Ready to Sell Your Software Business? 5 Tips
Owning a company in the software sector is pretty exciting. Technology is one of the economy’s fastest-growing sectors, and many individuals have grown large companies in software that add tremendous value to our everyday lives.
At some point, you may want to sell your software company. You may want to retire — or you may have other businesses you want to devote your time to.
Whatever your reason for selling, make sure you take the following specific steps to maximize your return from the sale.
Selling a Software Company Tip #1: Clean Up Your Financials
At the heart of your business are your financials. Your financial statements indicate whether your business is profitable. They also illustrate potential problems in the organization, like declining revenues, significant debts, and issues with customer collections.
If you don’t have a dedicated accounting and finance team in your organization, seek help from a CPA. Your CPA can take a deep dive into your financials and identify potential issues. They can alert you to opportunities to improve your books, such as changing your collections process.
You can also seek help from outsourced executives, like an experienced CFO or CEO. Individuals with prior experience growing businesses in the software sector can give you ideas to build up sales, help introduce new pricing structures, or show you other ways to increase your organization’s worth.
While it may take some time, resolving issues in your company’s performance only adds value to your organization. That value will translate to a higher asking price for your business.
Selling a Software Company Tip #2: Obtain a Professional Valuation of Your Company
A professional valuation of your company establishes what your company is worth. You should start the valuation process early — at least a few years before you plan to sell the company.
You can obtain a valuation from financial advisory firms like KPMG or Deloitte. If you prefer to work with a local firm, look for a company with experience valuing software companies in your market sector.
Your valuation specialist will consider your financials when performing their valuation. They’ll also consider certain external factors, like your company’s market share, customers, and future potential.
There are several methods that a valuation specialist can use to value your company, including the sales multiple, internal rate of return, free cash flow, and P/E ratio. If your company isn’t performing well or is heading toward bankruptcy, the analyst may use the liquidation value instead.
If you’re unhappy with the valuation of your company, you can seek to improve it. Your valuation specialist can suggest methods to enhance its market worth. After you implement their suggestions, seek another valuation.
You’ll use your valuation to establish an asking price for your company and benchmark your offers. A document proving what your organization is worth prevents buyers from attempting to lowball you for less than you deserve.
Selling a Software Company Tip #3: Understand What Makes a Software Company Valuable
Software companies are different from other organizations that have tangible assets. Usually, software companies hold very little equipment of value; instead, they determine their worth based on factors like proprietary technology, customers, goodwill, and intellectual capital.
Your organization likely has technology that differentiates you from other companies in your sector. If your technology is beneficial or does something that no other software can do, it’s probably very valuable. Your valuation specialist will account for it in their assessment of your business.
A solid customer base can drive up your software company’s value tremendously. If you have numerous customers that rely on your software for their needs, buyers will account for that in their asking price. Conversely, if you don’t have many loyal customers, the value of your business will fall.
Goodwill can positively impact the value of your business. If your company has a strong reputation in the market or has long-standing, loyal customers, it will be worth more.
While growing your customer base takes time, you can expedite the process by establishing a robust online presence. You can also participate in conferences within your industry, produce whitepapers and research, and build a following on social media. The more solid your reputation is within your industry, the more buyers will be willing to pay for your organization.
Finally, your employees probably make up a significant portion of your company’s value. Your software engineers likely spend most of their day ensuring that you have a solid product or service that your customers can rely on. Without your key employees, your software may not remain competitive.
Your valuation specialist will consider your most critical employees when deciding on the final valuation of your organization.
Selling a Software Company Tip #4: Create a Prospectus for Your Company
A prospectus provides a summary of your business, along with supplemental details concerning the company’s financials, prospects, and proprietary technology. A business lawyer and broker can help you prepare a clear prospectus that buyers can review.
Your prospectus should include the last three years of your financial statements. As buyers review your documentation, expect lots of questions from them. They’ll likely want to understand every aspect of your business. You may seek the help of a qualified CPA to assist with buyer inquiries.
Selling a Software Company Tip #5: Be Ready to Negotiate and Undergo the Due Diligence Process
A business broker can help you with the negotiation process. In fact, we recommend working with one rather than trying to handle the entire process yourself.
Potential buyers will prepare their offers during negotiation, including specific terms and conditions. You’ll want to review each submission carefully to ensure that you don’t agree to something that doesn’t align with your expectations.
Once you reach an agreement, you’ll undergo due diligence. During the due diligence process, your buyer will likely ask for lots of information concerning your business. They may request customer contracts, underlying information from your financial statements, and other details.
You can perform your own due diligence on your buyers. Ask them for information about their prior acquisitions and their financial condition. You don’t want to accept a purchase from a buyer who doesn’t have the financial means to follow through on the deal.
Selling Your Software Business Is Rewarding, but It Takes Effort
Once you decide to sell your software company, you can expect lots of work. You’ll need to assess your organization thoroughly, and you may need to make some changes to improve its value. However, the process can result in a lucrative sale that can reward you for all of your efforts spent building the business into what it is today.
Do you want to sell your software business quickly and confidentially?
Cowen Partners’ business sales approach is notable because we are one of the nation’s leading executive search firms and are in touch with potential buyers daily, including investors interested in buying software companies, HVAC companies, dental practices, and more.
Our Partners come from a diverse set of backgrounds and skills, ranging from business owners and entrepreneurs to CPAs and financial analysts.
This diversity of talent enables the team to guide our clients with firsthand knowledge and experience through all phases of the business processes of building, buying, and selling.
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