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How to attract private equity interest in tech companies

September 20, 2018 Article 2 min read
Matt Petrucci
Considering a sale to a private equity firm? Differentiating yourself is crucial to expanding your options and maximizing your ROI. Here are the key characteristics PEGs look for when investing in a technology company.

Image of two people looking at laptopConsidering a sale to a private equity (PE) firm? If you want to maximize your opportunities and enhance the value of your business, then it’s time to look at it from the perspective of an investor. The following are key characteristics PEGs consider before investing in a technology company:

A differentiated product or service.

Do your products or services solve a customer’s problem or address a need? Brilliant technologies only go as far as customers are willing to pay.

Niche market leaders.

While a middle-market company may not be a global leader in a particular industry, it can be a leader in its specific market or subsector. Investors look for a proven record of growth and profitability.

High industry growth.

PE investors look for long-term viability, not what might be trending at the moment. Potential investors seek opportunities that have demonstrated historical growth but are also well-positioned for future expansion.

A well-defined expansion strategy.

Having a strategy is critical. Whether it’s geographic expansion or entering new markets, a solid plan for future success is vital in attracting investors. Solid brand recognition, long-term viability, and a unique model will keep one’s strategy from becoming a falling star.

Solid brand recognition, long-term viability, and a unique model will keep one’s strategy from becoming a falling star.

Blue chip customer base.

Investors don’t want to worry about fickle customers, or a fickle market. A company with a blue chip customer base is seen as a less volatile investment opportunity because those customers are likely to stay, regardless of market conditions or changes in the economy.

Recurring or sticky revenue streams.

Many technology companies don’t have a backlog in the traditional sense, but demonstrating viability of revenue is important. For example, Software as a Service (SaaS), where software is licensed on a subscription basis and is offered via the cloud, allows for continuous revenue streams.

Proven management team.

PE investors value organizational stability and proven success. Maintaining the management team post-transaction may be a deciding factor. Oftentimes, this means selling well ahead of retirement (3-5 years).

Sell-side quality of earnings.

Maximize the value of your company by getting in front of the issues. Sell-side due diligence provides a detailed analysis of your company, focusing on the quality of the earnings and adjusted EBITDA, which allows you to go to market with the confidence of knowing your numbers have been thoroughly vetted. Buyers will submit letters of intent, having knowledge that’s normally gained much later in the process, thereby eliminating surprises and avoiding renegotiations.

Critically evaluating these characteristics can help you avoid potential pitfalls. You’ve spent years building up your tech company by making thoughtful, strategic decisions — don’t stop this close to the finish line, but don’t rush either. After all, a well-timed and well-researched exit strategy can maximize your ROI.

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