As we close the books on 2024 and look ahead to the New Year, entrepreneurs contemplating the sale of their business may be wondering how the evolving market will impact them. The value of your business can fluctuate based on market trends, industry dynamics, and external conditions. These factors are evolving rapidly, presenting both challenges and opportunities for software businesses.
In 2025, we anticipate an increase in both deal volume and potential acquirers. Here’s what you need to know about the factors that could impact your bottom line:
Macroeconomic Trends Influencing Valuations
Global economic conditions have always had a direct impact on software business valuations. Key trends to watch for this year include:
- Interest Rates and Financing Costs: Central banks' efforts to stabilize inflation are causing fluctuating interest rates, which influence buyer behaviour. Higher borrowing costs may reduce acquisition activity, particularly for private equity buyers reliant on leverage.
- Tech Spending Rebounds: Enterprises are increasing budgets for digital transformation after cautious spending in previous years. Gartner forecasts, IT spending alone is expected to grow by 9.3%, reaching $5.74 trillion1. This spending will increase the demand for innovative software solutions which can be easily obtained through mergers and acquisitions.
- Cybersecurity Prioritization: Software businesses are increasingly equipping themselves with robust cybersecurity measures. This trend is driven by the growing threat landscape and the need to protect sensitive data and maintain customer trust. Secure software businesses are inherently seen as less risky investments.
Industry-Specific Dynamics
Certain trends within the software sector are having a significant impact on valuations:
- Rise of AI and Automation: Companies with AI-powered solutions are commanding premium valuations as industries prioritize efficiency and innovation. However, it's crucial for founders to stay focused. If your current solution does not directly benefit from an AI add-on, avoid distracting your R&D team just for the sake of having an AI feature.
- Subscription Models: Businesses with recurring revenue streams, such as SaaS models, remain highly attractive due to their predictable cash flows and scalability.
The Impact of SaaS on Deal Volume
SaaS (Software as a Service) companies have consistently attracted higher valuations due to their recurring revenue models and their role in digital transformation.
From 2022 to 2024, the volume of SaaS deals increased by approximately 20%2. This growth reflects the ongoing demand for cloud-based solutions and the continued digital transformation across various industries. In 2025, we anticipate that the high volume of SaaS M&A deals will continue to have a ripple effect across the technology sector.
Buyer Behaviour in 2025
Our Co-Chief Investment Officer Michael Goldband, shares insights on anticipated buyer behaviour in 2025:
"In 2025, buyer behaviour in tech M&A will continue evolving. Strategic buyers are expected to be increasingly active, seeking acquisitions to fill product gaps and enhance competitive positioning, while private equity firms will focus on profitable, established companies due to higher financing costs. In 2024, we saw continued alignment between founders and Perseus’s buy and hold approach, where sellers were looking for a partner that shared their vision and provided mutual growth opportunities."
What Founders Should Do to Maximize Value
To position your software business for a strong valuation in 2025, consider these steps:
- Focus on Recurring Revenue: Highlight the stability of your subscription-based income streams. Recurring revenue models, such as SaaS, are highly attractive to buyers due to their predictability and scalability.
- Demonstrate Profitability: While growth is important, buyers are increasingly favoring companies with sustainable performance. Ensure your financial statements reflect a healthy balance between growth and profitability, showcasing sustainable business practices.
- Leverage Industry Trends: If your product aligns with hot sectors like AI, cybersecurity, or fintech, showcase this prominently in discussions with potential buyers.
- Streamline Operations: Address inefficiencies to enhance margins and make your company more attractive to buyers. This includes optimizing processes, reducing unnecessary costs, and improving overall operational efficiency.
- Organize Financial Records: Ensure your books are well-organized and your finances are in order. Accurate and transparent financial records build trust with potential buyers and can significantly impact your valuation.
Looking Ahead
The software industry is primed for continued growth in 2025. Founders who stay informed, adapt to new trends, and focus on creating value are likely to succeed in these changing environments.
Despite the evolving landscape, our acquisition mandate at Perseus Group remains the same. We never sell our businesses, providing a permanent home for customers and employees. So whether you're planning for a sale or just exploring your options, we're here to connect with entrepreneurs at any stage of their journey.
Ready to learn more about positioning your software business for a successful exit? Let’s connect.
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1 https://www.gartner.com/en/newsroom/press-releases/2024-10-23-gartner-forecasts-worldwide-it-spending-to-grow-nine-point-three-percent-in-2025
2 https://www.demandsage.com/saas-statistics/
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