies, or client segments.
Tip: Prepare a clear, concise growth narrative supported by data. Highlight your pipeline, competitive advantage, and market trends.

Final Thought: Sell a Business, Not Just a Job

Many services business owners have spent decades building deep expertise and client trust—but they’ve also unintentionally built a company that revolves around them. To buyers, that’s a risk. The key to a successful exit? Start viewing your firm as a transferable asset, not just a successful practice. That means strengthening systems, teams, and recurring value well before you enter a transaction.

Thinking about selling your services business?

At Eaton Square, we specialize in advising owners of consulting, engineering, IT, and professional services firms on how to prepare for and navigate a successful exit. Let’s talk. Contact us for a confidential conversation.

Factors That Increase  The Value Multiple

At Eaton Square, we’ve seen firsthand how value multiples are closely tied to a buyer’s perceived risk. The lower the risk, the higher the multiple. So, while many owners focus on achieving a particular sale price, the more strategic approach is to focus on making the business more desirable—and de-risking it for the buyer.

Below, we outline key factors that can help increase the value multiple buyers are willing to pay.

1. Strengthen Your Financial Foundations

Buyers need clarity and confidence in the numbers. Cleaning up your financials means more than tax minimisation—it means aligning internal records with external reporting, tightening key ratios, and eliminating non-core or personal expenses from your accounts. While advisors can assist with recasting earnings, only you can ensure your financial systems are clean and reliable.

2. Build a Standalone Leadership Team

If your business relies heavily on your personal involvement, it may struggle to attract premium buyers. Establish a leadership team with defined roles, decision-making authority, and formal agreements in place. A capable, independent team signals that the business can thrive under new ownership.

3. Reduce Customer Concentration

No single customer should account for more than 10% of revenue. High dependency creates perceived risk. Broaden your base by expanding into adjacent markets, acquiring new clients, and deepening your bench of suppliers and partners.

4. Reach Scale

Smaller businesses—particularly those with less than $5 million in revenue or $1 million in EBITDA—are often overlooked by institutional buyers due to the effort required post-acquisition. Consider organic or strategic growth before going to market.

5. Document Core Processes

Clear documentation across operations, finance, HR, and sales demonstrates that your business is organised and replicable. This also facilitates buyer due diligence and can support financing efforts.

6. Expand Strategically

Growth in revenue, product offerings, or geographic markets increases both perceived potential and transferable value. Show buyers that there is a well-executed strategy in place—not just ambition.

7. Demonstrate Agility

Markets shift. Buyers value companies that have shown the ability to respond, pivot, and capture new opportunities. Document examples of how your business has evolved or innovated in recent years.

8. Highlight Your Track Record

A consistent performance history increases confidence in future earnings. Use historical data to illustrate how the business has weathered market changes and continued to deliver results.

9. Know Your Market Position

Be prepared to educate buyers about your industry and your position within it. Market share, growth prospects, and competitive advantages are all key factors that influence valuation.

10. Build Your Brand

Buyers are drawn to businesses with strong reputations, not just strong revenue. Invest in your brand visibility—within your niche, not necessarily with the general public—and position your business as a trusted leader in its field.

11. Formalise Your Plans

Have a clearly articulated business plan, backed by financial forecasts and documented goals. This helps buyers see how the business can be scaled under their ownership.

12. Recognise Hidden Assets

Beyond revenue and profit, intangible assets like IP, proprietary systems, long-term contracts, or strategic alliances can significantly impact value. Make sure these are documented and well-positioned in your sale process.

13. Streamline Non-Core Functions

Many successful sellers outsource logistics, payroll, or manufacturing to keep their operations lean. This not only reduces complexity but allows buyers to see how core capabilities can be leveraged without distraction.

14. Maximise Cash Flow

Ultimately, buyers are buying future cash flows. Work on improving operating margins and net profit. Show clear, sustainable pathways to continued profitability.

15. Improve Presentation

A clean, well-maintained operation—physically and administratively—sends a strong message. Sell or retire idle assets, tidy up the workspace, and ensure your business is presented in its best light.

The Best Time to Start Is Now

Preparing your business for sale takes time—often 12 to 24 months or more. The earlier you begin, the greater your ability to shape how your business is perceived and valued by buyers.

At Eaton Square, we help business owners take a structured, proactive approach to improving value ahead of a transaction. By addressing the factors above, you’re not just improving your multiple—you’re creating a more resilient, attractive business for the right buyer.

If you’re considering a sale in the next few years, now is the time to prepare. Speak with one of our advisors to understand where you stand—and where you can go.

*This article originally appeared on IBG Business website.

John Johnson
Principal

John Johnson is a Principal at Eaton Square. He serves M&A clients by marshaling strong community, regional and national relationships combined with a rich professional background in business sales and purchases. John and his Oklahoma-based firm have managed projects for the owners of hundreds of private family and entrepreneurial businesses.

john.johnson@eatonsq.com
Ph: +1 (918) 749-1616

Confidentiality isn’t just a matter of good paperwork—it’s a disciplined approach that should guide every stage of the process, from initial outreach to due diligence.

A Costly Misstep: When Confidentiality Fails

Consider the case of a large conglomerate selling two subsidiaries. The sale of the first business went smoothly, led by an M&A advisor who managed the process professionally. However, the second sale took a different turn.

A prospective buyer—a direct competitor—approached the seller’s CEO, asking to bypass the broker and negotiate directly. The buyer refused to sign a confidentiality agreement, claiming it was too restrictive. Against their advisor’s counsel, the CEO shared sensitive financial and operational information in the hopes of expediting the deal.

The result? The buyer walked away and immediately began poaching employees, undermining customer relationships, and spreading damaging rumours about the business’s viability. Ultimately, the subsidiary’s performance suffered—along with its value.

This real-world scenario is a powerful reminder: confidentiality isn’t just a legal formality. It’s a business-critical safeguard.

Why Protecting Confidentiality is Essential

Maintaining confidentiality protects more than just proprietary data. It ensures:

• Stronger buyer interest. Top-tier buyers are more likely to engage when the process is well-managed and professional.
• Preservation of value. News of a sale—or failed sale—can destabilise relationships with employees, customers, and lenders.
• Regulatory compliance. Disclosures must be carefully managed in line with privacy, labour, and competition laws.
• Business continuity. Disruption or mistrust within the team can derail day-to-day operations and distract leadership.

Put simply, poor confidentiality can erode value long before a deal is closed.

The Role of a Professional Advisor

This is where experienced M&A advisors bring unique value. An effective advisor:

• Ensures NDAs are signed and enforceable.
• Controls the timing and flow of information to buyers.
• Maintains discretion throughout the process.
• Shields the management team from unnecessary distractions.

By creating a structured, controlled environment, advisors enable sellers to share the right information with the right buyers—at the right time.

Professionalism Protects Value

Selling a business is not just a transaction—it’s a strategic process. And confidentiality is a core part of that strategy. A disciplined, well-managed sale process protects sensitive information, preserves value, and helps secure the best possible outcome for the seller.

After a lifetime of achievement in business, many senior professionals approach retirement or semi-retirement with a familiar question: What’s next? For those who’ve led, scaled, advised, and steered organisations, the transition away from full-time work can feel like the end of a powerful era. But it doesn’t have to.

At Eaton Square, we’ve long recognised that leadership doesn’t switch off with a retirement date. Experience, networks, and insight remain valuable assets—and for the right people, there remains a profound opportunity to stay connected, informed, and influential. That’s why we created the Eaton Square Associate Network.

Eaton Square Associate Network

The Associates Network is a low-commitment, high-value community designed for retired or semi-retired executives who want to maintain professional identity, remain intellectually engaged, and contribute meaningfully—without the demands of operational delivery. It’s not about going back to the 60-hour week; it’s about staying part of the conversation, on your own terms.

Eaton Square is an international M&A and capital services firm operating across 25 offices in nine countries. With over 150 senior professionals globally, our platform is purpose-built for cross-border transactions and capital services across sectors such as IT, engineering sciences, professional services, industrials, mining and emerging technologies. Our clients range from founders of $20–$200 million businesses to global corporations seeking to grow through acquisitions.

The Associates Network extends our global platform by welcoming experienced professionals—former CEOs, partners, business leaders, and senior advisers—into a trusted circle. Associates are individuals with deep networks and a desire to stay close to the industries they helped shape. They play a critical role in expanding our reach, surfacing quality opportunities, and deepening our industry insights.

Benefits of the Associates Network

Membership in the network brings several privileges. First, there’s the intellectual stimulation and professional alignment. Associates are invited to participate in quarterly briefings, webinars, and industry talks. These sessions are led by Eaton Square Principals and external experts, designed to sharpen understanding of capital markets, sector trends, and the evolving landscape of M&A.

Of course, the network also offers financial recognition. When Associates refer opportunities—whether it’s a founder considering an exit or a company exploring acquisition—they work closely with an Eaton Square Principal to qualify and progress the lead. If the referral results in a closed transaction, the Associate receives a share of the fees. It’s a win-win: value for clients, recognition for relationships, and no operational complexity.

Being part of the Associates Network also means becoming part of a global professional community. From Sydney to San Francisco, Toronto to Tokyo, our Associates and Principals connect across borders. These aren’t just networking opportunities—they are relationships rooted in shared values, mutual respect, and decades of collective experience. The strength of the network lies not just in what we know, but in how we share it.

Join the Eaton Square Associates Network

At Eaton Square, we don’t see retirement as an ending—it’s an evolution. The Associates Network is designed to honour what seasoned professionals have built over their careers, while creating new pathways to contribute, connect, and stay engaged.

If you’re a senior leader looking for a new way to stay active professionally—without returning to the rigour of deal delivery—Eaton Square offers a home. A place to be intellectually curious, commercially connected, and part of something distinctive.

To explore joining the Associates Network, visit www.eatonsq.com. We’d be delighted to welcome you into our global conversation.

This decision—more critical now than ever amid global economic uncertainty and evolving trade policies—can define the legacy and financial outcome for owners. With tariffs, interest rates, and market volatility influencing valuations, timing truly is everything.

Our Principal Bob Latham wisely observes, “Owners rarely sell too early, but far too often, they hold on too long.” And the consequences can be stark. Health issues, market disruptions, or unexpected regulatory shifts can rapidly erode the value of a business built over decades.

One vivid example from recent experience: a business owner in his late 60s had planned to grow his company for another decade but was suddenly struck by illness. The business lost its guiding force, and its value to heirs declined sharply. This underscores a sobering reality—no matter how strong your company seems, unforeseen events can derail even the best-laid plans.

How can owners protect their wealth and legacy? Two key practices stand out: a personal health check and a thorough scan of the business horizon.

Business Health Check

Just as personal health is vital for individuals, regularly assessing the health of your business is crucial for long-term success. Monitoring key indicators like cash flow, customer retention, operational efficiency, and market position helps you spot risks early and seize growth opportunities before they become urgent. Proactively evaluating your business’s “wellness” ensures you’re prepared to make strategic decisions—whether that means scaling up, pivoting, or preparing for a sale.

Scanning the Horizon

Even a thriving business isn’t immune to external forces. Interest rate hikes, inflationary pressures, changing tax laws, or shifts in buyer appetite can swing valuations dramatically.

Right now, for example, rising interest rates and inflation are headwinds for some sectors, while strong buyer competition in others sustains high valuations. Owners who actively monitor these market dynamics can anticipate windows of opportunity—or risks—to act decisively rather than react too late.

What Moves Business Values?

Factors that boost business value:

• Consistent profit growth
• Recurring revenue and diversified customer base
• Strong, stable management teams
• Favorable tax environments
• Robust economic confidence
• Healthy owner focus and energy
• High buyer demand and capital availability

Factors that can diminish value:

• Declining or volatile sales/profits
• Market downturns or competitive disruption
• Owner health issues or leadership instability
• Rising interest rates and taxes
• Shrinking pools of qualified buyers
• Legal or regulatory challenges

The Good News for Sellers Today

Despite uncertainty, current market conditions still favor sellers. Acquisition capital is plentiful, and motivated buyers are competing for quality companies. But this window won’t remain open indefinitely. Baby Boomer retirements and economic shifts will soon swell supply and likely shift power toward buyers.

Final Thoughts

Smart owners recognize the urgency of timing. They do the hard work early—monitoring their health, scanning market trends, and partnering with seasoned M&A advisors who understand their business and can navigate complexities.

At Eaton Square, we guide owners through these critical decisions with insights grounded in over a thousand successful, well-timed transactions worldwide. Whether you’re holding and growing or preparing to sell and move on, understanding timing and market dynamics is your best tool for maximizing value and securing your legacy.

Thinking about your next move? Reach out to Eaton Square today to start your personalized business readiness review.

At Eaton Square, we’re seeing a consistent pattern: private equity and institutional buyers are actively chasing deals, but they’re becoming more selective—especially when it comes to industry.

So what are buyers actually looking for right now? And what should owners consider if they’re thinking about selling in the next 12 to 24 months?

Let’s dig into what’s trending—and what it really means.

What Buyers Are Asking For

On any given week, each of our M&A partners is fielding dozens of inquiries from buyers across the globe. While their exact criteria vary, nearly every buyer is clear on two things:

1. Their target EBITDA range
2. The industries they want in on

In many ways, these requests offer a live, rolling survey of what’s hot. But before diving into the list, let’s take a step back.

Not every “hot industry” is worth the hype.

Sometimes buyers are genuinely targeting a sector because of long-term fundamentals. Other times, the demand is driven by capital pressure—they’ve raised funds, they need to deploy them, and they’re following the crowd. That’s not always a sign of sustainable value.

The Return to Real-World Businesses

We’re seeing buyers, particularly in North America, shift away from speculative tech plays (with the exception of cyber) and toward more grounded, cash-flow-positive businesses. In our recent conversations with private equity groups, here’s what’s standing out:

In-demand sectors include:

• Electrical infrastructure services (especially those tied to grid transformation and maintenance)
• Infrastructure maintenance firms with recurring contracts—think roads, bridges, water, and energy assets
• Field services like HVAC, elevators, and fire safety, especially with long-term service agreements
• Pharmaceutical logistics, including storage and cold chain distribution
• Food packing and distribution, with strong capabilities in processing, cold storage, and freight
• IT and cybersecurity services, especially when tied to enterprise clients and recurring work

We’re also seeing continued strength in:

• Environmental remediation
• Precision metals and component manufacturing
• Civil engineering
• Logistics and trucking
• Energy and resources

These aren’t “faddish” sectors. They’re essential industries with high barriers to entry and ongoing demand—traits private equity values deeply.

As I shared in a recent Eaton Square client letter, this renewed interest reflects a more cautious, strategic mindset: investors want businesses that are resilient, understandable, and able to deliver consistent returns, even in uncertain economic conditions.

Global Politics, Local Impact: The Trump Factor

Geopolitical shifts are also playing a role in where capital flows. Policies out of Washington—especially under a second Trump administration—are encouraging U.S. investment to stay home. For Australian and international sellers, this could mean:

• More inbound buyer interest from U.S. acquirers looking to diversify
• A narrowing window for outbound deals, especially in politically sensitive industries
• Stronger demand for high-performing assets in stable, Western markets

If you’re running a mid-market company in Australia, this is a prime opportunity to engage with international buyers before policy tightens further.

Bottom Line: Buyers Still Want Great Businesses

While trends come and go, one truth never changes: good businesses get bought.

Whether your company operates in a “hot” sector or not, if it’s profitable, well-managed, and has growth potential, there is a buyer out there. In fact, many of our most successful deals have come from sectors that weren’t trending—but had the fundamentals to attract strategic or financial suitors.

At Eaton Square, we help business owners around the world—particularly in the U.S., Australia, and Asia—prepare, position, and sell their companies at the right time, for the right value.

If you’re thinking about selling in the next year or two, let’s talk. We can give you a read on market demand for your specific industry and help you understand how global dynamics might impact your deal.

At Eaton Square, we know that low-margin doesn’t mean low-value—and the right buyer sees the opportunity, not just the numbers.

Who’s Buying Low-Margin Businesses? (And Why That’s an Advantage)

Unlike high-margin businesses with high EBITDA that attract financial buyers, low-margin companies appeal to strategic buyers—industry players who understand your business model and see it as a way to scale, diversify, or increase efficiency.

Strategic buyers are:

Already operating in your industry – They know the margins and don’t see them as a red flag.
Focused on revenue, market share, and synergies – Not just financial ratios.
More likely to pay in cash – Because they use less debt, meaning a better deal for you.

By targeting these buyers, we turn perceived weaknesses into selling points—getting you the best deal possible.

Why Low-Margin Businesses Can Be High-Value Acquisitions

What financial buyers see as a challenge, strategic buyers recognize as an asset.

High-Volume, Predictable Sales – A steady revenue stream from repeat customers.
Diverse Customer Base – Reducing risk and making revenue more stable.
Operational Efficiency – Lean processes and optimized supply chains.
Scalability – A proven model that can expand into new markets.
Competitive Moat – Lower margins discourage new competitors from entering the space.
Cash Flow Velocity – Faster capital movement improves return on investment.

Turning Buyer Bias into a Competitive Advantage

With our global network and deep M&A expertise, we position low-margin businesses as high-value opportunities—connecting sellers with the right buyers who appreciate their true worth.

If you’re considering a sale, let’s discuss how to maximize your company’s value. Contact us today.

Robert Latham
Principal

Robert Latham is a Principal at Eaton Square and a managing partner at IBG’s Texas office.

Bob offers extensive M&A experience in the purchase and sale of businesses in the manufacturing, construction, maintenance, and distribution sectors and in logistics and other B2B services.

roberth.latham@eatonsq.com
Ph: +1 713-463-9222

A Promising Environment for Middle-Market Issuers in Q1 2025

It is hard to imagine a more favorable environment for financing middle-market issuers than the private market in Q1 2025. Credit spreads have compressed to their lowest levels in years, and leverage multiples for larger issuers have expanded to levels not seen since just before the Great Recession. If there is one unifying theme in the market today, it is the lack of quality deal flow and the incapacity to get money to work. From an issuer’s perspective, that translates to better pricing and terms; if you are planning to undertake a capital raise in 2025, “Get Ready!”

Market Dynamics in 2024: Fed Rate Cuts and Adjusted Leverage Metrics

During 2024, the Fed reduced the Fed Fund rate three times (in September, November, and December) for a total of 100 basis points. During the same period, SPP reduced its indicative credit spreads five times and expanded leverage tolerances on three occasions. Going into 2025, the process continues. We are making a slight tweak to our leverage metrics, bringing the high end of the leverage multiples for issuers with greater than $25 million in LTM EBITDA to 6.50x (a half turn pop from 6.00x in Q4 of 2024). Pricing is another story; SPP is tightening indicative commercial bank cash flow pricing by 25 basis points across the board and non-bank senior, unitranche, and junior capital indications by as much as 50 basis points.

Recent reductions in pricing are certainly not unique to the private market; credit spreads for leveraged loans, investment-grade and high-yield issues have all compressed over the course of the last quarter. To put this in perspective, credit spreads for corporate issuers, from the highest-quality investment-grade issuers to the lowest-rated high-yield borrowers (and all credit qualities in between), are all currently at levels not seen since 2007, prior to the Great Recession.

Compressed Credit Spreads Across Markets

What distinguishes the private market from the larger traded markets (including the leveraged loan syndication marketplace) is that while issuance exploded in the last 12 months in these public, traded, less parochial markets, issuance still remains suppressed in the private market. As noted in a recent report from PitchBook, “U.S. private credit market activity increased at a slower pace than the syndicated loan market this year. Direct lenders faced dwindling credit spreads and renewed competition from banks.” Interestingly enough, new deal activity in the private market really tracks more to the commercial banking market than the public, 144A, and syndicated loan market. Like the traditional private placement market, during the last half of 2024, new deal activity among commercial banks was also lackluster. Data generated by MarketDesk Research shows that since the Fed started tightening monetary policy (i.e., “quantitative tightening” or “QT,” a monetary policy that central banks use to reduce the money supply and liquidity in an economy), loan growth in the U.S. banking system has been relatively weak, specifically only 2.4% in 2024 vs. ~13.0% in 2023.

Public Market Activity: Refinancing Over M&A

Finally, it should be noted that while the public, 144A, and syndicated leveraged loan market deal activity did grow precipitously in 2024, the overwhelming majority of transactions executed were not for accretive purposes such as acquisitions and capital expansion but rather driven overwhelmingly by refinancing and repricing transactions. In short, all markets, public, private, and syndicated loans were characterized by a- distinct absence of M&A activity, and it is likely that new deal activity in 2025 will also be suppressed unless there is a dramatic pick-up in M&A.

Factors Favoring a Resurgence in M&A Activity

However, conditions are clearly ripe for the long-anticipated resurgence in M&A activity:

1. Sponsor “hold periods” have become attenuated, and sponsors are eager to return capital to LPs (in 2024 the median exit hold period and average existing hold period have increased to 6.4 years and 5.3 years, respectively, up from 5.1 years and 4.9 years, respectively in 2021);
2. The “all-in” cost of capital is about 150+ basis points lower than it was in January of 2024 (SOFR down ~1% and spread compression of another 50+ basis points);
3. Macroeconomic data remains robust (see below), and;
4. Expectations are that the new administration will be more “business friendly” (i.e., less regulatory impediments).

   By the same token, there remains a significant concern about the impact of the new administration’s proposed tariff policy, and ongoing geopolitical conflicts (Ukraine and the Mideast at the forefront) pose a persistent threat of global uncertainty and volatility.

In short, all indications suggest that 2025 is going to be a very exciting time. “Get Ready.”

Tone of the Market

Initial pricing and leverage metric indications point to a particularly aggressive private market start to 2025; bank and non-bank lenders are flush with cash and hungry to book new assets in January. After an unusually long holiday and very little new deal activity for the last 30 days, bank and non-bank lenders, private credit funds, SBICs, BDCs, and insurance companies are all vying for a limited inventory of new assets. 2024 was a “meh” to “ok” year for most market participants, the clear bulk of transaction activity dominated by refinancing and repricing amid a dearth of M&A activity, especially in the middle market. Expectations are that M&A deal flow will finally break open in 2025 as sponsors seek to harvest long-held assets and return capital to LPs (especially those seeking to raise new funds later in the year). Conventional wisdom suggests that enterprise valuations should be enhanced by (i) greater leverage capacity across the board; (ii) credit spread compression (pricing is ~50-75 basis points tighter than January of 2024); (iii) lower base rates (SOFR today is ~4.30%, ~110 basis points below where they started the year in 2024); (iv) a perceived more business-friendly political/regulatory environment; and (v) hopes for a potentially less volatile geopolitical atmosphere (with a focus on the Mideast and Ukraine). While the jury is still out on the deployment and magnitude of a tougher new tariff policy and its potentially adverse consequences on macroeconomic activity, there is little doubt that presumptive issuers in Q1 of 2025 will have among the most competitive issuance conditions since 2022.

Minimum Equity Contribution

The level of new cash equity in a deal remains a primary focus point for all leveraged buyouts. Regardless of enterprise multiples, lenders remain fixated on a minimum 50% LTV (i.e., equity capitalization of 50% of enterprise value), and actual new cash in a deal should also constitute at least 75% of the aggregate equity account. While lenders will certainly give credit to seller notes and rollover equity, the cash equity quantum continues to be an essential and primary underwriting consideration. The good news is that non-bank lenders, private credit funds, insurance companies, BDCs, and SBICs are all potential sources of equity capital as well as debt capital, and in many cases, are more than happy to shore up and backfill the equity account directly.

Equity Investment

Liquidity for both direct equity investments and co-investments is robust in the new year, and in most cases, more competitive debt terms can be achieved where there is an opportunity for equity co-investment. Importantly, equity investment can take a variety of forms (preferred, common, warrants, even HoldCo notes) depending on the unique requirements of a given deal. Interest in independently sponsored deals continues to be strong as well, but investors will require that the independent sponsor has real “skin in the game” (i.e., a meaningful investment of their own above and beyond a roll-over of deal fees). While family offices remain the best source of straight common equity, credit opportunity funds, insurance companies, BDCs, and SBICs will actively pursue providing combined debt and equity tranches.

*Securities offered through SPP Capital Partners, LLC: 550 5th Ave., 12th Floor, New York, NY 10036. Member FINRA/SIPC

Stefan Shaffer
Managing Partner and Principal

Stefan has over 30 years of experience in the private market includes hundreds of transactions in North America, Asia and Europe. Prior to becoming a principal at SPP Capital, Stefan was a Vice President in the Private Placement Group at Bankers Trust Company where he was responsible for origination, structuring and pricing of private placements for the Capital Markets Group, both nationally and internationally.

sshaffer@sppcapital.com
Ph: +1 212 455 4502

Here are 5 key trends in Software M&A in 2024:

1. Recovery in M&A Activity

• Deal Volume and Value: After a dip in 2023, the total deal volume in 2024 is projected to grow by approximately 15-20%, according to industry reports. This resurgence is fueled by companies looking to enhance their digital capabilities, enter new markets, and consolidate their positions in existing ones.
• Valuations.   One of the impacts of the techwreck was a rapid divergence in buyer/ seller valuation expectations.   The gap appears to have substantially closed,  buyers looking for ‘extreme value’ have found themselves missing out,  and sellers expectations appear to have reverted back to metrics in line with long-run benchmarks.
• High-Value Deals: Mega-deals (valued over $10 billion) are making a comeback, particularly in sectors like enterprise software, cloud computing, and cybersecurity. In the first half of 2024 alone, several deals have surpassed the $5 billion mark, indicating robust investor confidence.

2. Increasingly Complex Regulatory Environment

• Regulatory Scrutiny: The regulatory landscape is increasingly stringent, especially for tech-related deals. In the U.S., the FTC and DOJ are more aggressively scrutinizing deals for anti-competitive practices. Globally, the rise of economic nationalism has led to more deals being blocked or delayed. For instance, in the EU, over 25% of proposed tech mergers faced significant delays or were abandoned due to regulatory hurdles in 2024.
• Cross-Border Challenges: Cross-border M&A deals are particularly challenging, with 40% of such deals in the tech sector facing extended review processes. Governments are increasingly wary of foreign acquisitions, particularly in sensitive sectors like AI and cybersecurity.

3. Focus on acquiring Technology Capabilities

• Tech-Driven M&A: Technology capability acquisition is one of the primary motivations driving  M&A in 2024. Companies are acquiring firms to gain access to cutting-edge technologies, with a strong focus on artificial intelligence (AI), machine learning (ML), and cloud infrastructure. According to PwC, over 60% of M&A deals in 2024 are motivated by the need to acquire new technology or digital capabilities.
• AI and Automation: The integration of AI and automation technologies is a key trend, with 35% of tech M&A deals focusing on companies specializing in AI, robotics, and automation. This trend is expected to continue as industries like finance, healthcare, and manufacturing seek to enhance efficiency through technology.

4. Private Equity’s Growing Role

• PE Firms in Tech M&A: Private equity (PE) firms are increasingly active in the software M&A space. In 2024, PE firms are expected to account for nearly 40% of all tech-related M&A deals. This is up from 30% in 2023, driven by the vast amounts of dry powder (uninvested capital) available and the need to deploy it in high-growth areas.
• Focus on Distressed Assets: PE firms are also eyeing distressed assets, especially in sectors hit hard by economic downturns or rapid technological change. This is leading to a rise in opportunistic acquisitions, where PE firms acquire struggling tech companies at lower valuations.

5. Macroeconomic Headwinds

• Economic Uncertainty: Despite the overall growth in M&A activity, macroeconomic factors like inflation, rising interest rates, and geopolitical instability are influencing deal strategies. In particular, there’s a shift towards acquiring companies in recession-resistant industries, such as healthcare IT and cloud services, which are less likely to be impacted by economic downturns.
• Interest Rate Impact: The rising interest rates are a double-edged sword. While they increase the cost of borrowing, making some deals more expensive, they also create opportunities for PE firms and corporations with strong balance sheets to acquire assets at more attractive valuations.

Statistical Highlights:

• M&A Value Growth: Global M&A activity in 2024 is expected to reach approximately $4.7 trillion, up from $3.9 trillion in 2023, with technology-related deals comprising around 25% of the total.
• Cross-Border Deals: Cross-border M&A activity is projected to account for 40% of total deal value in 2024, despite regulatory challenges.
• PE Dominance: PE-driven deals could reach a record high in 2024, potentially accounting for nearly 50% of total global deal value in the software and technology sector.

Overall, 2024 is shaping up to be a good year for software M&A,  of you are interested in learning more about the state of the M&A market or wishing to discuss plans for your own business,  please contact one of the Eaton Square

]]> https://eatonsq.com/blog/the-key-questions-buyers-ask-before-buying-a-software-company-part-1/ Mon, 02 Sep 2024 07:01:17 +0000 https://eatonsq.com/?p=7455 When it comes to selling your software company, understanding the mindset of potential buyers is crucial. At Eaton Square, we’ve worked with numerous software firms and have found that buyers, especially private equity (PE) firms, focus on key metrics and factors that determine what opportunities they will spend time considering and the potential attractiveness of an acquisition.

Many buyers want to know ARR, Churn Rate, Growth Rate and EBITDA before deciding to respond to a potential seller’s call or email. But sticking with the grand tradition of ‘top 10 questions’ we’ll go a bit deeper in this first blog of a two-part series, we will assume we have gotten past the front door and explore the first five of these qualifying questions that help potential buyers determine if they will spend serious time evaluating a purchase opportunity.

With financial acquirers such as Private Equity and Software Aggregators now accounting for nearly half of software business purchases, and the transition of most software sales to SaaS businesses models, it should come as no surprise most buyers questions first focus on ‘standard’ SaaS metrics to triage or quickly cull opportunities.

1. What is your Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR). Everybody loves to talk about sticky recurring revenues, and it is easy to slip into the habit of speaking of ARR when referring to total revenue. When talking to potential buyers it helps to be specific about revenue mix upfront. Even rough ballpark revenue scale and composition numbers helps buyers quickly determine if an opportunity is in their ‘goldilocks zone’ – big enough to move the dial, but not so large as to be indigestible.

2. What’s your customer churn rate (CCR), net retention rate (NRR), customer acquisition cost (CAC), and estimated Customer Lifetime Value (LTV)?

Because SaaS business models are now mainstream, almost all investors are familiar with the basic metrics of SaaS unit economics and want a potential opportunity to ‘show not tell’ the calibre of the business by the numbers. Fortunately, the buyer universe is diverse so even if your metrics are not top quartile, there may still be buyers albeit at a difference price compared to a business with fantastic numbers.

3. How has your revenue grown year-over-year for the past 3 years, and what is your forecast growth for next year?

There are buyers who like high growth businesses and those who focus on acquiring more mature businesses. Understanding the strategies of potential buyers prior to approach helps sellers be more efficient in finding and engaging the buyers most likely to be interested.

4. What’s your current sales and marketing expenditure, gross margin, and EBITDA?

Or more simply put, tell us if you are losing money, profitable or really profitable either right now or are heading in that direction.
Amongst financial investors EBITDA is a convenient filtering measure to assess if a deal is in the sweet spot for their fund or acquisition strategy. EBITDA too large, then there is likely to be more competition from larger funds, EBITDA too small (and lacking without a great story as to why it is about to recover) then why waste time on something too small.
EBITDA is also an important filter for strategic acquirers – they may buy for other reasons, but it much easier to get on acquisition agenda if a deal is seen to ‘move the dial’

5. Who are your primary target customers, and what industries do they represent? Which geographic markets are they located in?

Let’s assume that our audience likes our ARR, Churn, Growth and EBITDA story. Next on the agenda is understanding your customer base. For strategic buyers, this probably comes first in considering whether to look at a deal. For financial investors, this question is key to assessing the potential for growth and risk of overreliance on a cyclical industry or a small number of customers.

Next Steps

In this first part of our blog, we’ve touched on the first ‘filtering’ level of questions buyers ask when initially deciding to invest time considering the purchase of a software company. In our next blog, we’ll delve into additional questions that sellers should anticipate early in an acquisition discussion.

Stay tuned for Part 2, where we dig in further so you as a potential seller can mentally prepare for buyers initial questions. If you’re considering selling your software company and want to ensure you’re fully prepared to answer these questions, contact us at Eaton Square. Our expertise in software M&A can help you navigate the complexities of selling your business, ensuring you achieve the best possible outcome.