Selling a software company
Updated: 22nd September 2016
It’s understandable that many software business owners see tech companies trading hands for billions of pounds and dream that they’re sitting on a goldmine. Unfortunately, the reality is that software companies rarely sell for such dizzying prices and most owners end up settling for much more modest sums.
That’s what makes it all the more important that, as a seller, you work for every last bit of value and negotiate for a deal that nets you not only the biggest possible payday, but does so in the most tax-efficient way.
Valuing a software business
Technology is a vibrant and exciting arena to work within. New ideas disrupt the marketplace all the time, and it’s possible for newcomers to quickly break in. The flipside, however, is that existing good ideas become obsolete quickly and that Software as a Service (SaaS) businesses can struggle to sell the promise of future returns to potential buyers.
Your product or service may be hot stuff right now, but buyers are paying for the potential future returns, and who knows what software - or even what platforms - will be relevant in two, five or ten years?
As such, prices for software companies in recent years have been set at around 75% to 150% of annual turnover. The good news is that there’s plenty an owner can do to attract investors and maximise their price.
Potential buyers include competitors, vertical mergers, investors, or even current employees. Your business may be attractive to another because keeping existing customers is far cheaper than acquiring them from scratch. Essentially, your biggest asset can be customer loyalty to your brand, especially if purchase of your software includes recurring fees or licenses rather than one-off, up-front payments. You can drive the price of your business up by demonstrating a dedicated client base, which you can build up through marketing, customer service and quality products.
Another valuable asset is the creative minds that built your company. This is a complex matter. It’s possible to ensure their commitment to the cause by writing ‘golden handcuff’ deals into the sale package, tying key members of staff to the company for a minimum term. However, many buyers prefer to relocate the software companies they purchase into their existing premises to cut costs, share resources and have better access to their talent. If you’re already located in a major city or close to the buyer, this is less of a worry. But if not, it’s hard to guarantee the continued service of employees when a relocation is on the cards.
In addition, many software businesses rely heavily on the owner, often the founder who is either the public face, creative driving force, or both. Owners struggle to sell a business in which they’re too important. They either need to continue to work within the organisation for a transitional period at least, or accept that the business doesn’t amount to much, and therefore isn’t very valuable to a buyer, without their presence. In this situation, it’s best to consider grooming your successor before entering the sales process, and trying to ensure that their salary doesn’t eat too much into your profit margin.
Selling a software business
The sale itself is a complicated, but can be navigated with plenty of forward planning and the assistance of specialists.
It can take around six months to complete the sale of a business, but getting affairs in order can start months or even years in advance. At the start of your sale process, you should have a price in mind, backed up by an independent valuation by a professional, and a clear idea of what your objectives from the sale are. Your business advisors will be able to help transform those goals, whether that’s financial or otherwise, into a workable action plan. Not only is this vital for a smooth sale, but it’ll help keep your tax burden to a minimum once you complete the sale.
The next stage is to search for a buyer. Even if you’ve received an offer, it can be advantageous to test the market to gauge the level of demand. Competing bidders will increase the price you can command.
It’s possible to put your company on the open market, but beware that a ‘for sale’ sign hanging over a business can cause an uneasy feeling among employers, customers and creditors. It may seem counterintuitive, but marketing your business for sale is often best kept quiet and on a need-to-know basis. Alternatively, a business broker can shop your company around privately, using their network to find potential buyers.
Once those potential buyers have been identified, expressed an interest and narrowed down to serious, qualified bidders, they will want to undertake a thorough due diligence process. This means putting your business under a microscope, including all your financial and legal documents, ensuring you own all relevant intellectual property, and poking into every aspect of your company.
This can feel like you’re giving away all your secrets, but it would be unreasonable to expect a buyer to commit to a purchase without knowing everything there is to know. The easiest method is to prepare all your documents in advance and allow time for buyers to talk with you and answer their questions.
Following a successful due diligence process, it’s time to negotiate a deal. As well as the final price, this will include payment options, include the option of installments, any golden handcuffs or future guarantees, as well as your role, if any, in the business during the handover period or beyond.
Your business advisor who helped establish your objectives in the beginning should be part of the negotiations to ensure that all terms and conditions meet your goals and done so in a way that won’t involve a surprisingly large tax bill following the sale.
If you’re looking to sell a software business, it pays to have professional help on your side. Contact BTG Corporate Finance for specialist advice and a free consultation, and we can help you secure the best value from your sale.
Emma qualified as a Chartered Accountant in 2002. Since then, she has specialised in corporate finance, joining BTG-McInnes in July 2006. She has extensive experience in advising the SME market on fundraising, re-financing, acquisitions and disposals, across a broad range of industries.