Over time, we have built a set of resources to be proud of concerning getting started in programming, building software companies and everything else to take advantage of the popularity of cloud computing and software as a service. When we covered building the company, we noted that it was essential to have an exit strategy. Unless your product is unique and innovative, it will not sell in the numbers you would like. If it is unique and makes regular sales, then a larger company than you will be bound to take an interest. They may have an eye on the subscription income or feel that your product would complement their range – or even benefit from being rolled into a more extensive service.
Selling your business can feel like selling one of your children, and it is not something to take lightly. What you do post-sale is up to you – you may be invited to join the company that takes over or may make so much money that it is time to retire. At the very least, you want to make as much as you can from the sale, and the following tips will place you in the perfect position for the best deal.
1. Know Your Valuation
It is simplistic to say that a business is worth whatever someone is willing to pay for it – but also somewhat accurate. If you are a private company that does not have your worth dictated by share prices, then you will need an alternative way to create a ballpark figure as a tangible valuation can guide you on the kind of offers to accept. Traditionally, software businesses are valued at 1.7 x the total revenue over the preceding 12 months.
2. Revenue Drives Valuation, But Profit Matters
Revenue matters as it gives potential buyers an idea of the incoming capital they have to work with while cutting costs, changing pricing or doing anything else that aligns with their vision. However, lower costs can often mean lower profits, and you would prefer the highest return in the long-term. In some cases, prospective buyers are more inclined to take the plunge if they spot an opportunity to cut costs – even if you have identified it previously and left it for the buyer to find.
3. Be Honest and Transparent
If you understate the qualities of your company, you risk missing out on elements of the valuation. If you overstate them, you risk a lawsuit for fraud. Without question, the best way to approach a potential sale is to provide factual, accurate information. You do not need to give an opinion – buyers are more interested in forming their own, and the correct data means everyone will have a fair chance of getting things right.
4. Consider the Value of Different Departments and Products
You may have several software products in your catalogue, and a potential buyer may be interested in a full company acquisition to get their hands on only one. It is routine for the buyer to undervalue the other products to reflect their worth to them. It can be worth inviting bids for the product generating interest alone to establish their valuations of the other products. If these are not in line with your opinions and you feel there is more to be made, there is nothing wrong with suggesting a sale of rights to one product rather than the whole business.
5. Future Revenues Matter
Buyers use past performance as a guide, but they are most concerned with future revenues. If your software is well-positioned to take advantage of new trends, upcoming changes to legislation or anything else with a positive impact on value, your excitement for the future should be clear to potential purchasers.
6. The Value is in Intellectual Property
You may have spent big to reach a market-leading position and have stunning offices packed with the best sales guys and coders around. These positives will all contribute to the valuation, but it is nothing without your intellectual property. When they make the purchase, they want exclusive rights, so it is best to ensure everything is in order at the earliest opportunity.
7. Place a Value on Partners and Contacts
There are intangible elements of every business that a buyer may not be aware of but will be willing to increase their offer for once discussed. Relationships with large companies, influencers and research projects can all have a price placed on them, especially if you can quantify the impact they can have on future revenues.
8. Identify the Perfect Buyer
While building the business, you probably spent time working out who represented the perfect customer. It is time to put those skills to the test and do it again, with results guided by your ambitions. Some profile elements speak for themselves – you want a prospective buyer that has cash on hand to meet your valuation. If you want a managerial role for yourself, you’ll seek a buyer that can provide one. If your staff are part of the deal, you want somewhere with a similar working culture. Finally, if you want your brand and product to remain standalone, the ideal buyer will be new to the software industry or not already boast a complementary product that would benefit from absorbing yours.
9. Hit Targets Until the End
Your targets are likely already established before even receiving a bid and may well have been shared with potential buyers. Nothing is more likely to scare them away than missing them. It is easy to consider that you have had 12 months of good luck with revenues without being well-positioned for the future profits they seek.
10. Spend in Your Head and Nowhere Else
In history, there are tales of employers cutting wages if their employees bought something that they ‘shouldn’t’ be able to afford. That is illegal today, but the mentality persists. You might be expecting a windfall, but save the spending for your mind’s eye until the deal is complete so that the buyer does not return to the negotiating table with a lower price in mind.