March 11, 2022 – Solganick & Co. has been named by Axial as a top software M&A advisory firm. Following a record-setting 2021 for lower middle market software M&A, the Software Top 50 highlights the most active software-focused dealmakers on the Axial platform.
“Public market software company valuations have been battered starting in November of 2021. Over 50% of Nasdaq companies are down 40% or more off their highs,” says Peter Lehrman, CEO and Founder of Axial. “We’re not seeing that in the lower middle market, where 2022 M&A is off to a brisk pace, with near-record investor interest and plenty of ready capital available to fund deals.”
In 2021, M&A activity in the Technology sector increased 56% in 2021, up from 2020’s modest 7% increase, led again by software deals. Up 26% last year, software companies represented over 40% of all sell-side technology-related deal activity on Axial. Interestingly, the Covid-19 pandemic appeared to have a direct impact on the lower middle market’s fastest-growing tech sector, retail technology (e-commerce and computer hardware/software), where deal volume increased 132% YoY. Technology services were 2021’s second-fastest-growing sector at 64%.
“What we’re seeing in software M&A in the lower middle market is really a continuation of the dominant trends which emerged in 2020,” says Dani Forman, Director of Research at Axial. “The pandemic drastically changed consumer behavior to the benefit of the software and broader technology sectors, as more and more consumers got used to shopping, working and living much of their lives online. As a result, acquisition interest in smaller software companies supporting these technology-driven trends hit record highs, often with equally record-breaking valuations. We expect this trend to continue in 2022.”
An analysis of deal activity on the Axial platform shows that the number of technology companies marketed for sale increased by 56% in 2021. That’s after a modest increase of 7% in 2020, despite the drag from Covid.
The pandemic, in fact, spurred a flood of investment to support the shift to shopping at home. The fastest growing sector within technology on the platform was retail technology, where the volume of deals increased by 132% YoY. The second fastest growing subsector within technology was the services space.
The largest category of technology deals, however, continues to be software companies, representing a bit more than two-fifths of all sell-side technology-related activity on the platform. Software deals increased a healthy 26% in 2021.
“Everyone talks about the next unicorn,” Solganick says, “but the majority of deals are smaller founder-backed companies.”
Those main-street software companies are now attracting private equity investors who traditionally ceded the technology sector to the more risk-tolerant venture capitalists.
“Private equity firms that were doing other industry ecosystems all of a sudden were doing software,” he said. This influx of capital pushed valuations to a record level. Solganick calculates the average revenue multiple for private software firms in 2021 was 7.3x, up from 5.6x in 2020.
Meanwhile, large businesses in every industry are looking to embed software and data analysis into their products, and they are often buying specialized mid-sized technology companies to do it.
For now, the market for software and other technology companies in the lower middle market remains strong. Healthcare and financial technology are the most active sectors, with a lot of interest in any company connected to the collection and analysis of data. While valuations have stopped increasing they are stable.
For the full Top Software Firms Report by Axial, go here: https://www.axial.net/forum/the-top-50-lower-middle-market-software-private-equity-investors-ma-advisors-2022/
Axial is the online M&A platform for buyers and sellers of small and medium-sized businesses. The company’s pioneering deal sourcing and deal marketing platform is trusted by professional buyers, M&A advisors, and business owners to source opportunities, confidentially and digitally exchange critical deal information, and quickly assess the quality and reputation of potential deal partners. For more information on Axial, visit www.axial.com.
Solganick & Co. is a data-driven investment bank and M&A advisory firm that exclusively covers software and tech-enabled services companies. It’s deal team has completed over $9B in transaction value to date. Offices are located in Austin, Dallas, Los Angeles, and San Francisco. For more information on Solganick, visit www.solganick.com
