Soft Focus: Growing Buyer and Investor Interest in Software

In this Q&A, Mike Wilkins, a managing director in the Harris Williams Technology, Media & Telecom (TMT) Group, draws on a number of recent Harris Williams software deals to discuss burgeoning buyer and investor interest in the industry.

Key Takeaways

  • The software industry’s maturation has made software companies increasingly promising targets for both strategic buyers and investors.
  • A number of recent deals shows that large end markets and a vertical industry focus can justify high valuations.
  • Prospective buyers and investors need both a deep understanding of the platforms they’re targeting and an angle that makes them most attractive to sellers.

1. What’s driving strategic and financial buyer interest in software assets right now?

Wilkins: There are really three main factors. One is the market itself. The software industry has matured and expanded significantly. It’s used in every type of industry and serves as the backbone of many businesses. This pervasiveness gives investors and strategic buyers confidence in software’s staying power and growth prospects.

Another factor is the predictability that often comes with software business models. Whether it's the traditional model of license and maintenance sales, or one of the newer subscription-based arrangements, that connectivity to the customer and predictability of revenue streams is extremely attractive.

Then there’s software’s inherent resistance to business cycles. It’s tough to argue that a mission-critical piece of software that's instrumental in running a business, engaging with customers, managing the supply chain or performing another key process is going to be switched off during a downturn.

2. In the past few months, Harris Williams has worked with PayIt, Practice Insight, Caliber, iContracts, and Veriforce. What do these software companies have in common?

Wilkins: The first thing that stands out is the customers to whom these companies sell. PayIt plays in the government tech space, Practice Insight and iContracts in health care, Caliber in real estate, and Veriforce in workforce safety and compliance. All of those sub-segments represent massive end markets. To an acquirer, whether strategic or financial, segments like these—ones in which there's an enormous total addressable market, and no large industry incumbent already playing—are very attractive. They offer a major opportunity to continue to innovate, evolve, and grow.

The other commonality is that they’re sharply focused on a vertical market. Strong companies with best-in-class technology, great customer service, and deep knowledge of the industry they serve build really sticky customer relationships and a virtual “moat” around their business. That, in turn, enables buyers and investors to justify robust valuations.

3. What’s your advice to strategic and financial buyers looking to participate in the software space today?

Wilkins: Because of the software industry’s maturation and high profile, it’s no longer possible to approach the market opportunistically. You really need to do your homework and get educated about what’s out there to understand the differences between the various platforms that operate in a particular space. This is especially true for private equity buyers, who may find they need outside expert help—an industry advisor, for instance, or other third-party resources—to get better informed and identify the themes that are important to them. It also helps to immerse yourself in the industry so you really get to know it, and to understand what makes certain companies stand out.

It’s also important to have an angle that distinguishes you from other potential buyers or investors and makes you more attractive to sellers. Maybe it’s being more competitive in a process via better pricing or terms, faster speed of execution, or certainty of closing. You can also differentiate yourself as a buyer by being able to offer some kind of commercial or cost synergies with another company in your portfolio. Either way, with valuations as high as they are today, you need a differentiating angle that can help you beat other buyers or investors to the punch.

Published July 2019