Don’t Take Your Eye Off the Ball
Selling your business can be the most distracting process you will ever undertake. That’s why, in our very biased opinion, we advocate a professional mergers and acquisitions company.
It’s critical that during every step of the M&A process you keep your eye on the performance of the business. Don’t allow your attention to wander from this vital element of the sales process at any time.
How Your Software Tech Business Is Likely to Be Valued
So, the question we are most often asked is “So what do you think this software company is worth?” The truth is there’s no “right” price for a company. There’s only the one price and that is the best price you can negotiate. Management teams from the buyer and seller side will concoct a vast array of metrics to justify a number. Ultimately, though, the price for a software tech business depends on what the big company can justify to the market or their shareholders.
A software business is part of the global software technology industry and often mirrors the drivers that influence value in different regions of the world. The technology markets themselves are diverse and there are many subcategories. These subcategories enjoy a wide range of valuations that can ebb and flow.
With public limited companies, the answer is slightly different as it’s relatively straightforward to monitor publicly quoted companies. However, even then, we all know from buying a house there can be an enormous difference between valuation and selling price. You may also get a professional company valuer’s advice from accounting firms who may use all types of formulae. Remember though, such formulae are only indicators of value and sale price.
Intangible Assets Add Value
The only way you’ll know for sure what your business is worth is when you have offers on the table. At the end of the day, ”beauty is in the eye of the beholder”. And, don’t forget, the intangible assets of your company such as branding, visibility and positioning, can dramatically affect value when you sell your business.
There are several things that add value to a software company. In no particular order they include:
- Your brand, if its established and recognisable
- Intellectual Property Rights (IPR)
- The Employees of the company (Intellectual Capital)
- Customer base (Clients)
- Recurring Revenue: Annual (ARR) & Monthly (MRR)
- Historical Revenue
- Proven Sales Ability & Reach
- Consistent Marketing Results
- Positive Business Trend Analysis
The above isn’t an exhaustive list. However, it does capture many of the key areas of value potential.
Strategic Value Rather Than Tactical
The trade sale of a software tech business will be valued based on where it fits within the acquiring company’s short or long-term strategy. There can often be some surprising reasons your software business has strategic value to an acquirer. The acquiring company may want to acquire your business as a protective, defensive measure to prevent your business being acquired by a close competitor. To be a strategic acquisition is preferred.
There can often be personal reasons for a senior executive to champion and spearhead an acquisition. Quite often they may have career objectives whereby they need to be seen to be making significant strategic moves for their company. Sometimes, an acquisition is made to acquire talent that is lacking in the buying company.
It’s the synergistic fit of two specific companies that needs to be understood in some detail. Combining strengths can give a company a competitive advantage that makes the new whole of more value than the two companies total.
The best way to gain the best price for your business is to ensure you have multiple interested parties willing to buy your company. However, this doesn’t mean you try and solicit acquisition offers from all your competitors. This is the wrong way to go about a company sale and a mistake often made by shareholders.
However, the first mistake shareholders typically make is not to plan the exit/sale of the business early enough. As Stephen Covey states in his “7 Habits of Highly Effective People” guidelines to success, you should “begin with the end in mind”. Typically, the decision to sell is made too late in the timeline and the first two questions we get are “How Much?” and “How Long Will It Take?”. The two can be linked.
Selling at the right time can be critical and this does not just involve matters internally within the business. Market conditions are also a major factor – and market drivers can change very quickly.
Be Prepared to Move Quickly with Shareholder Alignment
Your first step is to assess your company and the market. The two are intrinsically linked. In undertaking this initial assessment, you may discover it is possible to pivot the business and reposition it to take advantage of certain hot sectors. This can take time but maybe not as long as you think or at too prohibitive a cost and/or workload. This is certainly a practical option for some businesses. However, for most, it’s a case of sharpening your existing positioning to ensure that there is focus, brevity and clarity in the way the company is described.
Having Additional Options Works to Your Advantage
Before you receive your first offer you need to make sure you have alternative options. You can do this by creating a strategic exit plan early in the lifecycle of your business and working to that plan. Managing a buyer/s can be like transporting a dozen eels in a string bag. You need to be prepared to move quickly with shareholder alignment.
You may have a key business partner with a company that’ll insist on a cool down period when you receive an acquisition offer. This affords them the time to prepare and make a counter-offer for your business. If you have planned for this event, this can also assist you. These cool down period clauses can work in your favour to garner additional offers once you’ve received a letter of intent (LOI) or term sheet.