We are hearing a lot of differing opinions on what is to come for the broader economy in 2023 and the impact this will have on M&A in the technology sector. Although we are only a few weeks into the year, most tech M&A advisors are cautiously optimistic. There is still a ton of capital available and buyers haven't pulled back on their acquisition strategies. However, buyers have become more cautious amid today’s uncertain environment and are even more focused now on decreasing their risk and willing to wait for the “right” acquisition target. Although the metrics that were important at the height of the market in 2021 and 2022 remain key (revenue growth, high gross margins, strong customer retention, large TAM, etc.), we are now seeing more emphasis on profitability. The message we are hearing from buyers and investors is no longer “growth at any cost” but has shifted to profitability or path to profitability.
Due to the amount of excess cash on corporate balance sheets and dry powder among private equity and other related firms, founders will continue to see increased inbound interest, and unsolicited offers will still be prevalent across many vertical and horizontal markets in tech. Now is not the time to entertain unsolicited offers without expert help.
When you receive an unsolicited offer, at the bare minimum you should speak with an advisor to understand what your strategic options might be.
Do not make the mistake of thinking that because this company has already approached you that you won’t need assistance. Sourcing buyers is a crucial part of the M&A process, but it is far from the only area where an advisor will provide value. Even with a pre-emptive or unsolicited offer, after negotiations and due diligence, the process can take upwards of 4 months to complete, and we have seen many instances where claw backs have occurred during due diligence and founders are left with an offer that is not nearly as compelling as the initial LOI. At this point, a lot of time and resource has been invested into the process and it can be very difficult to walk away. A good advisory firm will help to avoid this scenario and ensure that the offer that was initially accepted is one that the buyer will stand behind.
Going through an exhaustive process for a deal that does not transact wastes a lot of time and involves significant cost (attorneys, tax advisors, accountants). But it has also taken focus away from running, and growing, your business. It is very challenging to run a company and sell a company simultaneously. Anyone who has gone through an M&A process will attest to the work involved in getting a successful deal across the finish line.
Read more about why working with an advisor is important here.
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