Tech company owners who are part of the baby boomer generation ‒ those born between 1946 and 1964 ‒ face the challenge of a shortening window of time in which to decide their future. As the saying goes, "time waits for no man." Faced with that clicking clock, these owners need to decide whether to continue running their company and forego retirement, sell it, or leave it for others to run, such as their children or grandchildren. As difficult as that decision can be, the current environment for tech companies makes the decision even more complex and can be concerning. Let’s examine some of the factors in today’s environment that add to that complexity and concern.
Bolt-ons and market consolidation
One factor that tech company owners in the boomer generation need to be aware of is the current appetite that PE firms have for bolt-on acquisitions, where these firms add smaller companies to a platform company in their portfolio. Currently, there is record activity in the M&A market, but most of it is bolt-on acquisitions. In 2022, PE firms did nearly eight bolt-on deals for every platform deal. The ratio of 7.6:1 bolt-on deals to platform deals set a new record, far exceeding the ratio of 5.4:1 in 2021 and 4.1:1 in 2020. The bolt-on strategy fuels market consolidation, and it leads to the following questions for tech owners: Is my market consolidating, and if so, how does that affect my decision about the future?
If a tech company is a potentially attractive target for a PE firm's bolt-on strategy, pursuing an M&A can be a winning strategy for the company owner. In particular, companies that provide products, technologies, or services that align with global trends can be highly attractive targets for bolt-ons. But if a tech company doesn't fit well into the bolt-on plans of PE firms, it might be time for the company owner to take another approach. If that approach is to stay on with the company, it could require a change in business strategy, one that is better able to compete with larger competitors in a consolidating market. Or it might warrant finding another suitor for the company.
The second area of note is generative AI ‒ artificial intelligence that is capable of generating text, images, or other media. Tech companies are quickly pivoting to take advantage of the technology because it can accelerate innovation through creative, original content, as well as increase efficiency by automating or streamlining time-consuming tasks. One application of generative AI, chatbots ‒ conversational AI systems that generate human-like text responses in real time to customer questions ‒ are gaining prominence in almost every business sector from healthcare to finance. And that has stimulated a recent acquisition spree by strategic buyers picking up tech companies that offer generative AI capabilities. The biggest purchase to date in this buying wave is AI company Databricks' megadeal pickup of Generative AI startup MosaicML for $1.3 billion.
But what if a tech company is not embracing generative AI? What if it doesn't offer generative AI capabilities? In fact, even if a tech company embraces generative AI, is it seen as a market leader in this area? Given the surge in interest in generative AI, lacking those capabilities or not being seen as a leader in the technology, can leave a tech company owner at a disadvantage if he or she is looking to sell.
The economic outlook
Currently, the U.S. economy is strong in terms of growing economic output, labor market resilience, and slowing inflation. And the tech M&A market is also very strong. However external pressures such as geopolitical tensions, as witnessed by the war in the Middle East and Russia’s war on Ukraine, as well as uncertainties about future monetary policy by the Federal Reserve have led to an up and down stock market and predictions in some circles of a big correction in the market. If that correction happens, it could drop tech M&A volume and valuations precipitously. On average, it takes seven full years for tech company valuations to fully recover after a market correction. Baby boomers who own tech companies don't have the luxury of time to wait out a recovery. Even thoughts about health and longevity become more concerning for people in that age group. What if you die? If the value of your company drops significantly after you die, will your company be salable by your heirs? And speaking of heirs ...
The next generation
It's not unusual for a tech company owner to want their children to succeed them in running the business after they leave. What often gets left out of those wishes is whether the owner's children actually want to run the business. The values and motivations of Gen Xers and millennials are often quite different from those of baby boomers, meaning that children in those age groups are not likely to want to succeed their parents in running a tech business. And even if the children have an interest in succeeding their parents in running the company, have they been sufficiently trained to do it? The fact is that while company owners have thoughts of their children succeeding them, less than half actually have a succession plan in place that accomplishes that. In reality less than half of family owned tech business are passed on to a second generation and less than 1% of those companies make it to a third generation.
It’s a good time to calibrate
With these concerns about the future in mind, it's actually a good time to calibrate your company's worth in the current market. Strategic buyers, PE firms, and VC funds are flush with cash and competing to invest in or acquire good tech companies. This is driving some of the best increases in tech company valuations in the last three years. And having an experienced M&A advisor assist in that calibration will help get you an optimal result. At the very least, going through a professional global M&A search process led by Corum can help you tune your business model, refine your market position, get useful market feedback, and open up many business opportunities. Ideally, it can result in an acquisition offer or a capital infusion that sets you and your family up for the future.
As a tech company owner in the baby boomer generation, you don't want to miss your window of opportunity.