Martin Wilderer: Felix. I’m glad to have you here today to discuss the buyer landscape we encounter in our transactions. Perhaps we should start by differentiating which buyer groups we predominantly see in our processes?
Felix Brokatzki: Hello Martin, thank you. Generally, we cluster the buyer landscape into two categories:
- Strategic Investors and
- Financial Investors.
Strategic investors, as the name suggests, pursue strategic, long-term goals and aim to optimize their existing business model through acquisitions, meaning these are usually larger, operating companies.
Financial investors, primarily private equity firms, focus on financial goals with the intent of selling the company after a certain holding period.
However, in recent years, we’ve seen that financial investors often think much more strategically than one would expect.
There are also management buy-ins, where individuals acquire a company to run it themselves, often financed by financial investors.
Martin: Exciting, Felix. You mean the boundaries between strategic and financial investors are blurring?
Felix: Of course, there are still purists. However, we do observe that financial investors are increasingly building highly focused and long-term ecosystems within their portfolios, sometimes holding them for very long periods. So-called “evergreen funds” are even designed to never sell the acquired assets but to generate long-term capital from the investments through a dividend model.
Within these focused ecosystems, private equity investors operate in a manner more akin to strategic investors, almost completely blurring the boundaries between the buyer clusters.
Martin: Often, new clients seem to initially have an aversion toward financial investors, as if they’re all sharks. Is that justified?
Felix: That’s almost a rhetorical question. Of course not. Naturally, there are bad apples on both sides, investors I wouldn’t want to work with. However, we know highly reputable investors who focus on margins but also value other aspects. This is particularly true for so-called impact investors.
Moreover, financial investors play a unique role when, for instance, our client’s company isn’t quite at the point where a strategic investor would acquire it—whether due to size, lack of processes, or other missing aspects that a “desired strategist” might require. Here, a financial investor can act as a bridge, giving the company the necessary momentum to sell to a strategist in a second step.
Martin: Has this behavior already reached sellers, or does the “holy grail” still lie in selling their company at astronomical valuations directly to a strategic investor?
Felix: A very good question. Let me give you two answers:
Firstly, it’s important to note that assets held by financial investors usually appear on the market under their original company name—meaning it’s often not immediately apparent which companies are bundled within a financial investor’s portfolio. For direct competitors, most entrepreneurs still have a relatively good overview of who bought and/or sold whom in the past. But if you move a position forward or back in the value chain, most sellers are less aware, and you’ll find exciting companies within both the strategic and financial buyers that could be potential buyers for your own company.
It’s also clear that, particularly here in Germany, the major strategic deals, like those by SAP, dominate the media. So when SAP, like in 2023, puts more than a billion on the table for a German start-up like LeanIX, many other start-up founders dream of that as well. I understand that too—these deals are very, very rare, simply because everything has to align perfectly for such an acquisition and, in most cases, is carefully and long-term prepared, even with start-ups.
However, we’ve noticed an increase in acquisitions by strategically minded financial investors, and the prejudice that “strategists pay more than financial investors” doesn’t align with our perception of the past few years.
Furthermore, another point that makes us appreciate working with strategically minded financial investors—and why we believe this is an equally viable exit option for our sellers—is the speed of decision-making and the ability to efficiently complete M&A processes. Strategic buyers are generally less agile in our experience, which is understandable as their processes tend to be more complex.
To finally answer your question: Our sense is that yes, especially start-up founders typically dream of a (positive) headline-making exit to a national or international strategic corporation. With succession arrangements, expectations are a bit more subdued; here, entrepreneurs tend to metaphorically reach one or two shelves lower, to competitors closer in size to their own company.
Martin: Indeed, our clients often have candidates in mind who are closer in size and market proximity to their own company. But this also means that the final buyers often weren’t initially on the entrepreneurs’ radar. And interesting combinations often emerge.
Felix: I would agree with that. At the beginning of every engagement, we sit down with the entrepreneurs to outline the universe of potential buyers and examine the extended competitive landscape of the companies. These conversations are always fascinating because our experience and external perspective bring in factors that entrepreneurs hadn’t considered.
Conversely, there are times when we think a certain buyer makes sense, and the entrepreneurs quickly explain, based on their extensive market experience, why the consultant’s “brainwave” isn’t feasible. That happens too.
However, it helps us immensely to know which financial investors are building and expanding portfolios in which areas, alongside the strategic buyers. And that changes daily. To stay “up-to-date,” we regularly engage in conversations with them.
Martin: How do entrepreneurs make themselves attractive to the ideal buyer even before the sales process?
Felix: Unfortunately, there’s no universal answer to that. What unites all buyer groups, of course, is a preference for attractive EBITDA margins and rising revenues. Even here, however, there are exceptions.
In general, we advise against focusing too narrowly on one ideal buyer; there are so many variables in a potential transaction that you can’t control, so even a seemingly perfect match on paper may not lead to a successful outcome.
As advisors, we prefer critical mass due to the increased probability of a successful closing. This means we always recommend a sufficiently broad outreach for an upcoming transaction, which can involve contacting anywhere from 30 to 300 potential buyers in a single process.
What do those contacted want to see? We could easily do an entire interview on just this question. I’ll keep it brief. Applied to our core market, IT-Software/SaaS, buyers look at:
- the quality of technical solutions, of course,
- how deeply the sold solutions are integrated into the business processes of the client group,
- how easy it is to replace the solution with an alternative. Here, the focus isn’t on “how long is the customer contractually bound” but on how difficult, long, and costly it is to implement an alternative solution that provides at least the same benefits as the original, and
- the potential to convert this market position into attractive financial KPIs, including questions such as: How visible are future revenues? What is the proportion of recurring revenues? What is the EBITDA margin?
If sellers can provide excellent answers to these questions, both strategic and financial investors will show strong interest in their company now and in the future.
Martin: Felix, thank you for your valuable insights. This raises the question of when a company is ready for a transaction. But let’s discuss that another time. Thank you for your time, and I look forward to continuing the conversation soon.