As one of the fastest-growing industries, technology plays a significant role in the global economy. It impacts nearly every aspect of our lives. No individual or enterprise can imagine their life or day-to-day business without using any type of software. It has become an integral component of corporate operations in all sectors. So, if you want to sell a software company, the circumstances are quite favorable today.
As the software sector evolves, the desirability of purchasing a software company grows. There are a number of good aspects related to the software business and how it influences the economy. Since the last century, software production has surged by more than 50 percent, and even more explosive growth is anticipated for the future.
However, selling your software company for maximum value involves far more than having a great software product or service. In order to do so, you must fully engage in the entire process. The more effort you invest and the more details you pay attention to, the greater the success of the sale will be.
Selling a software company and businesses in general can be very complex, so we’ll explore all the aspects of the sale process, from the planning and marketing to due diligence and closing the deal.
Before You Sell A Software Company
Why do you want to sell a software company, and why would someone want to buy a software company? The beginning of the sale process lies in the answers to these questions.
There are several common reasons why a business owner wants to sell:
- They grew the startup into a profitable business, and now they want to sell and earn big. Perhaps they plan to invest in other projects, start a new business, or simply travel and enjoy the time of their lives.
- They want to sell because they are no longer driven by running the company.
- They want to retire.
- Divorce, illness, or any other private reason
- The company is not successful, and they want to pay off debts.
And there are two main reasons why buyers want to buy a software company:
- The software company is profitable and shows excellent potential for future growth.
- The software company is not that profitable, but the product is good, and there is a potential for success once the strategic changes are made.
Now, you have to consider all of this when you are about to sell a software company, as that will help you define objectives and desired outcomes of the sale process and further the overall exit strategy.
Once that is defined, it’s time to get your software company ready to sell. Let’s dive into the process.
How to Sell a Software Company?
You have decided to sell your software company, but you may wonder when the perfect time is. Timing can be crucial, so listen to the market. You have to look into the future and listen to the experts’ predictions. For instance, M&A activity hit new records last year, and it seems like that trend will only go forward.
You also have to take into account that you’ll need a certain amount of time to prepare your business for sale before you actually market it for sale.
Although the process of selling a software business and the process of selling a regular business are similar, there are quite a few differences, especially when it comes to business value and evaluation.
Determine the Value of Your Software Company
Determining the value of your software company is the best way to prepare you for the sale process. There are general methods of valuation that can be applied to the software companies as well:
1. Sales Multiple
2. P/E ratio
3. Internal rate of return method
4. Free cash flow model
5. Replacement value
6. Book value method
7. Liquidation/salvage value
8. Recent internal transaction price
Keep in mind that the multiples vary depending on the type of software and the industry where the software is used. However, the value won’t depend only on the financial factors (revenue, net profit, cash flow, and balance sheet). It also includes factors such as the size of the market, market share, competition, technology, distribution channels, sales projections, growth trajectory, etc.
Your business is part of the global tech industry, and that technology goes beyond the borders, impacting the value in different regions of the world. Although the standard metrics and measurement criteria can be applied to this industry as well, there are a few things that mainly determine the value of a software company:
- Technology. If you provide quality and useful software that solves specific problems and is likely to be used for many more years in the future, the chances are your business’ value will be greater.
- Customer base. Any buyer will be interested in the size of your business’s customer base. As any business person already knows – new customer acquisition is much more expensive than customer retention. Once they purchase and start running your software company, they will be secured by knowing that they have customers that will buy the existing product. There is also an opportunity to sell new products to those customers as they prefer to purchase from familiar companies.
Further, software companies, such as SaaS (software as a service) companies, have recurring revenues from a strong customer base. That refers to monthly/yearly annuities – maintenance and additional service revenue. That revenue is predictable and generates high margins and significant cash.
- Goodwill. It includes customer loyalty (connected to the previous), brand reputation, and other non-quantifiable assets. Brand recognition and reputation drastically affect your business value when you’re selling it: the better the branding, the higher the value.
- Intellectual capital (employees). This is the main value driver in your company, and it includes staff’s knowledge, skills, experience, business training, etc. There are many buyers that prefer earnout and want to keep key staff as they are valuable resources for future growth and increase in overall value.
Market trends are rapidly changing when it comes to technology, so determining the value of your software company takes a lot of effort. It’s easy to underestimate or overestimate the value of your business.
Therefore, bringing in experienced professionals, such as M&A advisors, can significantly help speed up the entire valuation process. Furthermore, they can help you increase the value before you sell a software company and reach the most favorable outcomes of the sale.
One of the most important steps is to get your documentation and financial records in order. A prospective buyer would be highly interested in facts, figures, and numbers to assess if your business is truly profitable and sustainable. Therefore, your financial statements have to be accurate, complete, and well-organized.
Gather all the documentation and financial records, such as profit and loss statement (P&L) and Balance Sheet, for the last 3 years at least. A buyer would go into every detail, so ensure everything is thoroughly processed and ready for the due diligence process.
Documentation includes intellectual property rights, so you have to ensure that you possess the full legal rights to all intellectual property of your company, including trademarks, patents, and copyrights registered with all the legal authorities.
Review Your Sources of Funding
This is especially important if your software company is a startup. If you have investors, you’ll have to inform them about your decision to sell a business. The nature of your investment agreements will further determine how the sale will proceed.
For instance, if your investors are crowdfunding or angel investors, you’ll be able to sell your business in a short period of time. On the other hand, the situation with traditional venture investors may prolong the process.
Review the terms and conditions of the funding agreement to figure out the investors’ impact on the sale.
Market the Company for a Sale
Once everything is ready, it’s time to step on the market. You can list your business on the online platforms known as business marketplaces, or on auction sites. Another way is a direct sale to the suppliers, customers, partners, or competitors.
Or, as mentioned above, you can hire experienced M&A advisors, which will facilitate the entire sale process. They will create a successful business exit strategy, determine the accurate value of your business, easily connect you with potential buyers, negotiate to get the best deal, carry out the due diligence process, and, finally, sell your software business for the maximum price.
Keep Working and Growing Your Software Company
Although you are working on selling your company, your efforts in growing the business are not done until you finally sell it. The thing is – you have to make sure your numbers don’t decrease. Act like you will be running the business for many more years. Keep working on the company’s objectives and keep the revenue stream on track, as that will only make your software company look good in the buyer’s eyes, promising that growth will continue after you leave.
That also includes marketing and customer relationship management (CRM) efforts. The key is to keep the existing customers and increase the customer base as much as you can because, as mentioned above, it has a substantial impact on your company’s value.
Negotiation, Due Diligence & Closing the Deal
Once you find and screen prospective buyers, it’s time to meet with the qualified ones and negotiate the price, as well as the terms and conditions of sale. Ensure you are well prepared and that you know everything about the buyer. Confidence, honesty, and respect are the important aspects of every negotiation.
When you and the buyer come to an agreement on price and terms, the following process is due diligence. Due diligence is a crucial step in the sale process, as the buyer still hasn’t decided whether they’ll purchase your company. Therefore, you have to provide them with all the relevant documentation. You have the right to inspect the buyer’s financial condition as well, so we recommend doing so.
After the due diligence is completed, it’s time to finalize the sale and officially close the deal. Outline previously agreed terms and conditions and modify them if necessary. There can be some adjustment in the final price, depending on the due diligence results.
Sell Your Software Company The Right Way
As experienced M&A advisors, we understand that every software business is unique. Once you make a request for our M&A services, we take the time to learn everything about you, your business and your goals. Our team will perform a thorough valuation of your company and provide you with an initial sale price.
We’ll help you develop a successful business exit strategy and prepare all your documents and initial memorandums. We anticipate any issue that may arise during the transaction process.
We assist you in marketing your company effectively, connecting you with qualified buyers, and negotiating the transaction on your preferred financial terms. Before sharing information about your company, we ask all potential buyers to follow rigorous confidentiality requirements and present proof of financial sustainability.
Our team of advisors has decades of combined professional experience in selling software companies. When you partner with us, we make sure that you get the best possible outcomes in a time-efficient manner.
We will be there for you at every stage of the selling process, advising you and helping you with everything needed, from day one to a wealthy lifestyle.
Sell your business the right way with us.
IAG M&A Advisors is a business intermediary consulting firm, facilitating the buying & selling of businesses. With over 100 years of combined experience, the IAG team has been a leader in the industry by helping the owners of privately held companies “cash in” on all their hard work and get the best payoff possible.
We are here for you if you have questions about selling, and ready to help you get started when you are ready.
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