Stay Focused on Your Business
Selling your business can be a huge distraction from the day to day running of your business. That’s why, in our very biased opinion, we advocate you seek assistance from a professional mergers and acquisitions company.
It’s critical that during every stage of the M&A process you don't let your focus slip from the performance of the business. It is vital you don't allow your attention to wander away from the daily processes within your business at any time.
How Your Software Tech Business Is Likely to Be Valued
The question we are most often asked is, “So, what do you think our software company is worth?” The truth is there’s no “right” price for a company. There’s only one price - And that is the best price you can negotiate. Management teams from the buyer and seller side will devise an array of metrics to justify a figure. Ultimately, though, the price for a software tech business depends on its perceived value to the acquiring company and what the acquisition team can justify to their shareholders - as well as the current state of the market.
Any software business is an integral part of the global software tech industry and will mirror the drivers that influence value in different regions of the world. The technology markets themselves are diverse and there are many sub-categories, which enjoy a wide range of valuations that ebb and flow continually.
It’s relatively straightforward to monitor publicly quoted companies, so the answer is slightly different. However, even then, we all know, from buying a house there can be an enormous difference between the valuation and the eventual selling price. With businesses, as with houses, perceived value can be influenced by a variety of factors, including how a company acquisition fits into the growth strategy fof the acquiring organisation. 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 and don't take into account buyer motivation.
Add Value Via Your Company's Intangible Assets
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, it's true that ”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
At the time of sale, a software tech business' perceived value will be assessed 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 support and lead 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 the merging companies that needs to be understood in detail. Combining strengths can give a company a competitive advantage that makes the new 'whole' of far greater value than the two companies as separate entities.
The best way to gain the top price for your business is to ensure you have multiple interested parties competing to buy it. This doesn’t mean you try and solicit acquisition offers from all your competitors. This is a mistake often made by shareholders and is the wrong way to go about a company sale.
Prior to this, 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 but is not solely dependent on issues within the business: market conditions are also a major factor – and market drivers can change rapidly, particularly in the software tech sector.
Align All Shareholders & Be Prepared to Move Quickly
Your first step, is to assess your company and evauate the market. The two are intrinsically linked. In undertaking this initial assessment, you may find 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.
Additional Options Work to Your Advantage
Before you receive your first offer, you need to be 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 all shareholders aligned.
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.
Read: C-Level Execs Guide to Selling Your Software Business - Part 4