Software businesses are attractive acquisition targets for an obvious reason: high gross margins, low marginal cost to serve an additional customer, and revenue that renews without a new sales cycle each year. Those attributes are real, but they are also table stakes — every software business claims them. The economics that actually separate a good acquisition from a value trap sit one layer below the headline metrics.
Net revenue retention tells you more than growth rate
A business growing revenue 20% a year by adding new customers while losing 15% of existing revenue to churn is in a fundamentally different position than one growing 20% with 95% retention and modest new-logo growth on top. The first is a leaky bucket that requires an ever-larger sales engine just to stand still; the second compounds almost regardless of what the sales team does next year. We weight net revenue retention more heavily than headline growth in every underwriting we do, because it is the number that predicts what happens to the business if new customer acquisition slows for a year.
Gross margin hides in the support ticket, not the server bill
Cloud hosting costs get all the attention in software gross margin conversations, but for most mid-market software businesses, the real margin drag is service: implementation, custom integrations, and support headcount that scales with the customer base instead of staying flat. A business that looks 80% gross margin on paper but requires a customer success manager for every fifteen accounts is a services business wearing software multiples. Distinguishing the two before signing an LOI saves considerable disappointment eighteen months in.
The multiple the market pays for software is a bet on how the business behaves after the founder’s attention moves elsewhere. That is the question worth underwriting, not the multiple itself.
Integration cost is a line item, not a footnote
Acquirers routinely underprice the cost and time of integrating an acquired software business — migrating infrastructure, consolidating overlapping tools, retraining support teams on a second product. Every quarter spent integrating is a quarter the acquired business isn’t fully focused on its customers. Our approach through Axionik treats integration as a planned, budgeted phase of the acquisition itself, not an afterthought that gets solved once the deal closes.
Why concentration risk matters more in software than elsewhere
A software business with 40% of revenue from three customers looks fine until one of those customers is acquired, changes strategy, or builds the feature in-house. Because switching costs in software can evaporate faster than in a services or industrial business, we look harder at customer concentration and contract structure in software diligence than we would in a business with physical or relationship-based switching costs.
None of this argues against acquiring software businesses — it argues for underwriting the economics underneath the label rather than the label itself.