M&A and Growth Strategies for ServiceNow Boutiques: Insights from Industry Experts

Jerome Glynn-Smith, the Head of Europe for Equiteq in London, recently shared highlights from our ServiceNow webinar, co-hosted with iconica. 

Materials

Access the webinar materials here.

Recording

Review the recording here.

This event brought together owners, investors and practice leaders from the ServiceNow industry to discuss key trends and insights. Jerome was joined by Sylvaine Masson, Head of APAC, and Michel Regueiro, co-founder of iconica. Iconica is an exclusive alliance in the ServiceNow ecosystem, uniting boutique consultancies to achieve extraordinary results for clients.. 

The ServiceNow ecosystem is experiencing unprecedented growth and attracting significant interest from investors and acquirers.

“We think there's a huge opportunity around equity value consolidation and transformation over the next few years.”

Here's a summary of the key takeaways:

1. ServiceNow Market Overview

ServiceNow operates in the rapidly expanding Enterprise Service Management (ESM) and IT Service Management (ITSM) markets. The platform is broadening its scope beyond IT to include non-IT workflows such as HR and customer service, potentially expanding its addressable market to $220 billion. With over 2,000 partners globally, ServiceNow holds an estimated 40% market share in the ITSM software market. Notably, the impact of generative AI could further expand this addressable market, perhaps by a further $1 trillion.

2. ServiceNow Partner Ecosystem

The ecosystem consists of three main categories:

1. Large service providers and IT/BPO companies (e.g., Accenture, Infosys)
2. Mid-sized, often private equity-backed digital transformation companies - some of these firms are exclusively ServiceNow-focused, but many combine ServiceNow capabilities with adjacent and complementary technology skills (e.g. Atlassian)
3. Smaller, emerging firms largely-dedicated to ServiceNow, and focused on specific verticals or geographies

3. M&A Landscape

The ServiceNow partner ecosystem has seen significant M&A activity, with deal volumes growing by 40% from 2017 to 2021. While there was a dip in 2022-2023 due to macroeconomic conditions, 2024 already shows signs of a rebound. Three types of transaction are prevalent in the market:

• Strategic deals: driven by trade buyers seeking to expand capabilities or geographical reach
• Private equity Platform deals: financial investors seeking to make platform investments in the space, normally targeting larger acquisitions
• Private equity add-ons: PE-backed platforms acquiring other ServiceNow boutiques. This relatively new market is creating new liquidity options for smaller companies

4. Valuation Metrics

ServiceNow partners are attracting healthy multiples, with a median of 2.7x the last twelve months revenue and 16.4x EBITDA. However, Equiteq’s experts stressed that these multiples should be viewed in conjunction with deal structures, as earnouts and other conditions can significantly impact the final value realized by sellers.

5. Key Value Drivers

Several factors can make ServiceNow consulting businesses particularly attractive to investors:

1. Ability to leverage ServiceNow beyond IT workflows into customer and HR domains
2. Recurring revenue from managed services (ideally 20-35% of total revenue)
3. Consultative approach to solving business problems at the C-suite level, using ServiceNow as a decision-making tool
4. Strong financial performance (15%+ EBITA margin, 45%+ gross margin)
5. Consistent growth and scalability
6. Innovation in offering portfolio aligned with C-suite strategic agendas
7. Hybrid delivery model with onshore senior resources and offshore centers of excellence

6. Preparing for M&A

The experts emphasised the importance of being "transaction-ready" even if a sale isn't imminent. Key steps include:

1. Understanding the M&A process and its complexities
2. Aligning shareholders on exit goals and timing
3. Familiarising yourself with valuation metrics and deal structures
4. Assembling the right team of advisors (M&A, legal, tax)
5. Managing business disruption during the process
6. Continuing to invest in growth and not slowing down operations

7. Building for Equity Value - Focus on Key Financial Metrics

Building a company for equity value is different from building a company for lifestyle or for the next generation of employees. To maximize equity value, focus on key financial metrics:

1. Revenue Growth: Demonstrate consistent year-over-year growth, ideally balancing growth rate and profitability as per the "Rule of 40". ServiceNow partners should emphasise their ability to expand ServiceNow's capabilities across multiple business functions to achieve this balance.
2. Profitability: Maintain strong EBITA margins (15%+) and gross margins (45%+).
3. Cash Flow Management: Ensure healthy cash flow management, demonstrating the ability to reinvest in growth and weather financial fluctuations

8. Building for Equity Value - Focus on Goodwill Drivers

Goodwill assets play a crucial role in valuation:

1. Sales Predictability: Establish predictable and recurring revenue streams, such as managed services, which should ideally form 20-35% of total revenue. ServiceNow's extensive suite of products can drive long-term client engagements, enhancing predictability.
2. Brand Recognition: Build a strong brand within the ServiceNow ecosystem, highlighting unique selling propositions that resonate with clients and investors alike. Being recognised as a top ServiceNow partner can significantly enhance brand value.
3. Management Team Strength: Develop a robust management team with clear incentives aligned with equity value creation. Implementing employee stock ownership plans (ESOPs) can be an effective way to align interests and drive growth. ServiceNow partners should ensure their leadership team is well-versed in ServiceNow's capabilities and market trends.

9. Building for Equity Value - Focus on Strategic Positioning

Strategic positioning involves showcasing what makes your business uniquely attractive to buyers:

1. Unique Value Proposition: Clearly articulate how your ServiceNow solutions address specific business problems, particularly at the C-suite level. Emphasise unique implementations and custom solutions that leverage ServiceNow's platform.
2. Market Positioning: Demonstrate your firm's niche within the ServiceNow ecosystem, whether it's through specialisation in certain verticals or innovative offerings. Highlight successful case studies and client testimonials that showcase your expertise.
3. Innovation and Adaptability: Highlight your firm's ability to innovate and adapt to changing market conditions, leveraging the latest ServiceNow capabilities to stay ahead of the curve. Show how your innovations align with ServiceNow's product roadmap.

10. Responding to Acquisition Approaches

If approached by a potential acquirer:

1. Qualify the interest thoroughly, ensuring it’s serious and from high-level decision-makers.
2. Focus on showcasing your value proposition and market positioning.
3. Avoid disclosing sensitive information or valuation expectations prematurely 
   For more insights and for personalised advice, reach out to Jerome Glynn-Smith or Sylvaine directly via email.

By focusing on these key areas, ServiceNow partners can maximise their attractiveness to investors and acquirers in this dynamic market.