​

​

Selling a software business for maximum value is not like selling any other type of business. On the face of it, you should follow the same step-by-step process for selling any other type of company:

 

1. Prepare thoroughly. Produce your Information Memorandum and ensure your financial reporting is on good order.

2. Identify a comprehensive range of prospective acquirers, approach them, secure confidentiality.

3. Generate a competitive bidding environment. Meet the acquirers under the right conditions. Invite offers. Negotiate the best possible valuation.

4. Negotiate the Heads of Terms thoroughly before signing over exclusivity to one party.

5. Execute the transaction swiftly, maintaining trading momentum.

 

In theory, that’s all true.

 

In practice, a whole range of other considerations need to be taken into account. 

 

Let’s take them one at a time.

 

What valuation metrics apply to software businesses?

 

Software business valuations depend on the business model and sector that the company operates in. But the key terms to be aware of are:

 

EBITDA = Earnings Before Tax, Depreciation & Amortisation

 

EBITDA is a proxy for free cash flows that would be generated by a business if it had no debt or capital expenditure needs. Whilst not a perfect measure of profitability or cash generation, it is however the standard used by M&A professionals across many sectors, internationally.

 

ARR/MRR = Annual/Monthly Recurring Revenue

 

The combined revenues from all customers and revenue types that repeats month on month or year on year. This may be from monthly subscriptions (such as Netflix), ongoing service & maintenance contracts or license agreements

 

Note: The ‘A’ can also stand for ‘Annualised’. This would mean looking at the current recurring revenue position, usually a recent month, and multiplying accordingly to ascertain the assumed ongoing value over a year.  Whereas ‘Annual’ is a measure of a given 12 month period – usually a financial year but sometimes ‘TTM’ or ‘Trailing Twelve Months’ (the most recent 12 months). Make sure you know exactly what any abbreviations or acronyms refer to in your scenario.

 

ACV/MCV = Annual/Monthly Contract Value

 

As above, however explicitly looking at recurring revenues under a longer term contract which should, in theory, mean more reliable ongoing revenues.

 

 

What type of software do you sell? 

 

If you own all the Intellectual Property involved, then you will no doubt have given thought to your business model and how you deliver on this for your customers. 

 

Gone are the days of sending a disc through the post, however there are still many businesses who run an ‘on premises’ IT infrastructure, taking comfort from the sense of security and control from having their own servers on site. So there are therefore still many software providers who will load their product directly onto their client’s servers. This will often generate a higher initial sales values, chargeable at the point of installation. Ongoing recurring revenue potential is then likely to arise from service & maintenance contracts, license renewals & upgrades and ad hoc development or customisation work. Receiving a higher cash payment when a sale is made has it’s appeals. However, the ‘lumpy’ ongoing recurring revenue that comes with this model is less predictable. This results in both lower ARR and MCV than alternative SaaS models, making commercial budgeting and forecasting investment returns more difficult. You are likely to see valuations for this model based on a combination of different multipliers applied to earnings and contract values, depending on the weighting within the business.

 

However, the majority of proprietary software is now provided from the cloud and normally via a web browser, i.e. ‘Software-as-a-Service’ or ‘SaaS’. The benefits of SaaS are widely understood. Users love the ease & flexibility involved and all maintenance and upgrading happens “behind the scenes”. Software vendors, on the other hand, get complete visibility of customer usage, straightforward control of ongoing development and no handing over of ownership of the technology asset itself. 

 

Best of all, the economics of SaaS business models are superb. Every new customer layers onto the existing subscriber base. And with mostly fixed overheads needed to service those customers, the more customers, the higher the margins from each subscription. You also see little customer concentration or over-reliance on key developers, resulting in a very stable and resilient business model. Add high growth into the mix and you have an investor’s dream acquisition. And favourable valuations for sellers. Expect a valuation to be based on a more attractive multiple of Annual Recurring or Contracted Revenue. 

 

If you provide a consulting & development service rather than selling licenses, there is still a strong market for your business, however you will need to recognise that you are selling time and expertise as much as technology. As such, expect valuations to be based on a multiple of earnings, possibly with a performance based ‘earn out’ payment. Acquirers are as interested in the talent as much as the tech within these targets.

 

If you are reselling third party products and also have license commission revenues, then a multiple of that could be blended into the valuation.

 

Of course, there are many more software business models out there, such as software sold as part of a hardware solution (for example EPOS or Access Control systems). But valuations should by and large follow the principles set out above.

 

Who do you sell your software to?

 

In truth, your customer profile per se is probably less important to the valuation than the business model, growth rates and uniqueness & market resilience of the technology sold. But the customer type and sector you sell into will have a significant effect on that.

​

B2B or B2C? 

 

B2B will normally result in a higher spend per customer, based on annual (or multi-year) contracts and each client win will have more potential from ongoing account development. But there is more potential for reliance on a handful of accounts.

 

B2C will normally be driven by a monthly subscription across many more customers, assuming broad consumer demand. In theory, customers can easily cancel their subscription on a whim. In practice, a combination of inertia and good spread of customers makes for higher stability. Investors will want to make sure your offering stays relevant and ahead of the competition.

 

In which sector do you operate?

 

The relevance of sector to your valuation will depend on the growth potential, resilience and capital market sentiment of that sector at the time you sell. 

 

For example, Financial Technology is a dynamic and diverse sector including everything from stock trading apps to accounting software. Whilst most businesses will now manage their core functions (e.g. accounting, banking) through a software solution, there is still plenty of scope for growth through innovation and ongoing cloud adoption. The knowledge and skills required to develop and deploy Fin-Tech mean there are high barriers to entry. Decent valuations are reasonable to expect.

 

Similarly, Insurance, Health, & Leisure technology are being driven by high market demand right now. But every sector is different and your place in the sector matters too. You should take advice from an M&A professional to understand current levels of investment activity in yours.

 

Another key factor is the price-earnings (p/e) ratio in your sector.  If publicly listed technology companies like yours are trading on exchanges for higher p/e ratios, then they are more likely to be willing and able to pay a higher multiple of earnings for your business. This is because an acquirer’s expected increase to Earnings Per Share from an acquisition should result in a greater uplift to the market capitalisation and share price and therefore shareholder value. So giving more room to place an attractive valuation on an acquisition target.

​

Who is likely to buy your software business?

 

Clearly this is a matter of who you engage with and puts up the most attractive offer.

 

To ensure you are procuring the very best valuation in the marketplace you must approach the right targets at the right time in the right way.  

 

For instance, if you are seeking capital investment then you will want to meet with Private Equity at a time when your business model is established and proven but you are at the foothills of a multi-year growth trajectory.

 

If you want an acquirer who can bring clear infrastructure synergies and a pathway to exit, then a well financed trade acquirer is better for you.

 

There are no shortcuts when it comes to this crucial part of the process. You must define your objectives clearly, thoroughly research the acquirer marketplace and approach prospective acquirers in a systematic, confidential way.

​

What value should you expect for your software company?

 

Bringing this all together, you should take account of the above as to whether you should value on the basis of EBITDA or ARR and apply a discounted multiple of approximately 50% to 70% of what you are seeing in publicly listed exchanges for that valuation metric. However, be aware that selling to a large public corporate would depend on your business having the scale, growth potential and unique attributes to attract buyers of that profile. Unlisted or non-private equity backed acquirers may have more interest in acquiring smaller software companies but will rarely be in a position to offer at the same level.

 

You shouldn’t fix the price on your business going into negotiations. Instead, you should invite offers in a fully managed competitive bidding environment.  You should however present the value proposition clearly and robustly in your Information Memorandum and presentations.  

 

Like all businesses for sale, showing past, present and future financial performance and sales analysis is crucial.  However, software businesses selling licenses have a distinct advantage over many other types of businesses when it comes to projections. A well produced revenue and earnings model can demonstrate the value of future growth in a highly credible, substantive way. With high potential for enhancing your perceived value to the M&A market.

 

It is important that this modelling is of a sufficient standard to pass the due diligence scrutiny of the very best accounting and Corporate Finance advisory firms in the country. And should therefore: 

 

1. Be consistent with past & present performance

2. Use credible, realistic, transparent assumptions

3. Clearly distinguish between cash sales and GAAP/IFRS compliant revenue recognition on an accrual basis

4. Taper projections so that milestones are achieved throughout the sale & transaction process as well as any period during which performance contingent payments will be measured.

​

Once you have prospective acquirers as confident in your company growth trajectory as you are, then you are 90% of the way towards achieving the premium value you deserve.

 

The End Game; Due Diligence & Transaction Completion

 

Selling a software company also differs from most other businesses in the scope of due diligence.  

 

An acquirer will want to scrutinise your software code for IP breaches and probe your client license base for any potential attrition. You will consider this commercially sensitive and not want to allow them free reign until the acquisition is complete.

 

A Corporate Finance or M&A advisor can manage these tensions on your behalf.  Third party agencies and client data anonymisation techniques should be used to get the deal through due diligence without excess risk.

 

You should also look to your advisor to ensure that debt and working capital classifications and targets in the Share Purchase Agreement do not leave you financially exposed. There are some balance sheet items, such as deferred income, that will need to be individually assessed for each software business to determine the effect on your Equity Value and net proceeds from the sale.

 

 

I hope this high-level guide has been useful to you in understanding the challenges and upsides involved when considering how to sell a software business. Be prepared, get the right team around you to deliver on your goals, adapt to the market realities as you find them and you will absolutely maximise on the value you ultimately receive.

​

​

If you would like to learn more about Symmetry's fully managed services and how these can be tailored to your own business & goals, then we would be delighted to hear from you.

​

​

​

​

​

​