– And How to Avoid Them
You have enjoyed some success and generated strong momentum for the future growth of your software company.
You have solid customer relationships and a great team of programmers and product specialists making sure your clients get maximum value.
Your sales pipeline is full and your reputation as a thought leader is far reaching.
In fact, you’ve made so much happen that some of the bigger players want to buy your organization and bring those people and customers into their fold.
It’s an intriguing idea, and at times you are tempted to make the move so that you can exhale and enjoy the rewards of your hard work.
Before you sign, however, it’s best to consider some of the more common mistakes that software companies make when selling their business.
1. Misunderstanding your software company’s value
Potential buyers enter the process with a clear sense of what your company is worth.
Don’t let them dictate market value.
You’re the owner; nobody understands the company’s value better than you. Don’t wait for prospective buyers to set the price.
Determine your market value, and enter discussions with that baseline in mind. You can’t negotiate properly if you don’t have a baseline. It will guide you as to what’s fair value.
Remember – market value is determined by multiple factors:
- Financial value, based primarily on your bottom line
- Future value, based on sales projections and growth trajectory
- Strategic value, a consideration if you have successfully launched a complementary product line or captured a specific market space
You may be accustomed to viewing the prospects solely from your organization’s standpoint, but take an industry-wide view when determining value. You will find there are many different factors driving your company’s true value.
2. Not understanding what buyers actually want
Know your audience.
It’s the first rule of communicating effectively, and it applies here too.
Prospective buyers are your audience. Not every buyer is looking for the same things, so you shouldn’t have just one pitch.
How will your software company increase the value of the potential buyer’s company? Put yourself in their shoes, and emphasize the direct benefits that your resources will bring to their fundamental business practices.
3. Selling to the wrong buyer
How often have you heard of an acquisition failing?
It happens more often than we like to admit.
A software company sale is about more than just the sale price. It’s a merger of business lines, customers, and people. There has to be a fit.
Just because your people, technology, and processes worked in your organization, that doesn’t mean they will work in all organizations particularly one with a different organizational history and structure.
Make sure that the buying company offers an environment in which your software company can thrive.
4. Waiting too long to sell
As business leaders, we tend to look at our organizations and assume that growth will simply persist.
And it could.
However, your company’s value is determined by more than just its financials. It’s determined by the market, and there are many factors that impact the market, including:
- The economy
- The industry’s momentum
- Your nation’s trading practices
- The evolution of your products
The point is you need to think strategically about timing. Don’t assume that waiting necessarily means that you will achieve greater value or hit a certain milestone.
Your own corporate circumstances may change with time, but so will the environment around you. Understand all of the variables, survey the market, choose your moment and seize your opportunity.
5. Jumping on the first offer
Another common mistake is accepting the first offer that’s put on the table.
It may seem like a fair offer, and indeed, it may be, but it’s probably not the best offer, and it’s certainly not the result of a competitive, market-based process.
You probably understand that there are times when it makes sense to close a deal quickly and move on to the next transaction. But this isn’t necessarily one of those times (point #4 notwithstanding).
This time you’re selling your entire company. The company is the culmination of your years of hard work. It’s all of those everyday transactions put together. Your negotiating process should reflect that investment of time and effort.
6. Lacking transparency
When you get close to a sale, prospective buyers will turn your company inside out.
Due diligence should be expected.
They’ll want to uncover everything, and it’s important to be transparent about what they will likely find.
Nobody will be surprised if a company has endured challenges or faced obstacles – most businesses do.
But if the issues are exposed late in the process, there will be an impact on the financial agreement. You may think you’re saving the sale, but you’re more likely costing yourself money.
You should consider:
- The credibility of your financial resources
- Whether or not you have clear title to intellectual property
- Have you used outside programmers? If so, was their agreement specific in ownership of their output?
- Has a reputable accountant prepared your books?
- Is your legal house is in order?
Be smart about timing.
Be clear about what you want – your bottom line, the conditions that you are willing to accept, and those you are not.
Remember, you are in control, but you need to be prepared.
We hope you have found this information helpful.
Looking for further guidance? Let’s have a chat about how we can develop your business together.
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