The Exit Algorithm: Selling Your Software Company

by | Jul 18, 2023

Introduction

In the software industry, successful founders are excellent at marrying innovation and execution. However, mastering the art of selling their software companies is complex and not a natural extension of building a successful venture. It demands a completely distinct set of skills, akin to stepping into an entirely new domain with its own rulebook and complexities.

In this Agile Thinking® Insight, we will delve into the essential facets of selling your software company. We will discuss the power of timing, the art of selling, the right mindset, and the benefits of a sale. We will also provide some tips on how to get started early and strategically.

Navigating Tech Transitions

The software industry is constantly evolving. New technologies are always emerging, and the landscape is constantly changing. This makes it difficult for software companies to stay ahead of the curve. Sometimes, selling the company and moving on to something new may make more sense.

The Power of Timing

The timing of a sale is critical. If you sell too early, you may not get the best price. If you sell too late, you may miss out on an opportunity to cash out and move on.

There are a few factors to consider when determining the right time to sell your software company. These include:

  • The market for software companies: Is there a strong demand for software companies in your industry sector?
  • The valuation of your company: Is your company currently valued at a high point?
  • Your personal goals: Are you ready to move on to something new?

Mastering the Art of Selling

Selling a software company takes work. It requires a lot of planning and preparation. You will need to:

  • Get your financials in order.
  • Create a marketing plan.
  • Identify potential buyers.
  • Negotiate the sale price and terms.

Having the right mindset when selling your software company is also important. You need to be objective and detached. You also need to be willing to relinquish control of your company, which is more emotionally challenging than most founders admit.

Embracing the Right Mindset

Selling your software company is a major life change. It is important to embrace the change and be open to new opportunities. You should also be proud of what you have accomplished. You have built a successful company; now it is time to reap the rewards.

Understanding the Benefits of a Sale

There are many benefits to selling your software company. These include:

  • Financial rewards: Selling your company can provide you with a significant financial windfall. This money can be used to invest in new ventures, retire, or pursue other personal goals.
  • Strategic transition: Selling your company can allow you to transition to a new role or focus on other interests. This can be a great way to start a new chapter in your life.
  • Maximised value: Selling your company at the right time can maximise its value. This can ensure that you get the most out of your hard work.

Begin Early and Strategically

The best way to sell your software company is to start early and plan strategically. This will give you time to organise the business’ finances, create a marketing plan, and identify potential buyers. It will also give you time to adjust your expectations and be prepared for the emotional challenges of selling your company. Equally important is learningabout current valuation ranges and buy-side demand.

If you are considering selling your software company, contacting an experienced M&A advisor is prudent. They can help you assess your options and develop a plan to maximise the sale.

Additional Considerations

  • Valuation:Technology businesses are often valued based on their future potential, making it difficult to determine a fair price. This is especially true in rapidly changing subsectors, where the value of technology can fluctuate wildly. When reviewing valuations, it is critical to ensure that the comparable companies being used are similar in size, industry, and stage of development.
  • Due diligence: Buyers of technology businesses will typically conduct extensive due diligence, which can be a time-consuming and expensive process for founders. This due diligence often includes reviewing the company’s financial records, intellectual property, and customer contracts.
  • Integration:Integrating the technology business can be complex and challenging if the buyer is a large company. This is because the two companies may have different cultures, operating procedures, and IT systems.
  • Exit strategy: Founders of technology businesses often have a clear exit strategy in mind, such as selling the company to a strategic buyer or taking it public. However, it is important to have a backup plan in case the original exit strategy does not work out.
  • Opportunity cost: Founders are often unaware of the opportunity cost between selling soon versus waiting another year or two. It is very difficult to assess this without an independent review. Many founders are deeply and emotionally involved in their businesses and believe the valuation will substantially increase by waiting a year or two for revenue and profits to grow. However, waiting adds a dimension of risk that is difficult to quantify easily.
  • The right mindset: Selling a business can be an emotional experience for founders, and they need to be prepared to deal with a range of emotions, such as sadness, excitement, and anxiety.
  • The impact on employees: Selling a software company will impact the employees. Founders must communicate with their employees about the sale and answer their questions. Buyers may insist on a deal based on specific employees staying for a period or leaving when the sale is completed. Founders must factor in how this would be executed and all relevant costs.

Tips for Selling Your Software Company

  • Start early: The sale of a tech business can take many months or even one to two years to complete. Founders should start planning early to give themselves enough time to prepare.
  • Get professional help: There are professionals who can help founders sell their businesses, such as investment bankers and M&A advisors. Founders should work with a team of experienced professionals to maximise the sale.
  • Be prepared to walk away: There will be times during the sale process when you will be tempted to accept a lower price or less favourable terms. However, being prepared to walk away from a deal is important if it is outside your best interests.
  • Trust your gut: There will be times during the sale process when you will have to make difficult decisions. Trusting your gut and making decisions you are comfortable with is important.

By following these tips, founders can increase their chances of success and achieve their desired outcome.

Conclusion

Selling a software company can be a complex and emotional process. However, it can also be a rewarding experience. By carefully planning and executing the sale process, founders can maximise the value of their business and achieve their financial and personal goals.