You started with a dream and a few good people, you worked hard, and you’ve built a strong, successful software company. Now, you’re looking to cash in on that hard work and move onto bigger and better things. Or maybe you’ve gotten some fantastic offers on your company and you want to make sure you handle the sale of company like a pro.
No matter your situation, selling a software company can be stressful, especially on the heels of a global pandemic, social unrest, wild presidential election cycle, need I say more?
We've laid out the top 10 things to consider before you consider the sale of your software business in 2021. Read on to learn more about how to approach this process and ensure that you receive the outcome you desire.
1. Understand Your Company's Value
When you get ready to sell your software company, one of the first things you want to do is to bring in the professionals.
It can be easy to over estimate or under estimate the true value of your software business. On one hand, your imposter syndrome might be whispering that your company can’t possibly be worth that much. On the other hand, you might look at all the hard work you’ve put into growing it and honestly feel like it’s worth more than what it truly is.
Only a technology business broker or business intermediary with a background in software business exits can provide you the best guidance on how much your business is really worth. Furthermore a business intermediary can help you increase the value of your software business prior to listing and selling the business, increasing your ROI and the likelihood of a positive outcome for all parties involved.
One of the quickest ways to get a ballpark idea of your software business valuation is to look at your revenue over the last twelve months, in most cases, a software company will be worth about 1.7 times its revenue over the previous year. Depending on your particular situation, however, that valuation could be anywhere from 1.2 times revenue to 5.8 times your revenue for the trailing 12 months. Each situation is a little bit different.
Want to get a more precise number? Check out our online business valuation calculator.
2. Timing the Sale
Timing the sale of a business is crucial to extracting maxim value. You might be wondering if selling your software company during a pandemic and a new presidential administration is wise or will it be better to wait for a less tumultuous time.
There's no perfect time to sell your business however for some context, in recent years several studies have shown that many software companies have been sold for an average of 3.34x to 5.25x multiple.
It's almost impossible to time the market perfectly when it comes to the sale of your software business. If you looking to make an exit, 2021 looks as good (if not better) then the last few years in our opinion.
3. Create a prospectus
It should come as no surprise that one of the biggest steps in selling your software company will be getting your documentation and financial records in order. Potential buyers are going to be investing a lot of capital in acquiring your company, and they’ll want to know that their investment is a good one. This means they’ll be looking at your company under a microscope, and you need to be ready.
Gather financial statements for your company for at least the last three years. If you are venture-backed, you may also need to have an audit performed to ensure all standards have been followed and transactions have been recorded. You’ll also need to gather employee on-boarding materials so potential buyers know who has rights to what after the sale of the business.
4. Get Your Personal Affairs in Order
It may sound odd, but when you’re getting ready to sell your business, it’s also a good idea to get your personal financial house in order. Your financial interests will obviously be impacted by the sale of your software business. You need to be prepared to handle that in a smart, efficient way, and that will be easier if your personal financial affairs are in good order.
Talk to your lawyer and CPA make sure your interests are protected, including locking down things like double-trigger acceleration vesting. You may also want to have them check on any severance and change-of-control incentives. And make sure there won’t be any personal financial or estate planning issues related to the sale of your software business.
5. Review Your Funding Sources
You’ll also need to take a look at your funding sources when you’re getting ready to sell your company, especially if you’re a startup. If you have investors of any sort, they’ll need to know about your plans to sell the company. They may even have a say in whether you can sell your company and what that transaction will look like, depending on the nature of your investment agreement.
If you worked with small investors, whether they be crowdfunding or angel investors, your timeline will likely be shorter for when you’re allowed to sell the business. But if you worked with traditional venture investors, you may be looking at a seven- to ten-year timeline before you can exit the company.
Be sure you check on the terms of your funding and figure out how much impact your investors will have on your sale.
6. Address Legacy Software
The pace of software development moves fast. We don’t have to tell you that if you want to keep up, you’d better keep new product offerings flowing down the pipeline. But just because you’ve launched a new application doesn’t mean you can stop supporting old ones.
Legacy software will be a part of the story potential buyers are looking at, and they can become something of an elephant in the room if not addressed early on.
Rather than allow legacy software to muddy the waters and drive away potential buyers, address them directly. You may even want to consider offering a separate sale or a complete divestment of legacy software so potential buyers don’t feel trapped with older software products.
7. Show Off Your Technical Chops
Another aspect of being in the software industry that is unique from other industries is the pace of innovation. Potential buyers will want to know of your companies experience within trending software sectors such as AI/AR, therefore don't be afraid to highlight the things you’re working on that fall into those "hot" areas, even if they aren’t your primary area of development, showing off the work you’re doing in these sectors can grab buyer attention. It also shows that you’re dialed into the current market trends and that you’ve built a company capable of adapting as fast as the market place demands it.
8. Get Your IP Documentation in Order
One of the biggest issues in the software industry is intellectual property rights. Everyone from employees to buyers wants to know who owns an idea generated on company dime and time.
Before selling you need to ensure you possess the full legal rights to all intellectual property that your company possess, this includes trademarks, patents and copyrights registered with all the appropriate governmental agencies and legal authorities.
When you get ready to sell your software business, you need to be sure you’re prepared to answer any IP questions your potential buyers may have.
Ideally, your company should have the IP rights to any programs or solutions developed during company work time. When you sell the company, those should move with the title, transferring to the new owners.
Be sure to work with a lawyer that has experience with intellectual property laws to draw up documentation outlining the specifics of your IP rights and how those transfers will work after the sale.
9. Play the Field
Once you have an interested buyer or two, you don’t have to automatically start wooing and pursuing those first interested parties. There are a lot of potential buyers looking for deals in the software space, and it’s a good idea to play the field for a little while. See how serious each of these parties is and how closely they fit your target profile.
Of course, the balance here is you don’t want to keep a serious contender on the hook for long enough that they lose interest. Once you find a buyer or two who fit your ideal buyer profile pretty well, start engaging them more seriously. From there, you can narrow down your options and see who offers the highest bid or who fits your vision for your company the most.
10. Hit Your Milestones
When you start the process of selling your business, it can be easy to feel like your work growing the company is done. After all, you won’t be involved with it any more in a few months, right? But the last thing you want when you’re negotiating a sale is for your potential buyers to see your numbers going off a cliff.
Be sure to keep up the work you’ve been doing to hit all your milestones on time, even after you start negotiating the sale. Up until the paperwork is signed, you should continue acting as though you’ll be running this company for the foreseeable future. This will keep your revenue streams on track and ensure your buyer doesn’t get cold feet at the last minute.
Discover Tips for Selling a Software Company
If you have a successful software company, you have an opportunity to make some serious money by selling it to the right buyer. But there’s a lot of work that goes into making sure you get the best deal on your company. Be sure to get all your affairs in order, stay honest, and don’t be afraid to pursue your ideal buyer. And finally don't neglect to bring in the professionals to help you sell your software company.
If you’d like to discover more tips for selling a software company, check out the rest of our site at Sunbelt Atlanta. We’ve been handling business sales, mergers, and acquisitions since 1979, and we have more than seventy years of collective experience. Contact us today and join hundreds of Georgia business owners in getting the most value from the sale of your software business.