Know PE firms’ concerns

Software companies are attractive targets for PE firms. However, their interest can be tempered by some of the challenges PE firms see in relation to the technology industry in general – including in the software space. 

Respondents in the BDO Private equity study point to identifying growth opportunities (42%) and finding and retaining management teams (33%) as some of the biggest challenges when acquiring target companies. Something that also applies to the software industry.

A consensus amongst PE firms is that diversifying products and services (identified by 96% of respondents), evaluating cybersecurity risks (95%) and implementing digital transformation strategies (91%) are effective tactics to combat some of the challenges. While the latter may not be predominantly relevant to software companies per se, it is important to be aware of the areas that a PE firm see as potentially challenging in relation to your company and find ways to address these worries during a deal negotiation process.

For example, your company should have a clear, well-documented IT security policy that should include prioritised technical and strategic risk mitigation strategies – both for your current and future situation. 

PE firms may be concerned that your current product portfolio is too narrow or worried that your company has limited opportunities to enter new markets or engage with new customer segments. There may also be concerns regarding your intellectual property (IP) and solutions. For example, if your IP is reliant on third-party systems and solutions, or if you only have partial ownership of the IP in question. Cases of software company deals that became unprofitable because of IP issues have led more PE firms to hire technical and IP experts to help them during the negotiation of a deal. Your company should be prepared to document every part of your IP and IP rights during a negotiation process. Potential financial and compliance issues are other areas that PE firms will often want to focus on during negotiations. 

The speed of change in the software industry is another area that could concern PE firms. Disruptive technologies open new markets, but shorter life-cycle and intense competition can lead to uncertainties regarding medium to long-term profitability. Given the fact that many PE firms are looking for a time-limited exit in three to five years, such uncertainties can lead to lower valuations and a less advantageous deal if they are not addressed appropriately.