Tech M&A Myth #3: Profits are More Important than Growth

An article hit my inbox last week on mastering the ten value drivers in selling your business. As usual, stable and predictable cash flow was in the pole position at number one, the top driver of business value. But since we deal only in technology, I was really surprised to see that growth hit the chart right square in the middle at number five. It reminded me, as our clients know, that tech is different and requires special handling.

 

As a fifteen-year buyer of businesses prior to joining Corum, when we saw real year-on-year growth, quarter-on-quarter growth, under the seller’s own steam - it really moved our interest needle significantly. High profits and low growth are certainly not a bad thing, but in the M&A process, low growth history can really challenge the buyer internally, especially if the buyer’s investment thesis requires the move to a high-growth trajectory. Essentially, your business growth rate on your own can be a proxy or translate to just how bright (or dark) the future can be for the buyer.

 

Recently McKinsey published some great research on software companies titled Grow Fast or Die Slow. Pretty dramatic, but they analyzed the lifecycles of 3000 software and online services companies around the globe, from 1980 to 2012. The three main findings were that growth trumps all, yielding higher returns for shareholders, and as a proxy for predicting future success. Increased growth drove market value improvement versus margin improvement. You’ll never hear us say that profits aren’t important in tech, but at least in the tech world, sharing the growth story with the right buyers exponentially increases the chances of achieving your optimal outcome.

Posted by , Vice President on 27 August 2014
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