Technology businesses continue to attract significant interest from strategic acquirers, private equity investors and consolidators. While financial performance is unquestionably important, buyers are often assessing a much broader set of factors, likely linked to their ultimate goals and exit strategy.
Having advised on transactions involving SaaS providers, cloud service businesses, managed service providers and other technology companies, partner Thomas Clark and legal assistant Mark Norman explain that buyers are not simply acquiring today's earnings. Instead, they are investing in sustainability, scalability and the quality of future earnings.
1. Recurring revenue
Recurring revenue is often one of the most attractive features of a technology business. Buyers are generally looking for predictable, reliable income streams that provide visibility over future performance. Businesses with subscription-based models, managed service agreements or long-term customer contracts are often viewed more favourably than those relying heavily on one off projects or transactional sales.
Key questions buyers may ask include:
what percentage of revenue is recurring?
how long are customer contracts?
what are the renewal rates?
how predictable are future revenues?
A business with strong recurring revenue often provides buyers with greater confidence when assessing risk and future growth potential.
2. Contract quality
Revenue is important, but buyers also want to understand how well that revenue is protected.
A technology business may have an impressive customer base, but if key contracts are poorly drafted, unsigned or lack important protections, concerns can arise during due diligence.
Area’s buyers commonly review include:
contract terms and duration
termination rights
service level obligations
change of control provisions
liability limitations
intellectual property provisions
Strong contractual arrangements help demonstrate maturity and reduce legal and commercial uncertainty following completion.
In many cases, the quality of contracts matters just as much as the number of contracts.
3. Customer retention
Most buyers are not interested in a business that performed well last year. They want confidence that it will continue to perform well after acquisition.
A buyer will often look beyond customer numbers and focus on questions such as:
how long do customers typically stay?
are revenues growing within existing accounts?
how dependent is the business on a handful of key customers?
A large customer base can look impressive on paper, but if customer turnover is high, buyers may question the stability of future revenues.
On the other hand, businesses that demonstrate long term customer relationships and strong retention often attract greater interest and stronger valuations.
4. Key staff retention
In technology businesses, value often sits with people as much as products.Buyers frequently identify key individuals whose knowledge, relationships or technical expertise are critical to the ongoing success of the business. These individuals may include founders, technical leaders, developers, product specialists and/or senior management.
One of the buyer's biggest concerns is whether those individuals will remain after completion. If key employees are likely to leave shortly after a transaction, the perceived risk increases significantly.
Appropriately structured incentive arrangements and succession planning can help reassure buyers that the business can continue to thrive after the deal completes. Often the buyer will also look to implement their own incentive arrangements to ensure retention.
5. Scalability
A buyer is not only purchasing today's business; they are buying tomorrow's growth opportunity. Technology businesses are particularly attractive when they can demonstrate that growth can be achieved without a corresponding increase in operational complexity or cost.
Buyers often look for evidence that:
systems are well established
processes are repeatable
technology infrastructure can support growth
service delivery is efficient
management teams can scale operations effectively
The more scalable the business model, the greater the potential return on investment. This is especially true in SaaS, cloud and managed services businesses, where operational performance can significantly enhance future profitability.
Final thoughts
The strongest technology exits rarely happen by chance.The businesses that achieve premium valuations are often those that have spent years building the foundations that buyers value most. Revenue growth remains critical, but buyers increasingly focus on quality, resilience and scalability.
About Thomas and Mark
Thomas Clark is a partner in the corporate and commercial team, advising clients on a wide range of matters with a main focus on acquisitions and disposals. Mark Norman is a legal assistant also of the corporate and commercial team.
Get in touch
If you would like to speak with a member of the team you can contact our corporate and commercial solicitors by telephone on +44 (0)20 3826 7539 or complete our enquiry form.
