Industry Overview
Companies in this industry develop operating systems, productivity software, database management and business analytics tools, video game software, design software and cyber security software. The industry also includes software consulting firms and packaged software wholesalers.
The IT and Software industry is still in its growth phase and faces light regulation. Due to fintech and disruptive technologies like blockchain, the industry is highly dynamic and competitive. Over the last decade, an exponential increase in smartphone and laptop usage has fueled demand for the software industry.
While intellectual property and piracy has been a challenge, viruses like Malware and Trojan Horse have pushed consumers to spend on licensed software and antivirus. Going forward, continued reliance on smartphone and laptop usage will continue to generate demand software. Overall, this industry is driven by factors that affect corporate demand and expenditure for IT services. More specifically, this industry is driven by e-commerce growth, corporate profits, and technological innovation.
Industry Drivers
E-Commerce Growth – Accelerated by the pandemic, E-commerce growth signifies the percentage of business done online. As e-commerce demand increases, retail companies looking to grow would improve technological infrastructure and security, leading to increased demand for the IT and software industry.
Corporate Profits – Higher corporate profits would directly lead to increases in demand for the business services industry. Businesses that perform well are more likely to update to the latest technology and software to maintain efficiency as additional data storage and processing capabilities are needed to serve a growing customer base, thus increasing demand for industry outputs.
Technological Innovation – Innovation in the data processing and storage industry has been on the rise in the past decade, requiring companies globally to continuously improve their business systems else risking losing competitive advantages and creating inefficiencies within processes. As a result, increased innovation within this space would lead to increased demand for industry services, as companies require 3rd party assistance in implementing new technology.
Recent Software & I.T. Advisory Mandates
Selling a Software & I.T. Company
Over the last few years, the Software and I.T. industry has experienced strong consolidation and M&A activity as companies continue to grow and capital continues to flow into this space. A boost in online business activity following the pandemic and 5G internet infrastructure has catalyzed industry growth. As Canada’s leading private market M&A Advisory firm Beacon understands that selling a business is an important decision. A dedicated business owner not only seeks to extract maximum value from the sale of a business but also seeks to sell the business to a competent buyer who can continue the company’s legacy. Beacon has worked on over 100 valuation and M&A advisory mandates in the IT and Software sector, bringing extensive experience in deal negotiation to the table. Our experienced advisory team will assist your business in navigating the entire sell-side M&A process.
As an entrepreneur or business owner who is exploring a potential sale, it is important to understand some key factors specific to the I.T. sector that might impact the likelihood of a potential sale. These are factors that determine business attractiveness for potential buyers and investors.
Research & Development – The Software and I.T. industry is extremely competitive and dynamic. Due to low barriers to entry and high competition, developers must constantly invest in product development and R&D to stay relevant. Companies with proprietary Software & I.T. solutions that maintain an in-house team of skilled developers are strong targets for acquisitions. In addition, having a product roadmap can increase the likelihood of a successful acquisition.
Revenue Retention – Net revenue retention is an important metric in the SaaS space which measures the total revenue generated minus revenue lost due to customer churn. Companies that have a high net revenue retention rate are those that successfully add new customers while retaining a high proportion of existing customers. Software and I.T. solutions companies with a strong track record of new user growth warrant high multiples. In the Software industry, investors often invest in companies based on an enterprise value/ recurring revenue multiple. Having a strong customer base of recurring customers can therefore improve the valuation of a business.
Platform Stickiness – This is a qualitative metric that determines how easy or difficult it is for a customer to discontinue subscription services with a specific developer or I.T. company. Companies that have successfully created a platform or product with high utility that is deeply integrated with a client’s I.T. infrastructure have a high level of platform stickiness. This creates an economic moat around such companies, thereby creating a barrier to entry. Consequently, such companies are considered attractive by investors.
Scalability – Software and I.T. companies with a large addressable market and a scalable business model are considered attractive due to their strong growth prospects. Investors are often willing to pay a premium for such companies due to the prospect of strong cash flow generation in the future. In addition, companies that demonstrate strong growth and can exploit economies of scale to improve margins can unlock value due to multiple expansion.
With 40 years of combined experience serving businesses within Toronto, Ontario, and abroad, the Beacon transaction team has extensive knowledge and experience successfully working for several Software & I.T. companies from a variety of industries. Whether it be a valuation or sale, our team can provide expertise and resources found only at larger corporations, paired with the personalized touch of our M&A Advisory team. Contact us today to get in touch with one of our advisors.
