An analysis by Diego Gutiérrez ZarzaPartner at Baker Tilly Tech M&A
For years, growth was enough to build value in a tech company. Not anymore.
The market continues to pay a premium for good software companies, but it no longer rewards growth for its own sake. It rewards something more demanding: the actual quality of the asset.
One of the best ways to understand this change is to look at the case of Constellation Software.
What exactly does Constellation Software do?
It is a leading provider of software and services to a range of markets in the public and private sectors. It is not merely an active buyer of software, but also a clear indicator of the kind of companies that continue to attract investment in a more challenging environment.
Its focus is very specific: vertical, mission-critical software that is closely aligned with the client’s business. When a company like this acquires another business, it is buying quality, focus and the longevity of the asset.
A while ago, we wrote an article about Constellation Software, looking at what the company does and how it is valued.
What do recent developments tell us about the market?
The market is still paying, but it’s becoming more demanding. On the one hand, the fundamentals remain sound:
- +$11.6 billion in revenue (2025)
- +$2.7 billion in operating cash flow
- +$1.6 billion in free cash flow
On the other hand, the valuation has undergone significant adjustments:
- An estimated fall of 42% from peak levels (2025–2026)
The bottom line is clear: the market doesn’t just pay for results; it pays for future expectations. And when those expectations change, valuations adjust.
What does ‘asset quality’ mean in a technology company?
The company is well-structured.
A reputable company has:
- A clear focus on a specific problem
- Disposable income
- Ability to generate cash flow
- Less reliance on the founder
- A team capable of performing without fanfare
- A value proposition resilient to technological change
And in M&A transactions, having all these factors under control has a direct impact on the valuation and structure of the deal.
Why is vertical software more defendable?
Because it is harder to replace. Constellation has built its business model around mission-critical software in specific niche markets. This has key implications:
- Greater integration into the client’s workflow
- Higher exchange rate
- Greater operational dependence
In an environment of increasing competitive pressure (including AI), this is what makes the difference. It’s not the prettiest software that wins; it’s the software that the customer can’t do without.
Why does the market penalise reliance on the founder?
Because of therisk of transferability. When there is a high degree of reliance on the founder, the business is a person, not an organisation. The buyer doesn’t want to buy your story; they want to buy the company’s future without you.
If everything that happens in the company (products, sales, key decisions, etc.) goes through the founder, the company itself loses value.
The lesson is simple: if your business can’t function without you, it’s worth less than it seems.
Why does cash flow matter more than the narrative?
Because cash flow is a measure of financial sustainability. Cash flow measures the actual money coming in and going out. A company cannot pay salaries, debts or suppliers with ‘narrative’ or accounting profits if these are tied up in outstanding invoices.
Today, buyers prioritise:
- Quality of growth
- Unit economics
- Ability to reinvest
- Capital discipline
In bull markets or periods of cheap money, stories of exponential growth can inflate valuations. However, in periods of capital scarcity or when a business reaches maturity, the market always returns to fundamentals.
How are M&A transactions in the software sector changing?
There is greater flexibility and more hybrid structures.
The DerbySoft case is a good example of this:
- Majority acquisition
- Management retains its stake
- Coalition government
This reflects a structural change:
- More partial operations
- More continuity within the team
- Greater strategic flexibility
A read for founders: it’s not just a question of whether to sell or not to sell; there are increasingly more ways to structure a deal.
Why does multiple compression occur?
Because investors are willing to pay less for every euro or dollar of profit generated. Even the best assets are affected by this phenomenon. The reason is that multiples do not measure the quality of the business, but rather investors’ expectations and the cost of capital.
Constellation remains a high-quality company, but its valuation has corrected. This is because:
- Expectations are changing
- The cost of capital is changing
- Market sentiment is shifting
What questions should you be asking yourself today as a founder?
If you look at your business through the eyes of a buyer, you should be able to answer the following questions clearly:
- Is your software critical or merely convenient?
- Is your income justifiable?
- Could your business run without you?
- Are you generating revenue or just growing?
- Is your product replaceable?
- Does your self-worth depend on results or on expectations?
These are precisely the questions that determine your rating.
What does this mean for you if you’re thinking of selling?
To maximise the value of your business, you should focus on aspects such as:
- Reduce dependence on the founder
- Improving the quality of income
- Strengthen your position in the customer’s workflow
- Demonstrate cash flow generation
- Building a business that works without a narrative
Because, at the end of the day, the buyer pays for quality control, durability and the ability to deliver.
If you’re building a tech company, the question isn’t how much you’re growing, but whether you are building a quality asset.
Frequently asked questions about valuing technology companies
What are buyers looking for in a SaaS company today?
Companies with sustainable revenue streams, strong customer integration, cash generation and low reliance on the founder.
Is growth still enough to boost the valuation?
No. Growth that lacks quality and sustainability no longer commands the same price as it used to.
What factors reduce the valuation of a technology company?
Reliance on the founder, cash flow problems, low differentiation and the risk of being replaced.
Is it possible to sell without leaving the house entirely?
Yes. Structures involving a partial sale and the retention of the existing management team are becoming increasingly common.