Shopping for software businesses in France? Here’s all you need to know - Part 1

What are the top 3 SaaS markets in Europe, ranked by attractiveness for serial acquirers? I would say DACH, Nordics and France (the UK too has lots of great businesses, but it is WAY too competitive). 

We have written about aggregators like Chapters Group (originally from Germany) and Visma (originally from Norway). What do these firms have in common? Both are eagerly eyeing software deals in France!

And for a good reason. Consider these factors:

• Massive TAM: France has a population of nearly 70M (and growing!) and a GDP of $3T:  bigger than Texas or Canada 

• A mammoth public sector with a clearly articulated preference for domestic vendors

• A strong culture of entrepreneurship and tech

True, France punches below its economic weight when it comes to the number of software giants. According to one study, only 60-odd companies generate €50M+ in revenues. 

Not necessarily a bad thing if you are in the market for small and mid-sized software businesses. France has been a fertile hunting ground for foreign aggregators, including:

• Constellation Software - represented by TSS, Harris, Volaris - just to mention the ones with “feet on the ground”. In 2022, Harris established a French operating group with a revenue target of €100M by YE2025

• Visma - natural next step after a flurry of deals in Benelux

• Everfield - notched up 4 deals in 2 years

• Chapters Group majority owned platform mlog capital was established last year

And that’s before we discuss the more verticalised aggregators like Orisha (ex DL Software, ERP focus, owned by Francisco Partners) or Septeo (LegalTech, owned by HgCapital). Finally, French family offices have been very active on the smaller end of the market, frequently outbidding institutional competitors.  

All in all, we estimate that c.20 serial acquirers are actively scouring the French software market - double the number of domestic software aggregators listed in our database.  

In this 2-part series we deep-dive into French software M&A to answer the following questions:

• How does one go about sourcing deals? Specifically:

  • Where to find information on target companies? 

  • Is fluent French a must for originators?

  • How does one find bilateral deals?

• What are the common tricks employed by founders and brokers to inflate EBITDA? And how can you detect them?

In part 2 (out next week), we will discuss the bugbear - the government - and specifically: 

• What deal structures do and don’t work in France

• How to rationalise headcount without running afoul of the infamous French labour law? 

• Last, but not least: are government approvals a thing in M&A?

Information availability…

…sits somewhere between Germany and the Nordics. Company data is not as transparent as in Finland or Norway, where portals like proff.fi provide full access to annual reports, but it is pretty good.

On portals like Infogreffe.fr, Societe.fr, and Pappers.fr you will find information about shareholder structure (including changes) and employee count (NB: freelancers not included!). Historical financials and annual reports are usually available too.

French annual reports ("Comptes annuels") are pretty informative and tend to include a full P&L and B/S, along with detailed schedules that break down revenue and expense lines, as well as assets and liabilities. Here is an example of such a report for Everwin SASU, a portfolio company of Harris.

This level of detail saves a ton of time when screening leads, without having to beg owners for basic data on the first call, as it often happens in Switzerland or the US.

Parlez-vous français - Or can you source deals without being fluent in French?

In short: yes, but you will be disadvantaged.

How come?

You will be hard pressed to find originators who are NOT fluent in French. Empirically, many business owners simply aren’t comfortable communicating in English. Do you want to appear seller-friendly? Speak French! 

Caveat: if you are a staffed-up acquirer, like PE, this probably doesn't matter. You communicate primarily with the CEO and the CFO, who are comfortable in English. On the other hand, if you are an aggregator buying up smaller businesses, and you are keen to engage with the entire team - particularly if retention is a challenge - you will need to put in the legwork. Or, as the French say, mettre la main à la pâte. 

How about that off-market deal flow?

Pas de chance!

France is a heavily intermediated market. A staggering percentage of entrepreneurs have personal relationships with brokers, which results even in tiny software businesses having sell-side representation.

And what representation! I have lost count of 20-page teasers for $400K ARR SaaS businesses. What’s more, even white-shoe firms like Rothschild are not beneath peddling $4-7M ARR deals.

This has two main implications.

Number one, it is becoming increasingly hard to find “proprietary” or self-sourced deals.

Number two, it often results in a tendency of founders to overestimate their growth potential in sell-side materials (e.g., “we’ve been flat but the worst is behind us”), while showing buyers broker-adjusted EBITDA that we describe in the next section.

Common tricks employed by brokers to inflate EBITDA - and how to detect them

Imagine a situation:

You receive an Info Memo for a French SaaS business. It appears to be "Rule of 40" compliant: 20% EBITDA margin and 20% topline growth. You get excited and request more information. Your request is duly fulfilled… after which you withdraw from the process, disappointed by what you saw. What happened?

In my experience, top 2 tripwires in French software M&A are R&D capitalisation and tax credits. Both inflate EBITDA - to the point of rendering Rule of 40 meaningless. I will show you exactly how.  

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