When is the Best Time to Sell my Business?

15 August 2017

When is the Best Time to Sell my Software Business?

Let’s be honest, the majority of business owners in the software solutions world will be looking to

make an exit at a given point in their business life. Of course, every business is focused on the

execution of their vision and mission, coupled with expressing noble sentiments about improving the

experience of their customers and employees. This is all very genuine and important, however, one

day, the owner will ask him or herself, “How much equity value have I created over the years and

when and how should I capitalize on this value?”

Software Vendors Are Highly Desirable Acquisition Targets

The entire software solutions market is currently seen as a highly attractive marketplace for

acquisitions and consolidation and we are observing the following key drivers:

  • Large hardware vendors in the MFP market recognize that, because of the on-going focus on the “digital business”, hardware such as printers and scanners, will become less and less important over the next few decades - Lexmark becoming an e-Solutions based company underscores this trend.
  • The fast pace of innovation in software solutions, fueled by the many start-ups with Cloud/SaaS based solutions, which have almost no limitations in scaling up their business – e.g. Dropbox, Box, and others.
  • Large companies trying to scale up by consolidating certain parts of the software solutions market – e.g. Open Text buying multiple, similar types of company.
  • New entrants from unexpected quarters – e.g. Apple venturing into payment services.
  • Freely available funding via the investment community who are intent on building portfolios of clusters of complementary companies with the potential to combine them in the future.

It will be interesting to note how these acquisition drivers will mature over the next 3-5 years, for, as

we all know, any predictions about how the future may unfold, always include an element of crystal

ball gazing.

Hardware Giants Are Growing Market Share Via Acquisition:

If we look at the first category - the large hardware manufacturers; this is an area where we are

seeing increasing and ongoing M&A activity. The list of these companies is not long, but it includes

Lexmark, which is, so far, the largest and most active acquirer, along with others such as Xerox,

Ricoh, Canon, Kyocera, Toshiba, Sharp, Konica-Minolta. Each of these organizations is in the process

of expanding their capabilities to enable their customers to transform into “digital organizations”.

However, if one focuses on their real capabilities, much is still paper driven and they know their

growth can no longer be secured by simply launching yet another printer or MFP with more speed

and extra functionality.  

 

Each of these organizations is making relatively small acquisitions, except Lexmark with their $1B

takeover of Kofax and $250M purchase of Readsoft, after many smaller acquisitions. Lexmark’s

strategy sends a clear signal to the market that they are here to stay in the digital tech sector and

they plan to be a dominant vendor. Xerox and Ricoh have built up significant services and BPO

business over the years; they are optimally placed to further extend these services and carve out a

profitable niche, whilst maintaining their existing business. Even in the hardware sector, there are

several segments which are still profitable and not so prone to price erosion - such as the high-

volume sector.

Software Vendors Must Safeguard their Equity Value

Canon, Toshiba, Sharp, Kyocera and even Konica-Minolta however, appear to be lagging behind in

this market development. If each of these companies acquires a dozen companies over the next 3-5

years, to be able to compete with the likes of Lexmark, this would have a significant impact on the

software vendor community.

 

Each of these hardware vendors has already established strong distribution capabilities - something

most software vendors lack – and, with thousands of software vendors in the sector, it will clearly be

a challenge for mediocre, regional vendors, to differentiate themselves from these giants.

Software vendors must therefore, remain alert to changes in the marketplace and consider

opportunities as they arise as this acquisitive cycle will not last forever and, will undoubtedly pose a

considerable threat to their equity value if it disappears in the near future.