Today’s macroeconomics are affecting buyers (and some sellers), but many buyers still have access to plentiful amounts of capital; levels of activity and expenditure are only slightly down from 2022.
At iT Valuations, we’re seeing activity levels about the same as they were in 2022. However, the parties involved want to close transactions quicker than before to avoid fears around taxation and rising interest/borrowing rates.
Here are some key takeaways in the state of the market for IT services firms for 2023 and beyond.
- Demand is there but buyers are nervous. There’s still demand for tech owners who want to sell and exit their firms, but many buyers are somewhat concerned about the economic outlook, with increasing interest rates and accelerating inflation the major worries.
- Private equity interest in buying tech firms hasn’t waned much. There has been little impact on the M&A plans of most private equity firms. They’re still buying IT firms, SaaS providers, and other channel vendors to increase the value of their overall portfolios. Capital is still flowing freely into these PE firms to fund their acquisitions.
- Buyer behaviors haven’t changed much, which is encouraging for sellers. Because of the strong tailwinds behind them, we haven’t seen buyers noticeably change their behavior in the past year. While transaction and funding details might change from deal to deal, the overall mindset hasn’t noticeably changed.
For most, the biggest challenge is how to meet the demands of a saturated marketplace. Buyers have remained active because PE is still sitting on record levels of dry powder. It’s no surprise that nearly 70% of buyers and investors expect an increase in available capital. The outlook for deal volumes for the rest of 2023 remains strong, although not as high as the record highs of last year. Moreover, expectations for deal volumes in the longer term are strong, suggesting any slight softening in 2023 is likely to be short-lived.
Buyers and investors expect deal sizes to be largely the same for 2024, with few parties expecting smaller deals. Technology services and channel integrators/software vendors remain the vertical(s) with the strongest level of overall buyer interest.
The Rest of 2023
Despite the caution we’re seeing in the market, it’s reassuring that the appetite for deals remains strong, though off the highs of last year. Private equity expectations have moderated in the last 12 months, with more than half of buyers saying they expect to do “the same amount” of deals in the coming year, according to research from both Bain and Equiteq.
Buyers who are cash rich will keep acquiring, but those with less capital may find it harder to access debt financing and so will likely focus on acquisitions that will really move the needle for them in a shorter-term ROI.
Technology Services of Greatest Interest for Buyers
Buyer interest in cloud solutions remains exceptionally high. If you’re an IT firm or MSP with a cloud practice that aligns with SVP (specialization, verticalization, and productization) then there’s acquisition demand because there’s need across ecosystems for service providers that can reduce the complexity of cloud implementation and integration.
There’s also interest in tech firms that have a profitable track record of services like data analytics, providers focused on enterprise SaaS, and managed services.
Buyer and investor assessments of potential acquisition targets remain extremely consistent, with formal valuations telling the story of whether or not your firm is a good acquisition target. The most important assessment criteria for PE buyers and investors are quality of management, revenue growth, and profit margins, according to Equiteq.
IT services firms that want to take advantage of a still-healthy buyer market should start with a valuation to see where they stand.
REED WARREN is CEO, Certified Valuation Analyst (CVA), and value builder advisor at iT Valuations. During his 30+ years working in the IT services and technology industry, he’s provided business strategy, consulting, and M&A services (60+ successful transactions) to over 250 companies across 19 different countries. Learn more about iT Valuations here.
