So you’ve decided you’re ready to sell your software business. Great! Now what?
As a business owner, reaching the decision that you’re ready to sell your business can be a lengthy and often emotional process. However, it’s only after this decision is made that the real work begins and you then have to figure out the next steps.
How do you decide who to sell to? How involved do you want to remain after the sale? What do you need to prepare? What’s going to happen to your team? Who should be advising you?
There are a lot of questions to think about. Luckily, we’ve been there and we’ve got the answers.
Step 1: Planning and initial conversations
When should I start planning?
There are a number of key steps to selling a business, which generally take anywhere between 3-18 months to complete. Planning – of course – comes first.
If you’re running a strong, reliable business, a lot of the ‘planning’ will naturally be part of your day to day. Clean books. Organised contracts. A strong team. These are all success markers in your everyday, and so, in this regard, planning for an acquisition is less about making a sudden change and more about continuing to run a successful business.
Keeping clear documentation will stand you in good stead when the time comes and enables you to address any weaknesses before you reach out to potential buyers. All this will ensure you’re in the strongest position possible when those conversations begin.
How do I choose a buyer?
When you reach this crucial point, there are many factors you need to consider, and it’s not all about price.
- Price: it’s not all about price, but it is important and you need to choose a buyer who is giving you a fair evaluation of your company that should be calculated based on your recurring revenue and profitability.
- Deal structure: just because the price looks right, doesn’t mean the structure is – consider the upfront consideration, whether you feel it’s important that there be additional earnout potential over time, as well as any other considerations that will impact total value and choose a buyer who is offering you a fair deal.
- What happens next for you: you need to decide whether you want to walk away from your business entirely or remain a part of the team in some capacity. Different acquirers will offer different options, so make sure the decision is right for you.
- What happens next for your team: culturally you also need to consider your team and whether they will stay together or be split up. If the culture of your business is important to you, choose a buyer who will keep this intact whilst providing growth opportunities.
- Previous acquisitions: remember to look at the success of previous acquisitions made by your potential buyer – their track record in this area will tell you a lot about your potential success.
- Product growth: this is arguably the most important factor to consider; does the buyer have the right knowledge, expertise and experience to help your product grow and continue to stand out in the marketplace. Your product is ultimately your reputation, so choose a buyer that’s going to improve this.
- Cultural alignment: not only is this key for retaining your team, but it’s also vital to ensure the brand you have built isn’t impacted in a way that could negatively change customer perceptions. Choose a buyer who respects the culture you have built and wants to develop it further, not change it.
When should I start conversations with potential buyers?
There is no right or wrong answer for this, as you might find a buyer who you’ve known for several years, or meeting your acquirer could be the trigger which begins your acquisition journey.
However, we would encourage you to nurture and maintain relationships with potential buyers, whether that be by attending events or staying engaged in founder communities. The decision to sell might be several years away, but you can still acquire vital learnings and insights from being in conversations with software buyers. That way, when the time comes that you decide you are ready, you will already have key knowledge of who the right buyer might be and who might align best with your business culture and strategy, rather than starting from scratch.
*Remember* – there’s no amount of planning that can make things perfect. At some point your judgement as a business owner will come into play and ultimately you will need to choose the buyer who feels right for your business.
Step 2: Preparation and formal conversations
What should I prepare?
Once you’ve decided what type of buyer you want to sell to and found one that you think aligns with your goals and priorities, it’s time to start the formal process.
Providing initial information
At this stage you will need to provide some information so that initial valuations can take place. You won’t need loads of detailed documentation at this stage, but the cleaner and clearer your information is, the easier and faster this stage will be.
This will often include:
- Three years of management accounts and recurring revenue by customer (don’t worry, this will be anonymised within a customer cube)
- Forecasts for at least one year
- At ClearCourse, we’ll also ask for information on payments volume and type
Show your intent
As you prepare, you will also want to show your intent to your buyer. This means signing non-binding letters of intent to confirm high level terms and key considerations, and the beginnings of sharing goals and data so a formal valuation process can start.
Step 3: Due diligence
What is due diligence?
Due diligence is the process of gathering all the required information for a sale. This is usually the key milestone that founders jump to when they are thinking about selling their business, but it’s important to understand that this is not a test or an audit.
A potential buyer will go through due diligence to verify the financial information underpinning the deal, ensure the legal documentation is in place for a sale to complete, and identify and prioritise actions that need to take place post sale. It allows for smoother post sale integration and helps unlock growth potential. This will include examining financials, contracts, your tech stack, team structure and operations, and can take anywhere from 4 weeks up to a few months depending on the complexity of your business.
This is why it’s so important to be prepared for this process, as if certain information is missing or incomplete, due diligence will be extended and the potential sale of your business could be severely delayed.
What can be prepared for due diligence?
To reduce the time spent in due diligence, preparation can begin in advance of being ready to sell.
- Document your technical architecture and processes
- Verify that all IP addresses are probably assigned to the business
- Organise customer contracts and corporate records
- Review any leases or contracts with unusual terms
- Ensure financial records are clean and GAAP compliant (or as close as they can be!)
- Prepare revenue breakdowns by key segments
- Document key business metrics
At this point, the more organised you are upfront, the smoother due diligence will be.
Do I need external advisors?
Many software businesses will benefit from having some advisory support in place. At the very least, you need an M&A or Corporate Finance lawyer available to handle the legal complexities of the sale, and an accountant. You may also want to engage a specialist tax advisor. We are happy to make recommendations here if needed.
These people will help ensure you have all the correct information surrounding the three key areas of due diligence: tech, legal and financial. In short, this covers whether the product is maintainable, secure and can scale; whether ownership is all accurate and regulatory requirements specific to the industry are met; and whether revenue, margins and key metrics meet required benchmarks.
Who should be involved internally?
In addition to external advisors, you also need to consider who should be involved internally, as, crucially, you need to ensure due diligence doesn’t affect the day-to-day running of your business.
Therefore, this should be initially limited only to those on a need-to-know basis across your key leadership team, such as the CFO, CTO and COO.
As things move forward, depending on individual circumstances you may need to bring in developers or someone from a specific area of the business that is being reviewed during due diligence. You may want to brief key managers at a topline level as things progress, but full transparency across the business is not necessary at this point, and can sometimes lead to complications further down the line.
*Remember* – this isn’t a test and buyers understand there is no such thing as perfect. Due diligence is about understanding risk and where you need input and assistance in the next stage of growth to unlock potential. There’s very little that can’t be fixed, especially when working with the right acquirer.
Step 4: Getting started
Okay I’d like to discuss a sale – how do I get started?
ClearCourse has a proven track record of acquiring leading, industry-specific software businesses that align to our strategy, and helping them generate continuous growth through dedicated expertise, supporting operational and GTM functions, and our unique embedded payments offering.
Our M&A team have decades of experience at this and are committed to making the process as easy and transparent as possible.
If you’re interested in finding out more about joining ClearCourse and finding not just a new home for your business, but a new beginning, contact our M&A team directly on acquisitions@clearcourse.co.uk or visit our M&A page to find out more.
