Five Factors Influencing Large IT Companies Buying Small IT Firms
Original article available here.
When a large IT company begins looking for smaller mid-market firms to buy (under $30M in transaction value), five key factors usually influence their decision. These factors are crucial as the larger company works to maintain its market advantage and grow its business. If you are a small, emerging growth IT company and can answer “yes” to the following questions, then you may be a desirable acquisition target for a larger firm. The questions may seem obvious – perhaps easy. But effective, compelling answers are not.
1. Do you offer a unique service or product that the buyer doesn’t?
Large IT companies are always asking the question, “buy, build, or partner?” If you can offer a unique service or product that the buyer is interested in, and buying your technology is more cost-effective than “making it,” you are a hot candidate for sale.
For example, let’s say you are a mid-market IT company specializing in cyber security. A large IT company may approach you to purchase your company to add your capabilities to their offerings cost-effectively.
2. Do you have the technical talent that the buyer needs?
The world is in the most significant war for talent in history. One of the key factors that can make a large IT company want to buy a smaller mid-market firm is technical talent that the larger company needs.
For example, IT experts in artificial intelligence/Machine learning (AI/ML) are like finding a needle in a haystack. Then it’s likely that the large company will want to acquire the smaller firm.
In fact, according to KPMG, deal valuations hit new highs at $5.1 trillion in M&A transactions in 2021. The labor shortage is driving a key impetus of deals. Finding skilled labor via acquisition is called ‘acquire-hire.’ The bottom line is that those small companies should have iron-clad contracts with their best talent. Their value has never been greater.
3. Are you rooted geographically or in vertical industries where the buyer wants to expand?
Similarly, suppose the large company is looking to enter a new market, and the smaller firm has a strong presence. In that case, the large company will again be interested in acquiring the smaller firm. So geographic or industry markets can also be a key driver to entice a sale.
Tech firms often seek to open regions of the world or industries to capture market share. Purchasing the right smaller IT firm can accelerate that process.
4. Do you have leadership that the buyer needs?
Besides invaluable skilled workers, large IT companies seek the next generation of leadership as part of succession. In addition, larger firms may seek seasoned executives to help develop rising stars in their ranks.
A large IT company may choose to buy you and benefit from your managerial skills. For the seller, it can open a career growth opportunity.
5. Do you have the infrastructure to scale as the buyer provides marketing muscle and sales to grow your offering?
Finally, large IT firms are seeking scalable entities. Often smaller firms do not have the marketing power of larger firms and cannot meet insatiable market demand during the growth phase of an industry. An example of an industry experiencing warp speed growth is the global digital human avatar market. According to an analysis by Emergen Research, it is projected to reach USD 527.58 Billion in 2030 and register a revenue CAGR of 46.4% over the forecast period.
Smaller companies with technology in a market segment with blistering growth often have a scalable solution but not market power. These are ripe opportunities for a large IT company that can accelerate its growth.
As a small IT company, you may not fit the bill on all these factors – but if you have a strong story for any of them – you are a candidate for a sale.