Tech M&A: Being Interesting to Buyers Involves More Than Just Revenue

A common question we receive here at Corum is “What net revenue is needed to become interesting as an acquisition target?” or similarly, “I heard $10 million in net revenue is the minimum number you need to be acquired.” The truth is, although net revenue is an important factor in M&A, buyers look at a variety of elements when making acquisitions.

In traditional industries there is typically a revenue threshold to M&A. For example, in the food industry a snack foods company that gets to $50 million in revenue will get taken out. At that scale the food company is starting to command retail shelf space and consumer mindshare. It becomes, in short, a threat - and strategic M&A is driven more by fear than greed.

However, revenue is still only part of the story. If you are a digital marketing agency, for example, and get into an M&A discussion with a large agency, chances are you are negotiating with someone who is applying their old, pre-digital methodology to your newfangled shop. They used to buy agencies for 4 to 6 times trailing EBITDA, with part of the consideration held back for retention. That model worked pretty well. They will try to use it on you. The EBITDA multiple will be higher - closer to 10x if you are executing well - but they will still want to hold back 20 to 40% for retention or earnout.

This creates an interesting challenge. Do you grow the top line as fast as possible, reinvesting all of your profits, or do you maximize your EBITDA to feed the traditional valuation models?

In fact, either approach will work, but if you choose growth over profits, be prepared to take your buyer into the weeds and to educate them on the value that isn't expressed as EBITDA. Customer retention, contract duration, client satisfaction, revenue diversity, gross margin. . . and don't forget to trot out your internally developed IP. We have worked with several agencies that morphed from pure service models to technology enabled services, consuming EBTIDA in the short term but building scalable and, ultimately, profitable businesses.