M&A Insights

Harbor Ridge Capital has been covering the technology services and vertical software industries within the lower middle market ($5-50mm in revenue) for over 15 years, and while we primarily represent CEOs in a sale or capital raise, we’ve augmented this practice by securing buy-side agreements with a select number of highly strategic acquirers and investors that focus on these same verticals. This allows us to facilitate connections between our network of CEOs and these investors or buyers, as we see fit, in lieu of, or instead of, running a full process. For entrepreneurs interested in a transaction, this can serve as a great way to get quick tangible feedback from high quality sources, who may not be on your radar, regardless of whether a company is down the line with one party, or is even working with a banker. What makes the groups below so strategic, is the significant experience within technology services and software, usually from several past successful investments. This translates to a seamless understanding of company value, an ability to contribute beyond capital, and often pay a higher price as a result. Below are profiles of our most active buyers and investors where buy-side agreements are in place, and what they are most interested in:

• Boston-based PE firm managing $1.7 billion; invests $15-50mm of equity in variety of transactions including majority/minority recapitalizations, full buyouts, and growth capital
  • Seeking companies with >$3mm in EBITDA
  • Deep expertise in technology services, internet infrastructure, managed IT services, IT services, and vertical software; active in healthcare IT as well
  • Portfolio companies seeking smaller add-on acquisitions ($1-5mm in EBITDA):
    • Regional managed IT services (regional and or vertical focused)
    • Managed cyber security services (MSSP/MDR/Consulting)
    • Software/Services for government agencies – state/local primarily
    • MSFT focused cloud/managed services
  • Positioning:
    • 70-80% of activity is in business/tech services (deep understanding and focus)
    • Just raised fund of $700mm thus seeking to put $ to work
    • Can do minority deals, growth and or liquidity as well as buyouts

• Southeast-based PE firm, just raised a $1.4 billion fund, investing $25-125mm per investment
  • Target companies with revenues of $10-150mm, focused on verticals including: business/technology services, communications, and healthcare
  • Deep expertise in all areas of technology, cloud, and managed services, including managed cyber security services
  • Portfolio companies seeking add-ons acquisitions for platforms ($1-5mm in EBITDA):
    • MSFT Azure cloud partners
    • CRM cloud partners
  • Positioning:
    • One of most active and successful investors/acquirers in technology services
    • With fund size seeking larger companies for new platform deals
    • Given experience and success, understand quality assets in technology services, and thus willing to pay appropriately

• Bay Area-based PE firm focused on acquisitions of software companies
  • $1 billion fund raised last year has a lot of dry powder
  • Seeking software companies with >$1mm in EBITDA with high repeat/recurring revenue and ~90% customer retention
  • Seeking smaller add-on acquisitions in following software domains:
    • Marketing, Government, Medical, Legal, and Logistics
  • Positioning:
    • One of top tier firms for software buy-outs
    • Unique in that they require software companies to be profitable (for platform acquisitions)
    • Entrepreneur in residence led format
    • More growth centric vs. value from a valuation perspective

• Bay Area-based PE firm focused on technology services and vertical software
  • ~$500mm fund raised last year, focused on buyouts
  • Deep expertise in technology/cloud/IT services; companies that are $2mm+ in EBITDA
  • Portfolio Companies seeking add-ons in managed IT services, cyber security services, managed/vertical hosting, MSFT azure cloud, and CRM cloud services,
  • Positioning:
    • One of most experienced cloud/technology services investors and acquirers
    • Can write a check as small as $15mm for new deals, smaller for add-ons

• Southwest-Based Alternative Debt Fund
  • Excellent avenue for those seeking debt to minimize dilution
  • Debt investment size of $10-40mm, up to 4x leverage of pro-forma EBITDA, with companies >$2mm in EBITDA stand-alone trailing
  • Traditional mezzanine debt type pricing

• Former Entrepreneurs Who Sold Their Prior Businesses, Seeking Acquisition Opportunities
  • Entrepreneur sold his business for >$100mm, seeking managed security VARs, Consulting and or MSSP/MDRs
  • Entrepreneur who sold his cloud services business is seeking to acquire a legacy internet infrastructure business that can be modernized with the cloud
  • Entrepreneur who sold his cloud services business is seeking to invest in or acquire a cloud business in a high growth segment

Should any of the above profiles resonate with your financing and or M&A objectives, and or if you would like to receive broader feedback on your strategic plans, please do not hesitate to reach out to discuss.

Now more than ever entrepreneurs are being inundated with inbound inquiries about M&A and or funding. With the flooding of inquiries, and entrepreneurs busy running their companies, how are they to know who to speak with vs. ignore? See below for upfront questions to ask to avoid a long-winded, premature discussion, that is likely to end in “your company is not a fit at this time, yet we would like to stay in touch”, or even worse, getting dragged through an unsuccessful deal process, while not disregarding a potential top tier investment firm or acquirer.

• Questions to Qualify Investors or Buyers, and Key Insights:
  • Who are they?
    • investor (private equity or venture capital)
    • strategic (larger well funded competitive/complementary business doing acquisitions)
    • advisor (may represent the above and or have deep domain expertise)
  • Investment and Acquisition Criteria?
    • Minimum revenue, profit (EBITDA), growth, other (recurring revenue, customer concentration, etc.)
    • Minimum check size and sweet spot?
    • Be mindful that if you are not in their target size range, its highly unlikely they can proceed with a transaction. These groups have mandates they are committed to with their investor base, and rarely go astray
  • Does the investor have a fund? If so, how big, and how much dry powder?
    • If they do not, where do they get their capital from? Have they done any deals thus far?
    • Be mindful of the risks/challenges of a group without a fund who has not done a deal. These groups are flooding the markets and muddying the waters. Generally, they have the hardest time closing and pay the lowest valuation
  • Why are they reaching out?
    • What are their vertical focus areas and past deal experience herein?
    • Do they have specific experience, ideas, or knowledge of your core vertical?
    • Be mindful of a group’s vertical focus which if they are not tech focused, they may want to look at deals, yet it will be a stretch for them to proceed, achieve a market valuation and close
  • What type of deal is their preference?
    • Buy-out/control deal, or minority/non-control deal?
    • Some say they do both, yet vast majority are one or the other
  • Investment/Acquisition Activity?
    • How many deals have they done in the last 24 months?
    • Be mindful of those who have not done many deals. Suggests the likelihood of proceeding with you is lower

• How to Cherry pick the best folks to speak with:
  • Those who align best with your company profile (a match on company size and performance)
  • Match on your desired transaction and structure
  • Have a committed fund with significant dry powder
  • Have deep expertise, industry knowledge and can express why they are interested in your vertical. These are the ones who are most likely to add value beyond capital vs. those who claim they do
  • Preferably they have done deals in an around your space going back many years and have a clear investment/acquisition thesis
  • Any/all strategic acquirers, or the investment firm or advisor representing the strategic (assumes the strategic is much larger than your company and in good financial health, with investor backing)
  • The investor or buyer is generally active, e.g. they have been doing deals in the last 12-24 months (this is especially critical during the pandemic, where most firms are idle)
  • Assuming all the above which can be validated with a few quick emails back and forth, it is advisable to get to know the person who reached out, better understand their interest, strategy, and establish a dialogue

This should better inform entrepreneurs on how to quickly qualify inquiries and ensure their time is spent wisely with the most appropriate, high quality parties. Harbor Ridge Capital advises business owners through the many nuances and complexities of a transaction, and often engages with clients on flushing out investor/buyer inquiries. This includes understanding their true interest level, valuation, deal structure, financial information review, term sheet, and related, while reaching out to the many highly strategic parties who have not inquired, as well as working to ensure optimal company positioning and transaction process management.

As we plunge into this long overdue and pent up recession, a fact remains that is worth mentioning. Per Fortune, there exists $2.4 trillion of unspent private equity capital in the market, the highest total ever recorded. For those who don’t know, private equity funds have a contractual mandate to deploy committed capital, generally in 5-7 years from the start of the fund, or they will lose out on their investor commitments.

Despite the recent brutal economic climate, and with so much continued uncertainty, we are still receiving calls from investors asking for deals and reiterating that they’re open for business. For example, we recently spoke with a software-focused private equity contact of ours, talking about paying lofty revenue multiples, even when the S&P went down nearly 10% in that day, and ~25% in the last few weeks. Other inquiries include specialty debt/finance providers who are alternative lenders to that of traditional banks, and offer cash flow-based to growth technology companies who are naturally asset light.

While without a doubt, groups will exercise more caution and less exuberance, the fact remains they need to deploy this capital, or they lose out on such commitments. Specifically those who’s portfolio of companies have been less affected, will have less of a reason to slow down on evaluating new investments or acquisitions. So, if a business is performing well (>$10mm revenue, >20% growth, >15% profitability, strong recurring rev, low churn, low customer concentration, in recession resistant industries), many options still exist, and we expect company values to generally hold up, on the expectation that the broader economy will rebound upon a flattening/declining of the curve for Coronavirus, as this is a public health crises damaging the economy, not an economic one, like the last recession. Further we expect more demand for “safer bets” with companies in industries less affected (healthcare, insurance, IT), or perhaps even benefiting for this climate (think Zoom, Peleton, Slack), which may drive values back to where they were a month ago or higher.

For those industries related to travel, events, oil/gas, etc.., they’re likely already too heavily impacted, whether their financials reflect it or not, and may be placed in the “value” or “distressed acquisition” camp, with a valuation to match, or just lack of interest. Whereas for other industries, it remains to be seen how much of an impact there will be, which depend on customer retention, mission critical nature of their product/service, and some continued growth, etc.. Perhaps stating the obvious, yet to receive a growth-type valuation (revenue multiple or high single digit – low teens EBITDA), companies are still expected to perform well, even through a situation like this one.

Timing the market is nearly impossible and how long the current state will persist, yet with this record amount of capital in the market that needs to be deployed, there’s inherent urgency for funds to transact with the many strong performers out there weathering this storm, and who can still generate solid returns funds are seeking.  This in turn may not hamper activity and values as much as one would expect, yet its important to know who are the value investors vs. the growth oriented folks.

HRC is happy to speak with you regarding your business, provide feedback on valuation, the desired transaction you are seeking, options in the marketplace, and how we can be instrumental in accomplishing your strategic objectives.