The Croatian market for small and micro IT companies is highly fragmented, and Andrija Čolak, former owner of the franchise Surf 'n' Fries and currently a consultant on business sales, believes that the purchase of existing businesses in Croatia is about to gain momentum. Appearing as a keynote speaker at the CRO Commerce conference, Čolak assessed that the consolidation of the Croatian IT market is occurring, but is still in first rather than fifth gear.
Čolak identifies two main obstacles to the development of the acquisition market in Croatia: emotional valuation and financing. Potential buyers in Croatia must primarily fund acquisitions with their own capital, he warns, whereas in the US, programs such as SBA loans allow banks to finance the purchase of existing small businesses. In Croatia, as he describes it, you must first sell one business in order to buy another. Despite this, he sees an opportunity for the first serious consolidators, as the market is fragmented, valuations are still reasonable, and competition among buyers is not high. "We have the fuel and the engines, but the financial transmission that would connect them is missing," Čolak says.
The market, in his assessment, will be driven by the collision of two forces: the silver tsunami and the ETA. The silver tsunami is a demographic wave of owners who founded their businesses twenty or thirty years ago and are now reaching the stage of withdrawal. The children of these owners do not always wish to take over the family business, and if there is no family successor, the options are professional management, sale, or closure. CEPOR had identified more than 16,500 businesses with approximately 180,000 employees whose owners needed to begin planning the transfer of the business. The latest research shows that in 7,047 active businesses in this group, there has been no change in ownership structure. These businesses employ almost 60,000 people and generate around nine billion euros in revenue, with the average age of the owners being 72, and 97 per cent of them falling into the micro and small business segment.
On the other hand, the model of entrepreneurship through acquisition (ETA) is one in which the entrepreneur does not build a company from scratch, but purchases an existing profitable business, takes over its management, and develops it further. Search funds are one of the organised forms of this model: investors finance a capable entrepreneur during the search for a company, and then invest alongside them. The entrepreneur becomes the director and co-owner, while the investors provide capital, experience, and a network of contacts. The market begins to move significantly when it is joined by financing, quality advisory services, and several successful visible transactions.
Čolak compares starting a business from scratch to building an aircraft while it is taking off. In the case of an acquisition, he explains, you are buying an aircraft that is already in the air, with passengers, a crew, a route, and ticket revenue. With a startup, you risk that the market does not exist, whereas with an acquisition, you risk that the business is not as represented. This second risk can be measured through quality analysis, limited by contract, and included in the price. The buyer is not purchasing a label such as SaaS, an agency, or e-commerce, but rather is purchasing the predictability of future cash flow, with the most attractive businesses being those with a subscription model.
