In our sell side software M&A activities, I frequently run across small software companies that are market leaders in their niche. At first look, this seems to be an attractive affirmation of the quality of the technology and business model. Buyers like to own market leading companies, and the associated benefits of strong brand recognition, a large user base, and good recurring revenue. However, if you are small, and we see many $10-25 million revenue companies that lead their sectors, it raises the question about the overall size of the market. If you reporting 10 million in revenue in your vertical market sector, and your three competitors combined only generate another 20 million in revenue, math says the sector is currently limited to only about $30 million in total revenue. For some buyers, this may be attractive, especially if they can visualize how leveraging their brand, distribution and expertise can significantly grow the business. All too often, buyers are looking for very large expansion opportunities, those that offer the potential of 100 million and more in future revenue, or acquisitions that can be the foundation for a new business division.
So, know and understand the dynamics of your market space. When working with buyers on an M&A transaction, make sure you can articulate the market opportunity and back it up with solid industry stats if available. Otherwise, you may find that qualified buyers are all looking for a broader, more financially lucrative opportunity, and you will be left managing your business for a few years until things change. In the dynamic software industry, things can change for the worse as well as the better, so be prepared to defend your sector, and to go it alone if a buyer does not surface. And also appreciate that the economics of running a software company can be quite good, and the business may offer you a lifestyle that will hard to replicate inside a larger ISV organization. If no large buyer takes the deal, maybe it's time to look at expanding into new markets through partnerships, joint ventures and other distribution channels. One thing is for certain: your current products and business model are not likely to make it through the next five years, nor will you, unless something changes. You need to be the change agent to survive.