Typical mistakes when selling the business

  • - Lack of preparation is by far the most common mistake that small-business owners make
  • - most brokers recommend owners start the preparation process at least two years before the business is listed
  • - Overconfidence
  • - Far too many sellers go into the selling process with the confidence that they will get top dollar for their business simply because they believe that is what it's worth
  • - get an objective third-party valuation, or visit online business-for-sale websites to see comparable businesses for sale, early in the process
  • - Once you've identified an appropriate valuation for your business, address the issues that could lead to increases in value.
  • - Unwillingness to Leverage Professionals
  • - You're an expert at running your business--not selling it.
  • - Yet it's always surprising how many sellers are averse to hiring a business broker to facilitate the sale of their business.
  • - Would it be nice to save the roughly 10 percent brokerage fee? Sure, but in most cases brokers are capable of adding at least 10-12 percent to the sales price.
  • - Even though there are certain circumstances in which a for-sale -by-owner approach makes sense, most owners are better off hiring a broker to handle important tasks like preparation, showing the business to potential buyers, marketing and negotiation.
  • - Taking a Hands-Off Approach
  • - Unfortunately, many sellers make the mistake of disengaging from the selling process once they've signed a brokerage agreement.
  • - If you haven't done so already, have a conversation with your broker about how you can proactively market your business without stepping on his toes.
  • - In addition, once the broker has found a few qualified buyers, you'll play a key role in instilling confidence in the buyer that the business can be purchased and managed successfully.
  • - Failure to Pre-Qualify Buyers
  • - Early pre-qualification of prospective buyers is essential for a successful business sale.
  • - Business sellers typically want to avoid qualifying prospects too soon for fear that will scare the prospects away. In fact, more often than not pre-qualification draws prospects deeper into the sale.
  • - More importantly, early pre-qualification protects sensitive information about your company from falling into the wrong hands and ensures that only serious buyers have access to key details of the sale.
  • - Pre-qualification documents like confidentiality agreements and financial background information are standard requirements for prospective buyers interested in seeing critical information about your business.
  • - Misrepresentation
  • - As a seller, you want to portray your business in the best possible light. However, there is a big difference between representing your business in the best light and misrepresenting your business to prospective buyers.
  • - At some point during the selling process you will be tempted to exaggerate numbers, distort projections or even cover up problems. However, misrepresentations send up red flags when prospects review the actual financials and can become the basis for legal action after the sale.
  • - Talk to your attorney or broker about everything, including business forecasts, before passing the information on to the buyer.
  • - Pricing Problems
  • - Inexperienced sellers have a tendency to set a price (usually on the high side) before they've determined value.
  • - The reason this is such a big mistake is that price is the single most important factor in determining how long a business stays on the market.
  • - Sellers who have taken the time to conduct a thoughtful valuation process before assigning an asking price are more in touch with marketplace prices and better positioned to defend that price and to reap the benefit of a faster, smoother sale.
  • - Only Entertaining All-Cash Offers
  • - All-cash sales are unrealistic in today's business-for-sale marketplace. They can also be detrimental to sellers from a tax perspective.
  • - Instead of handing over a big chunk of cash at closing, today's buyers are more likely to need concessions in the form of seller financing, deferred payments or assistance in obtaining third-party financing.
  • - The benefit to you as a seller is that spreading sales receipts over a multi-year period can enable you to avoid higher tax brackets.
  • - Breaching Confidentiality
  • - Confidentiality is important. If the word gets out that your business is on the market, it could adversely affect sales and your relationship with your staff.
  • - A good broker will know how to simultaneously market your business and maintain strict confidentiality.
  • - If you're pursuing a for-sale-by-owner approach, it's a bit trickier but it can be done by creatively targeting your marketing efforts to a small handful of likely prospects.
  • - Failure to Address Transition Issues
  • - Many owners are so focused on selling their business that they completely neglect the transition process that will occur after closing.
  • - Some buyers will insist on the seller remaining on for a few months to assist with the transition or training, while others prefer a clean break.
  • - Either way is fine--as long as the buyer and seller have discussed the transition and reached a mutually acceptable arrangement during negotiations.
  • - Setting a price too soon. You set yourself at an immediate disadvantage if you state a price without knowing the potential value of the business. Do not sell yourself short by setting a price too quickly.
  • - Assess the value of your business very carefully with your accountant or financial advisor and your attorney, and then set a price. Remember, you can always come down, but you generally cannot go up once you have determined your selling price.
  • - Selling too quickly. Unless you have to sell the business quickly for financial or personal reasons, you should not rush to a sale without exploring all of your options to determine whether or not you are getting a fair value for your business.
  • - Lack of confidentiality during the sales process. Once word gets out that the business is being sold employees may leave, vendors may hold back on deals, and customers may head to your competitors. The value of your business can drop quickly if you do not maintain confidentiality.
  • - Not increasing the value. Owners who know well in advance that they want to sell the business have time to build up the value and make it more attractive to buyers.
  • - Not identifying the best buyers. You need to spend time on serious buyers only. If a potential buyer is not pre-qualified or does not appear to be prepared to make an offer, you may very likely be wasting your time. Do not spend time with the wrong buyers.
  • - Being unprepared to defend your valuation. If you have worked hard to create a value for your business, you should be prepared to defend and substantiate that value. Prepare backup materials to defend the value of your business.
  • - Failing to negotiate. How much leverage you have may depend largely on how many potential buyers are out there. Nonetheless, you need to be prepared to negotiate, and for this reason you should have professional guidance when you sell a business.
  • - Waiting too long to sell. Many business owners regret not selling at the most opportune time. By waiting, they subsequently encounter increased competition or have a product that has declined in value because of economic conditions. If you are thinking of selling, pay attention to changes in the economy and to the state of your industry, and look for the best selling opportunity.
  • - Not using the skills of professionals. You should seek out sound business and legal advice from professionals who have been involved with the sale of other similar businesses. Selling is a complicated process and not one that you should take on without expert assistance.
  • - Selling a business is rarely easy.
  • - Excessive or questionable tax deductions, including running too many discretionary, personal expenses through the company — even if the deductions are legitimate, they lower the earnings of the business and require explanation, so consider scaling back on them in anticipation of a sale
  • - Pending or threatening litigation — you may not be able to resolve everything, although take steps to resolve all the matters that you can feasibly resolve. You may still have to disclose the prior litigation, although buyers tend to give too much weight to risks and the more you can take off the table (resolve, so they do not have to), the better off you will be.
  • - Organization of books and records — a buyer of your company is going to conduct due diligence. Due diligence is the M&A (mergers & acquisitions) term for looking under the hood and kicking the tires of a company before acquiring it. A buyer and their legal and financial advisors will want to review all your contracts and governance records (such as minutes of the meetings of the board of directors and shareholders of a corporation or minutes of meetings and actions by written consent of the members and managers of an LLC). Have these documents collected, complete, well-organized and ready to go.
  • - Staffing considerations – be sure you have the right people in the right jobs being paid the right amounts (not much more or less than market rate for salaries and bonuses of employees in similar positions in your industry). If you aren’t planning to stick around after you sell the company, be sure the business can operate without you, that your employees know how to run the company.
  • - For very small businesses, the DIY approach may get the job done and you don’t have a lot of budget for experts. I understand that, just be cautious.
  • - “penny-wise and pound-foolish.”
  • - While you may be an expert at running your business, you probably aren’t an expert at selling it. It’s always good to get a broker involved to get a good price for your business.
  • - Both business brokers and investment bankers will be responsible for preparing documents presenting your company in the best light, identifying buyers, listing the company in the right databases, generating interest, soliciting offers, accepting one and shepherding the deal to closing.
  • - Transactional lawyers (also called corporate lawyers) help with the due diligence (organizing and managing it if you are the seller) and preparing and negotiating the asset purchase agreement or stock purchase agreement, and all the ancillary documents, such as bills of sale, promissory notes, secretary and officer certificates and resolutions and meeting minutes of directors, shareholders, members and managers.
  • - Accountants and financial consultants can play an invaluable role in helping you structure your deal and think about the tax consequences. Businesses appraisers can give you a great estimate of the value of your company, although many brokers and investment bankers will do this, as well.
  • - After you have hired a broker or investment banker, don’t get completely disengage from the process. Many sellers make this mistake, thinking that the broker alone will be enough to handle the M&A process.
  • - Always remember, that no one has the same level of motivation to sell your business as you do.
  • - Yes, the broker will bring in some qualified prospects, but it’s your job to turn those prospects into buyers by instilling confidence in them that they can run and manage your business with your guidance.
  • - Also, always remember that the deal is not done until it is signed and closed.
  • - As the deal went along, the owners became less and less active. While it was good that the business could still run without them, it sent the wrong message to my client, the purchaser, and the employees of the selling company.
  • - The seller’s employees got the feeling that the owners only carried about unloading the company and they felt quickly abandoned. If the owners were more accessible and communicated more along the way, they could have easily handled both sets of concerns.
  • - Finish strong, stay engaged.
  • - A buyer will be inclined to think you don’t care about the deal or the business if you are noticeably disengaged.
  • - Remember, the buyer doesn’t know that you spent 80 hours a week for years building your company. They only see what they see during the M&A sale process and, if you appear to not care, they may question how tight a ship you ran along the way.
  • - Show you care, stay engaged, finish the job strong and get the deal done.
  • - Misrepresenting Something About Your Company to the Buyer
  • - But never misrepresent your business to a prospective acquirer in an attempt to sell it. If you exaggerate numbers before the sale, it can cause you serious trouble once the buyer finds out after your business is sold.
  • - Don’t hide any prior investigations or litigation. That doesn’t mean you put these issues front and center in your sale documents. Talk to your advisors about when to bring up these issues.
  • - But, don’t wait for a prospective buyer to uncover them during due diligence if they are major concerns. Get in front of the issues and explain them.
  • - Your purchase and sale agreement will contain lots of representations and warranties, which are your promises to the buyer of your business about certain things. Some common reps & warranties deal with:
  • - The proper formation of your company (e.g., incorporation) and its good standing in the state where it was formed
  • - Capitalization – who owns the company
  • - Litigation – there is none (or reference will be made to a seller’s disclosure schedule that lists the relevant matters)
  • - The company has paid all taxes due
  • - There is no pending or threatened employee grievances or strikes
  • - The financial statements and books and records you provided to the buyer are accurate
  • - The reps & warranties are written in a legal contract. Your M&A lawyer should write them in understandable language (“plain English” as much as possible), although sometimes it’s tough to make the language highly readable to non-lawyers while still capturing everything that needs to be addressed legally.
  • - Be sure to ask what everything means. If you can’t understand it, it needs to be rewritten so you and the buyer can fully understand it. Again, it may not read like a comforting bedtime story, although you need to know what is being communicated and to be certain you can make every representation and warranty without exposing yourself to undue risk.
  • - Not Considering the Structure of Your Business Sale
  • - Many owners are excited to get an offer to sell their business. They don’t spend a lot of time thinking about how to structure the sale.
  • - There are three basic ways to sell your business – selling the assets with an asset purchase agreement; selling the stock or other equity interests (including limited liability company or partnership interests) or through a merger.
  • - Although the acronym, M&A, stands for mergers and acquisitions, mergers are not very common with smaller private companies, especially what we call main street businesses, which are businesses that sell for under $2 million.
  • - Most sales of main street business are completed as asset sales. Mergers tend to happen with larger, more complex companies where transferring a lot of assets is laborious and the tax implications of the structure are enormous.
  • - Asset sales tend to be good for buyers, whereas stock sales favor sellers. The reason sellers prefer stock sales is because the liabilities of the business go along with the stock, but purchasers can choose not to assume liabilities in an asset sale
  • - Setting a price without undergoing the valuation process can cause your sale to be slow. If your price is too low, potential buyers might think that there’s something wrong with the business.
  • - However, an extremely high price is obviously going to repel buyers. So, for a smooth sale, it’s a good idea to conduct a thoughtful valuation of your business before putting it in the marketplace.
  • - If you hire a business broker or investment banker, they will perform the valuation. If you are going it alone, selling without the help of a broker or banker, engage a qualified business appraiser before you list the business for sale.
  • - The valuation provided by your advisor will usually be a range (e.g., $1.8 million to $2.1 million). And, it’s their best estimate of value. Ultimately, your business is worth what a buyer will pay.
  • - Valuation is part science, more art. You will typically ask for a price that’s toward the higher end of the scale. Negotiating the sale price is where brokers and bankers earn their money. If they’re involved, let them do their thing and earn their fee. If they aren’t, if it’s just you, know how to defend the price you are asking.
  • - Paying Too Little Attention to Confidentiality Considerations
  • - It’s a good idea to not advertise to the general public that your business is for sale. This can affect your sales if customers get concerned that you won’t be around to service their accounts in the future.
  • - If your deal doesn’t go through for whatever reason, customers and vendors may unfairly label your business as “damaged goods” – a business no one wants to buy. This may be ridiculous. It may happen even when you, the seller, decide not to sell the business.
  • - While you can’t control this issue 100%, at some point word may get out that your company is for sale (especially if you intend to approach other companies in your industry as potential buyers), be intentional about how you control that message.
  • - A good broker will always market your business with discretion. They will not identify the name of your business or give any other key details that might allow people searching the online business listings to recognize your business.
  • - A careful broker (or banker) will only provide identifying information once they have done some basic qualifying of a prospective purchaser and obtained a signed non-disclosure agreement from the purchaser. If you are selling your business yourself, be sure to take similar precautions.
  • - The worst thing you can do for yourself is to travel the road alone.
  • - If you are like most sellers, you will be listing your business on the open market. In this case, you will be best off hiring a professional advisor to spearhead the process.
  • - Every business owner has a growth plan when they start, but very few plan an exit strategy in advance of considering a potential sale. Today, 65 percent of business owners do not know their company worth, and 85 percent have no exit strategy.
  • - Using a multiple or value ratio learned from a book – There is no single multiple or value ratio that applies to all privately held businesses across the board. Each business is unique and requires a comprehensive review and analysis of the company. Many considerations, including demographics, geographic location, financial and market trends, customer concentrations, and current dynamics in the M&A marketplace can all factor into determining a true market value for your business.
  • - Selling at the wrong time – Many business owners wait too long to sell, many times because they wait too long to begin planning an exit strategy. They invest their entire working life into building a business, which often represents a significant percentage of their retirement fund, only to lose leverage by waiting too long to sell. That, in turn, limits their ability to maximize value at the exit.
  • - Negotiating with only one buyer – Business owners often receive inquiries from prospective strategic buyers that are in an acquisition mode. Rather than actively seeking out additional buyers, owners sometimes feel more in control when dealing with a single suitor.
  • - However, generating interest from multiple buyers often increases the sale price. Owners must also keep in mind that negotiations do not stop at price, type, or buyer. There are numerous factors including type of transaction, method of payment, included/excluded assets, and seller retention post close, that come into play during the transaction that an experienced intermediary can help the owner navigate.
  • - Rushing the sales process – When a business owner decides to sell, they want the process over quickly. However, there is a systematic process of identifying prospective buyers, leveraging buyers to induce multiple offers, negotiating the best deal, drafting documents, and finally formalizing and signing closing documents.
  • - The entire process generally takes between five-eight months. It can be time-consuming and cumbersome. It is important to find an intermediary that meticulously manages every step of the selling process on your behalf while you continue to do what you do best, which is manage your business.
  • - Not understanding a buyer’s perspective – While the value of a business is ascertained from the most recent historical financials, a buyer is looking for potential. A buyer sees growth opportunity, multiple avenues for development, and potential synergy with their specific skill sets.
  • - Before diving into past performance, from a financial or productivity perspective, each buyer must be carefully vetted, interviewed, and qualified to ensure the best match possible for your business. It is important to find a firm with a process that carefully examines each potential buyer. You need to be sure that the firm you are working with has done extensive research before you ever meet any possible successor.
  • - Inadequate documentation – Buyers expect professional financial documentation, and rightly so. A business without proper financials many times isn’t a sellable business. Sellers must prepare a recasted financial analysis of the past three years that includes corresponding tax returns, profit and loss statements, balance sheets, asset and inventory lists, customer concentration breakdowns, and any other pertinent material that a buyer may need to examine.
  • - Waiting too long, or not planning in advance, can cause many business owners to miss their window of opportunity.
  • - It takes an average of two to four years to sell a small business.
  • - By keeping updated records, a detailed business history and sales portfolio on hand at all times, it will make your planning pay off. You just never know when that perfect buyer may walk into your business and make you an offer you just can’t refuse.
  • - Succession planning is a major misstep by retailers. Even if you do not have a successor who is a relative, you are still thinking like a succession planner. The person "succeeding" you needs to be set up for success. If they see you have been planning and considering this for quite some time and that it's not a quick "I've had enough" sale, your price will be much higher. Add to that the confidence the buyer will have in a retail store purchase if they see there was a strategy for the sale and that it's not driven out of desperation.
  • - Thinking You Don’t Have to Promote or Market Yourself
  • - On the other hand, a business that does not generate profits may do well with a going-out-of-business sale. This type of sale can generate instant cash flow and quick turnover. Too many business owners that have not turned a profit, or have cash flow problems, miss this wonderful opportunity.
  • - Some reasons they miss out is due to lost energy and/or motivation or because they may not want to admit defeat or failure. Remember it is business—don’t worry about taking it personally. Look for the most valuable opportunities for your business.
  • - Another mistake is to price the business too low. Often business owners will price their business low because they are burned out, suffer from an illness or did not get good advice. Do your homework first. Listen to brokers and consultants. Do research about other business sales before jumping in with both feet.
  • - Selling to the Wrong Person
  • - Taking the first offer may not be a wise choice. This may not necessarily be your BEST offer. Selling your business for top dollar with little or no money down along with an extended contract may lead you to lose it all.
  • - Business sales often go bad after the new owner takes over. The new owner may lack business experience, have a closed mind or be a poor leader. The list goes on and on. A successful business owner makes it looks easy, but change that mix and disaster may strike. When this happens, the new owner ends up going out of business and leaves the previous owner holding an empty bag. It saddens me to see a business fail after years of success due to this lack of business sale judgement.
  • - Evaluate your options and make the best selection for the long term. Ask yourself, is this the best person to buy and run my business? Or, can they quickly connect with my customer base and learn how to market effectively? When the business sale goes as planned, it creates a tremendous opportunity for both business owners and the success continues.
  • - Why are you selling?
  • - Not having a good answer here can put your sale at risk from the off. This will be one of the first questions you'll be asked. You'll need a good answer, as a buyer, and especially their advisers, will read much into it. Obvious reasons are retirement, health, capitalisation or a career change. If the buyer isn't comfortable with your reason, they will simply walk away.
  • - Selling at the right time
  • - Plan to sell when turnover and profits are at, or near, their best. It can be hard to justify a premium or great price when your turnover and profitability are in slowly in decline.
  • - Plan your sale well in advance, making sure the foundation is set e.g. taking appropriate tax advice etc. Preparation, or lack thereof, can make a significant difference to the amount of money deposited into your bank account at the end.
  • - There is also a definite timescale to closing a deal. Don't over ride the wave of consolidation or interest that might be happening in your sector or industry. Buyers can quickly go off the boil and move on if they feel they are not making progress or not getting accurate information efficiently. A good broker will know the right time and leverage it to your advantage.
  • - Bad advice
  • - Advice and opinions are all around. But always question the source and motivation behind it. A valuation from your mate down the pub who knows a bloke who sold for millions, might not be the most reliable indicator of your market position.
  • - In the pressure cooker environment of a negotiation, it is easy to take short cuts or look for opinions which support your own thinking. But keep an open mind. You might need to be objective and collaborative if you want a deal to work
  • - Over negotiating
  • - I have witnessed many deals fall over because one side has pushed their advantages too far by over negotiating. It is easy for a deal to turn sour because one side feels cheated. You may have to work with the new owner for a period post sale. A skillful negotiator will know when to concede and when to stand firm. The key thing is to concentrate on the bigger picture, be collaborative. Win the big battles but don't be too concerned with winning every little point.
  • - Experienced buyers will automatically assume a position of advantage if they see you have no professional help, especially if they're equipped with an army of experts. Beware.
  • - Not convinced? One of the best reasons to use a broker is to act as a buffer between you and the purchaser. There will be times when you'll want to adopt a tough negotiating position - a broker makes this possible without antagonising the buyer. Remember, you might have to work with a new owner during a handover.
  • - Being inflexible
  • - With all the different factors and personalities involved the need to take a pragmatic view is sometimes necessary. This shows empathy for the situation and a collaborative approach is always welcome and well received. A negotiation is often a compromise, a give and take process. If you dig your heels in too early, or overplay your hand, you might just find you get left behind.
  • - Ignoring feedback
  • - The market reacts very quickly to a good opportunity. Buyers will tell you the good, the bad and the ugly. Listen carefully, so you can, if need be, amend your offering, or make changes that might secure a sale.
  • - Poor information
  • - It is very easy to massively underestimate the amount of time and effort it will take to get a positive result. Intelligent owners realise this and do their research and take good advice early on. This gives them the chance to lay the ground work for a sale and get their house in order.
  • - Having accurate information to hand, particularly financial information is absolutely critical to keeping the momentum in a deal. You cannot expect a premium if you can’t quantify how you’re making money and prove it in a timely fashion. Get your house in order. Sort out the paperwork and do regular management accounts.
  • - Time spent sorting the finances and red tape, boring as it is, will pay massive dividends throughout the process.
  • - Price
  • - The number one standout reason businesses don’t sell. The wrong price based on on too high or unrealistic expectations. Get your value strategy and expectations in line right from the start. Get a credible valuation. In fact, get several. But make sure it’s robust and will stand up to scrutiny.
  • - Price too high, and your business won’t get taken seriously and otherwise interested buyers, with perhaps a real motivation to buy, won’t bother to investigate or review. Ultimately, the value will be whatever a willing buyer and a willing seller can negotiate following a competitive sale process.
  • - It’s great to have a firm idea of what you would like to achieve but keep it within reason. Don’t confuse the time you’ve put in over the years with value.
  • - And finally wanting a million because you’ve always fancied being a millionaire won't get you very far if you can't substantiate it.
  • - Carefully craft the non-compete provision.
  • - If there is a non-compete provision, be sure to include a safe harbor for any business ideas you might want to pursue after the sale of your business. The safe harbor should not only create an exception for any similar businesses you would like to work on, but also for any businesses you would like to invest in.
  • - Additionally, the non-compete should include the specific timeframe in which you are prohibited from operating a similar business, as well as the geographic scope. For instance, when selling a business, cap the non-compete at four years within a 40-mile radius of the location.
  • - Get as much of the purchase price at closing as possible.
  • - Never was the saying “one in the hand is worth two in the bush” more true than in the payment of the purchase price for the sale of a business. A buyer is not likely to run the business as well as you have and they might have trouble making payments that are stretched over time.
  • - In addition, by getting as much of the purchase price as possible at closing, you will have the opportunity to invest that capital or enjoy it yourself.
  • - If payment is stretched out over time, be sure that it is secured by the assets being purchased, and ideally by other collateral to help make sure you will get the full sale price.
  • - Hold the buyer personally accountable.
  • - Ideally, when the buyer signs the purchase agreement, you want them to sign it both on behalf of their company and as an individual. That's because if the buyer only signed on behalf of their company and that company is dissolved, you have no way to hold them personally accountable for the agreement and you could lose out.
  • - However, as long as the buyer has signed the agreement as an individual, you can still hold them personally accountable if their legal entity (the company) is dissolved. This ensures that the agreement is fulfilled independently of the fate of the company.
  • - Neglecting the day-to-day
  • - Firstly, it’s worth noting that selling your business will unavoidably take up much of your attention. The sheer amount of work involved can be quite overwhelming, however, you simply cannot let this impact your day-to-day business tasks.
  • - Put simply, if your business begins to suffer because your mind is elsewhere, then so will your saleability and subsequent profit. This is one of the reasons to ensure you have two years or more to prepare the sale, giving you the chance to work on your sales plan at your own pace.
  • - Additionally, most brokers will require you to sign an agreement that stops you from advertising elsewhere for the duration of the agreement. This means that if you do choose poorly, you are locked in for the duration, so make sure that you choose well, ideally on recommendation from a peer.
  • - Ensuring you prequalify any prospective buyers will save you plenty of headaches going forward. Often, sellers are wary of this step as it has the potential to scare off interested parties. However, in reality a professionally approached pre-qualification can in fact draw buyers in by signing documents to keep both parties safe.
  • - Ensure you implement a non-disclosure agreement at the very least to protect your confidential information as you move through the sales process. This way, should the sale fall through, you will not have to worry about your industry secrets falling into the wrong hands.
  • - Making yourself indispensable
  • - As they grow, many businesses understandably lean on leaders for success. Of course, it’s very tempting to make yourself utterly indispensable when it comes to your passion; after all, everyone likes to feel wanted. However, this is a big no-no when it comes to the sale of your business.
  • - Basically, if your SME falls to its knees the moment you leave, who will want to buy it? If you find that you have been fulfilling this role when you think about selling, then begin to transition yourself out of the business. Pass on responsibilities and ensure other staff members can take up the torch in your absence. This way, selling your business will not only be attractive to potential buyers, but will also be more sustainable generally.
  • - Additionally, if you plan to operate in the same industry, do you really want to sell your business to your main competitors? Avoid this mistake by ensuring that you and the buyer are clear in your intentions and that you don’t prize cold hard cash over everything else.
  • - Going public too soon
  • - A business that’s up for sale is a business with an uncertain future. Wherever possible, it’s best to conduct the first stages of a sale in private. Otherwise it can cause instability among staff worried about their jobs, as well as customers and suppliers concerned about your longevity, and suddenly the business can begin to unravel before the sale completes.
  • - Price is a tricky, highly emotive issue. Many inexperienced sellers set a price too low, missing out on a higher payout. But just as common, owners overestimate their organisation’s worth. This can result in a lack of enquiries, and the need to eventually settle for a lower price than planned for.
  • - Beyond this, many business owners fail to take into account the cost of a sale. While they may achieve the price they’d hoped, by the time taxes and fees are deducted, they’re left with a lot less than expected.
  • - Nosy parkers, tyre kickers, time wasters. It’s inevitable that you’re going to attract them, the pitfall is to entertain them. It’s going to be time-consuming process putting on your presentation and answering questions, so ensure you’re limiting your audience to genuinely interested parties with a screening process. Asking for proof of finances and insisting on a confidentiality agreement is usually enough.
  • - Ignoring the after-sale particulars
  • - It can often be advantageous to let a buyer pay in installments if this helps them finance a deal. Just make sure your terms are iron-clad.
  • - Don’t allow the buyer to dictate that future payments are contingent on the company’s future performance - especially if you’re no longer involved and it’s entirely out of your control.
  • - Any agreement to help the business after the sale should be formalised. It’s ok to work a handover period, it’s not ok to enter into your next venture or retirement while still at the beck and call of your old organisation’s new owners.
  • - Many of these mistakes occur simply from inexperienced business owners attempting to shoulder the burden themselves. Settling on the wrong price, bumbling through the sale process and being negotiated down, or ignoring the tax aspect and taking home a smaller portion than you’d expected can all be wildly expensive mistakes.
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    Typical mistakes when buying the business

  • - Buying the wrong business for you. Whether you plan to be a hands-on owner or hire managers to do the bulk of the work, most entrepreneurs need a business that suits their skills, knowledge, interests, and personality. Otherwise, the business may not be successful.
  • - Signing contracts or agreements in your own name. Do not put contracts, loan agreements, or the lease in your name. You need to have or set up a corporation or LLC to buy the business, since you don’t want to subject your personal assets to the risks of the business.
  • - Not doing proper due diligence. Just because a business appears to be successful, and even shows a profit, does not mean that it is not without problems. You need to find out exactly what is owned, borrowed, leased, and owed. You don’t want to get saddled with a pile of bills, unpaid vendors, rent due, and other outstanding debt.
  • - Not knowing why the business is being sold. A business owner may simply say that he’s retiring. However, he may know that a competitive superstore has purchased the property across the street. Determine why the business is up for sale and what the business environment will be like once you take over.
  • - Ignoring the company image. Most businesses have established an image or a brand over the years. Customers are familiar with this and changing it quickly can be self-defeating, since this image may be integral to the value of the business.
  • - Not having a favorable purchase contract. Not unlike buying a home, you will need to negotiate details regarding the acquisition. From physical concerns regarding the property, to assets, intellectual property such as trademarks, stock, and outstanding bills, you need to define in the contract who is responsible in each area and exactly when and how the responsibility shifts from the seller to you as the buyer. It would be wise to consult an experienced corporate lawyer.
  • - Overextending yourself financially. A common mistake is going into serious debt when buying a business. You are better off either waiting until you have sufficient funds to purchase without significant debt or putting together a buying team.
  • - Making drastic internal changes. The time in which it takes to train a new staff can cost you money and drain your reserves. Often, the current employees are the most familiar with the internal workings of the company.
  • - Not promoting the business. It is a big mistake to assume that since the business is already established that it will simply promote itself. Even if the business has a solid base of steady customers, you need to immediately establish a comprehensive advertising and marketing plan.
  • - Not knowing the value of the business. Buyers have to do a detailed financial analysis of the business to determine the appropriate price to pay. This includes reviewing income and loss statements, balance sheets, key assets, contingent and actual liabilities, and cash flow statements. You may find that it is more cost-effective to start from the ground floor with a brand new business.
  • - Due Diligence, Due Diligence, Due Diligence
  • - Not everything is as it seems and that is especially true when buying a business. The owner can produce financial statements that show a business is thriving. You need to do due diligence to make sure the information presented to you is valid and shows an accurate picture of the condition of the business.
  • - You want to make sure you know what items the business actually owns, what is leased, what is owed to the business and what the business owes to others. You do not want to buy a business only to find out there is a huge pile of bills that are due and the income you were expecting does not materialize. Doing a solid job of due diligence will help you avoid buying the wrong business or paying too much for the business.
  • - Not Having Enough Cash Reserves
  • - Running a business requires capital. Successful businesses are able to generate enough revenue to cover the cost of their expenses. In times when the revenue is less than the expenses then you need cash reserves to cover the shortfall. If you spend all your money in the acquisition of the company then you will not be able to cover shortages when they occur. This can be the quickest way to bankrupt your new business. Do not buy a business until you have the necessary funds to both buy the business and the necessary funds to keep it open after the purchase.
  • - Assuming Cash Flow will Cover Debt
  • - There will always be a transition period when buying a new business. Some vendors will have a loyalty to the seller and will pull their business when management changes. Likewise you might lose some of your buyers after the transition. These changes are unavoidable. They can have a tremendous impact on the cash flow of your business. If you purchase a business assuming the current cash flow will cover the payment on your debt, then you might be in for a rude awakening.
  • - Paying for Potential
  • - Sellers will try to set a price on a business based on the projected value of the business. For example a self-storage business that is 40% occupied at the time of purchase may be worth $1 million dollars. If the occupancy rate was 80% then the value of the business might increase to $2 million dollars. You should not pay $2 million for the business because the seller entices you on the future potential of the business.
  • - It will be your time, effort and energy that create the future potential in the business. You should be awarded for your efforts. Do not make the mistake of over paying for a business and rewarding the seller for your hard work. The value of the business should be based on the condition at the time that you purchase it.
  • - Wrong Entity Structure
  • - The worst mistake that you can make is to buy a business using the wrong entity structure. First time business owners will buy a business and sign every contract in their name. This is a major mistake because it makes you personally liable for any loss that the business incurs. If there is loss your creditors will go after your home, your car, and your savings. Buying a business using an entity structure such as a corporation or a LLC can minimize your personal risk. Use an attorney and an accountant to help determine what the best entity structure for you to use is. Do not make the mistake of putting everything you own at risk when you buy a business.
  • - Having insufficient cash to operate the business. Frequently business buyers
  • fail to adequately project cash flow of the business and forget it takes working
    capital in the business to make it successful. Most small businesses are sold
    without accounts receivable or accounts payable. The new owner will need
    sufficient cash to build up working capital and capital for changes in the business.
    Changes will happen and always require cash to work through those changes.
  • - Inadequate competent advisors. Many business buyers try to save money by
  • using inexpensive legal, tax, accounting and insurance advisors that do not have
    sufficient experience with the purchase of a business to give you the help you
    need. Your advisors don’t have to be the most expensive or prestigious in their
    area, but they must have sufficient relevant experience to help you navigate the
    process. Planning on the front end to have adequate cash flow projections, legal
    structure and insurance can help prevent disasters down the road.
  • - Not controlling your advisors. As a buyer you should be in control of the
  • process. Frequently, overzealous advisors will kill a transaction with the good
    intentions of protecting you the buyer. You the buyer has to be willing to instruct
    the advisors of which risks you are willing to take. If you are not willing to assume
    any risks, don’t buy a business.
  • - Buying a business that is not a good fit for you. To have a good fit, the buyer
  • must assess their own skills and weaknesses to make sure the business they are
    buying is a good fit for their background and abilities. Determining how to fill the
    gaps in your weaknesses before you buy the business will have a big impact on
    your success in that business. Are you a hands on type of person or a
    management type of person who gets their work done through other’s skills. If
    your background is with large organizations where there were always sufficient
    technical skills available in your business to handle complex situations, you will
    have to find those skills outside of your newly purchased small business. For
    example, in most small businesses with under 50 employees, the owner is the
    main marketing person. Is this a good fit for you?
  • - Failing to set up an appropriate business entity to use for the purchase.
  • Although sole-proprietorships are still a common form of business ownership,
    most of the time the buyer will want to have a legal entity that helps protect their
    other assets from business liabilities. In some states, such as Texas, this type of
    legal structure may cost you some additional annual state taxes. You should
    consider this cost as additional insurance against unforeseen events and
    liabilities.
  • - Inadequate due diligence. Due diligence is the process of verifying the sellers
  • statements and representations. Understanding how a business operates and
    verifying the representations of the seller is critical before you buy the business.
    Financial statements and tax returns can be fake. Just ask about Enron. There
    may be outstanding lawsuits, judgements, customer complaints, returns and
    significant warranty work that are not reflected in any of the information supplied
    by the seller. Also, during due diligence the buyer needs to determine if there are
    significant assets in disrepair or on the verge of being obsolete. You the buyer
    needs to manage the due diligence effort and control what your due diligence
    team is going to do. If you do not have the skills to verify management’s
    statements, you will need to hire experts to do this for you. This is another area
    where business buyers try to save money and because of this they fail to see a
    clearer picture of the business. In a well written purchase agreement, a lot of
    these minor worries can be overcome. If a seller finances part of the purchase,
    you should have the right of offset in the agreement to help with these potential
    problems. However, if the problems are significant, the documents alone will not
    save you the buyer
  • - Understanding the seller’s motivation to sell. Often business sellers will
  • simply say they want to retire. Sometimes there are other motivations such as
    new or threatened completion, changes in the business climate, product
    obsolescence, workforce problems, threatened litigation and many other
    reasons. The location may be imperative to the success of the business and the
    seller may know that some governmental entity is going to change roads,
    bridges, street access or other changes that makes the location not as good as it
    has been in the past.
  • - Understanding the company’s reputation. The goodwill of a successful
  • business is a significant part of its value. If the reputation or goodwill has been
    recently tarnished, then the value of the business in the future will most likely be
    less than it has been in the past. Do you know how to check a company’s
    reputation?
  • - Failing to focus on the purchase agreements. These agreements are very
  • complex. In real estate there are many standard forms provided by the state real
    estate commission. However, this is not the case for business sales. There are
    sample forms available on the internet and for purchase from online information
    sources. These sample forms can range in size from 2 pages to 200 pages. It is
    important to have in the document those conditions that are relevant to the
    business being purchased to provide you the new business owner with adequate
    title to the assets free of unknown liabilities.
  • - Not knowing your financial requirements. When small businesses are
  • purchased by a new business owner, frequently the new buyer fails to
    understand the cash flow requirements of the business and their personal
    lifestyle financial needs. Most small businesses are purchased with some type of
    financing. This will be a drain on the business future cash flow. If you or some
    other investor / owner do not have sufficient capital invested in the business, then
    the payments to buy the business could cause the business to fail or not be able
    to grow.
  • - Making too many changes to fast. When this happens, frequently key
  • employees will become disgruntled and leave. Most of the time, these key
    employees have the knowledge of how the business operates and are a
    significant part of the goodwill or value of the business.
  • - Relying too heavily on existing customers. When the ownership of a small
  • business changes, certain customers will go away. It may be nothing that the
    seller or the buyer did. From the very beginning of owning the business, the new
    owner must establish favorable relationships with the customers and obtain new
    customers.
  • - Overpaying for the business. In business valuations there are many formulas
  • and methods to value the business. The value of the business frequently
    depends on the buyer and how the buyer will operate the business. Because the
    valuation methods are complex and have many small assumptions in their
    calculation the buyer should have someone familiar with the calculations,
    evaluate and advise the buyer. The seller’s broker most of the time represents
    only or primarily the seller. Too often business valuation experts fail to consider
    key factors in their valuation. A key factor may be the seller is not willing to sign a
    reasonable non-compete agreement. All of the other valuation methods and
    calculations may be correct but in some businesses, the lack of a non-compete
    agreement from the seller makes the business goodwill worthless. The business
    is then worth only the liquidation value of the hard assets.
  • - Not planning the transition period. This is the time after the sale where the
  • seller transfers to the buyer the skills needed to successfully operate the
    business. For some businesses this can be as little as two or three weeks of
    time. However, for more complex business, in particular manufacturing, this is
    frequently many months. Included in the agreement should be details of the
    training and the entire transitions period. For example, if customer relations are
    significant the buyer should specify that customers generating 75% of the
    revenue should be personally introduced to the buyer. If there are trade secrets
    on how to make certain products, those processes should be documented by the
    seller prior to the end of the transition period.
  • - Not being flexible. If you really want to be your own boss, consider all types of
  • business – initially. Then narrow down to the types of businesses to where you
    feel your skill set will help you be successful in operating and managing the
    business. Don’t steer away from franchises because you don’t want to pay the
    franchise fees. Many are very successful.
  • - Expecting too much financial information and systems documentation. If
  • you are looking at businesses of 50 employees or less, good financial information
    and systems documentation is not the norm. Very few small businesses have this
    type of information. This does not mean they are a bad purchase you just have to
    be willing to accept this and adjust accordingly. This makes the transition period
    planning critical.
  • - Paying all cash for the business. If the seller is willing to finance as little as 10
  • percent of the purchase price, the seller has some confidence in the value of the
    business and their statements to you the buyer. Also, be sure to include the right
    of offset in this agreement. If the seller is not willing to do seller financing on the
    business, try to get 10 percent of the sales price put into an escrow account for
    one year with stipulations on how it can be forfeited to you the buyer.
  • - Waiting to make an offer until you have all the information. If this is a good
  • business, you will not be the buyer if you wait to make your intentions known to
    the seller. Your preliminary offer should be in the form of a non-binding letter of
    intent.
  • - Not closing quickly. When deals start to linger there are many problems that
  • can come up. Key employees may get wind of the transaction and leave.
    Customers may find out the business is for sale and start looking for another
    company to provide what this business provides. Suppliers might get nervous
    and stop extending normal trade terms. An adage in the business sales
    environment is good deals close fast and bad deals linger. Make sure you
    manage your advisors to get it to close quickly.
  • - Seller family members. If the seller has family members in key positions, be
  • cautious. If a family member is in a sales role and unwilling to sign a noncompete agreement – run and do not buy this business. If a family member is in
    accounting and is fairly compensated, they can be reasonably replaced with
    similar compensation. If a family member has a key roll in a manufacturing or
    process business, be careful and make sure this is a replaceable position. If you
    are uncertain, pass on this business and go on to another opportunity
  • - Ignoring Emotion
  • - It's true that when you buy a business, looking at the numbers and facts is extremely important. However, there are other aspects to a company to examine. For example, a buyer should find out if employees get along, whether they are satisfied with their jobs and how active they have been in contributing to management decisions. At the same time, even though buyers have to approach business ventures with some degree of logic, they should love the type of work the business is going to require.
  • - Not Understanding Advantages
  • - In the business world, it is not enough to do what everyone else does. To set your business apart, you must do something the competition does not do. If you do not know the company's competitive advantage, you cannot get a truly accurate picture of the company's full potential value or how to extract it. Know before you sign the purchase contract the direction you'll take.
  • - Signing Your Name
  • - Seasoned entrepreneurs understand the legal ramifications of everything they do with their businesses. One of the biggest mistakes company buyers make legally is to sign their own name on the documents related to the business. Avoid doing this, as signing your name means that you have assumed personal liability for the company. Should the company fold, you want your own assets protected.
  • - Shaking It Up Too Fast
  • - It's fine to purchase a business you know you can turn around and modify. However, companies are made of people, and people often are familiar with particular ways of doing things. If you try to make too many changes all at once, at the very least, employees may get frazzled. At the worst, they'll get angry and openly resist what you're trying to do. When you do make changes, don't ignore the insights and opinions of the employees and give them time to adjust.
  • - Going It Alone
  • - Even if you have extensive experience in business and marketing, it's difficult to think of everything for the company all the time. Other people can give you advice and information when you're on the fence about something and can point out things you might not have known or considered. Having some help also gives you time to think critically about the business decisions you're making.
  • - Assuming Cash
  • - Some customers inevitably will stop buying from your company when ownership changes. This is normal. The problem is that it can cause a disruption in cash flow until you build a client base that replaces the customers who left. Account for this when you buy the business or you may end up putting the company you just bought into early debt.
  • - Use those Corporations and Limited Liability Companies (LLC): Even a first-time buyer knows that a corporation or LLC should be used to buy and own the business. A common mistake, however, is not doing all business in the name of the company. All leases, employment agreements, loans, and other contracts for the business must be signed in the name of the company for the company to serve its purpose. One of my clients signed the lease agreement in his own name before the business closing. Now, even though the business has been sold, the landlord refuses to change that lease, and he is still liable for the rent!
  • - Signing personally subjects your personal assets to the risks of the business. More importantly, it may give parties a basis for arguing that your business and personal assets have been co-mingled and so the company should be ignored altogether. Your cars, stock account and bank funds could then be made available to pay the debts of the business.
  • - Know your Business or It's not just the money, stupid! Every few days, a client will walk into my office with a handful of financials and tax returns for a business that they are interested in buying. They will know a great deal of information about how the business makes money, but not much else. Simple but important questions may not have been asked. Take the time to find out all the information available on the business. The information below is just as, and sometimes more, important than sales:
  • - Is there a franchise agreement in place and how easy is it to transfer the franchise? How much is the transfer fee and who will pay for it?
  • - Has the business been paying its bills, or, are there unhappy suppliers and vendors who will need to be contacted and paid off before the closing?
  • - Is there a lease that will need to be assigned? Is the landlord willing to assign or is he looking for a new lease agreement?
  • - How many customers does the business have and are they happy with the business? (After one business closing that I handled, a customer who made up 75% of the revenues left because he had become unhappy with the prior owner's service.)
  • - The answers to some of these questions may change a buyer's mind as quickly as low sales. Ask a lot of questions and ask them early in the discussion.
  • - Search county, state, and federal records. Every business large or small has information about it available in government files and records. Most of these records have been established specifically to give notice to the public or potential buyers. Use those records early and often.
  • - Trust your partners.....but sign that agreement! If you have gone through the trouble of setting up a corporation or limited liability company to buy a business, take one more step and enter into an agreement with your business partners.
  • - What if one partner wants to get out?
  • - What happens when one of the partners dies, is disabled or bankrupt?
  • - What if one partner is stealing from the business?
  • - What if the partners cannot agree on how to run the business?
  • - Finally, read the "legalese". So many business people I meet think that agreements are "just a bunch of boiler plate." Unfortunately, boiler-plate or not, if you have not read and understood the agreement before signing, you will have to live with its terms. Some common provisions that can create a lot of problems if not properly drafted are: "indemnification" provisions, "default" provisions, "representations and warranties", "rights of setoff", "rights of refusal", and the ever-popular "waiver of notice".
  • - Generally, sellers are not interested in being responsible for anything once the business is sold, it is up to the buyer to negotiate the seller remaining liable for old bills, claims, and other obligations of the business. One of my clients has spent a considerable amount of time fighting the telephone company, not about the prior owner's telephone bill, but its yellow pages listing!
  • - Talk to customers, suppliers, employees...anyone who can give you more information about the business;
  • - Talk to other franchisees in the area, if buying a franchise;
  • - Buying the assets of a business is safer but buying stock may be easier. Stock sales involve a lot less paperwork;
  • - Review the equipment list and make sure you know what is owned, what is leased and what belongs to some other party;
  • - Get copies of all documents from the seller up front;
  • - Use accountants, attorneys and other professionals to review financial statements and documents, as needed.
  • - Signing Documents in Your Own Name
  • - This is a common mistake business owners make in many circumstances. If you are signing a business contract, for example, you are signing on behalf of the business, not yourself. If you sign documents in your own name, you are taking on liability and responsibility that you don't want or need.
  • - You personally are not buying the business; your business is buying another business. If you don't already have a business form, create one. Start an LLC or incorporate with a business name and then use that name when signing documents.
  • - Not Understanding Why the Business Is for Sale
  • - Knowing this detail can help you negotiate, but, more important, it can prevent you from making a mistake about the status of the business and the owner's intentions after the closing. For example, if an owner is in personal bankruptcy and needs the cash from the business, you know you're in a better position to negotiate. On the other hand, if the owner wants to set up a competing business nearby, you may want to get a non-compete agreement to protect your business.
  • - This one's tricky, because it's difficult to figure out the REAL reason someone is selling a business. There are always two reasons — the stated reason, and the unstated one. To figure out the unstated reason, spend some time with the owner in casual conversation away from the negotiating table. Listen for those little "tells" that could give you a clue. And there's nothing wrong with checking the owner's credit rating, Better Business Bureau rating (and other ratings), and doing a background check.
  • - Assuming That Things Will Stay the Same
  • - One of the biggest mistakes business buyers make is to look at a business as it is and assume that it will be the same business they saw before they purchased it. The day the business is sold, the business valuation changes. A new owner will always do things differently and have a different relationship with employees and customers and vendors. The new business might be better — or worse — but it's impossible to tell what might happen. Don't buy a business thinking you know what you are buying.
  • - Not Understanding Goodwill
  • - Who are the business's customers and how loyal are they? That's the goodwill the company has. Goodwill is an intangible asset, and it's often considered the value of the customer base. If you don't understand goodwill you won't be able to determine its value.
  • - Not Doing Enough Due Diligence
  • - Making Changes Too Quickly
  • - No one likes change, and even if you have great ideas for improving productivity or profit, take it slowly. Go too fast, and you could lose valuable employees and customers. Take the time to do what I call "MBWA" (managing by walking around), so you can get the feel of the place, and understand the people and the social situation. Figure out who you can trust, and how the politics works.
  • - Buying a business that’s wrong for you
  • - If your business acquisition represents a lifestyle change as well as a financial investment, it’s important to take the time to find the right business. Most entrepreneurs do best in a business that suits their skills, knowledge, interests, and personality – even if they’re not planning to be fully hands-on. Choose the right business and you’ll be on track for the freedom, flexibility and sense of achievement that owning a business brings. Opt for a business that isn’t such a good fit and you could be facing years of anxiety, frustration and debt.
  • - Banking on change
  • - Many businesses have an established brand that reflects their values and appeals to their customer base – ignore this at your peril. If you’re planning to change the essence of what makes the business successful, you could wipe out your profits overnight. Which is why it’s important to consider the company culture when thinking about buying a business. For instance, if you buy a specialist chocolate brand that leverages its organic, Fair Trade credentials, but plan to improve profit margins by cutting the cost of ingredients, you could find yourself without a customer base. Playing fast and loose with company culture can decimate some businesses.
  • - Overextending yourself
  • - A common mistake among business hunters is to buy a business that’s out of their budget. Running a business requires capital and although successful businesses can generate enough revenue to cover expenses, you’ll always need cash reserves to carry you through tough times. If you spend all your money acquiring a company, you won’t have the means to cover shortfalls when they occur and a just a small amount of debt could bankrupt your new business. Stick to your budget and only commit to a business when you have the funds secured to buy it and keep it afloat in the first few years.
  • - Clinging to Plans No Matter What
  • - Planning for a successful M&A transaction is important. And, your plans should be detailed and guide the acquisition process. As an M&A attorney, I highly advise you spend time planning. However, your plans are ultimately of little value if they aren’t fluid.
  • - M&A acquirers, especially larger companies with formal M&A deal processes (companies who have done hundreds, if not thousands, of acquisitions and have large deal teams and specific workflow), often make the mistake of emphasizing process to the point where it becomes the only thing that matters.
  • - Failing to require a non-compete clause from the seller, especially in a service-industry business
  • - Having unclear expectations for seller participation in the business after the sale
  •  

    Selling Software Business

  • - In reality two extremes occur in the sale of a software company: Future potential of perceived and future realisable value. Or established recurring revenue from a strong customer base.
  • - In London over 250 software companies have been set up since January 2014. The majority of these are thriving on innovation. While nowhere near the halcyon days of the dot.com boom, many investment banks, VC’s and larger companies are beginning to make offers based purely on the IPR (intellectual Property Rights). Is this typical of the industry? No.
  • - The majority of software companies fall into four categories: (My global estimates)
  • - Owner managed start ups that have potential (15%)
  • - Owner Managed established companies with turnover from €250,000 to €2,000,000 (65%)
  • - Investment/ owner managed companies with a clear exit strategy (10%)
  • - Public Software Companies (10%)
  • - In category 1 there may be distortions of value as already discussed but the reality is that for most of these companies they have no value but cost !!!
  • - The process of selling a company is described very often. There is the technical part as well as the human side of a business sale.
  • - At the moment in the United Kingdom (UK) market we are seeing multipliers in the software industries ranging from 90% to 150% of turnover or multipliers of 4 to 12 times discounted future profits.
  • - As a rule of thumb you should allow a 20% discount on the prevailing multipliers pertinent to your sector. However, please bear in mind this is only a guide.
  • - The only way you will know what you are worth is when you have offers on the table. At the end of the day, as the old saying goes ” beauty is in the eye of the beholder”.
  • - Technology companies and in particular software companies, have had to learn that they are not outside the metrics and measurement criteria that are applied to other industries.
  • - This has been driven not only by the dot.com crash but also by the fact that customers have become more sophisticated and demanding. Customers want value and return on investment. In short many markets are now mainstream. There are a few things that mainly determine the value of a software company:
  • - Intellectual Property Rights (IPR)
  • - Your Staff (Intellectual Capital)
  • - Customer base
  • - Your brand
  • - If there has been one area which has changed it is unquestionably in the valuation of IPR. In the dot.com boom days it was mainly the IPR that created most of the value. Not anymore.
  • - The only exceptions would be if the technology contained highly complex algorithms or had patents or patents pending. Regrettably, the cost of development does not correspond to value.
  • - Indeed the creation of low cost development centres in India and China has had a major impact on development costs in general and in the value of IPR in particular. The reality today is that IPR on its own has little value if any at the moment when you want to sell your software company.
  • - Hence, it should be considered a cost rather than asset. The value of IPR can only be realised through usage.
  • - The value of IPR then increases with acceptance in the marketplace as more and more customers utilise the technology of the IPR. If you are looking to sell just the IPR that has cost you a £1million to develop then you might get £60,000 if it is still state of the art !!
  • - Your Staff (Intellectual Capital) of a software company
  • - The area of the greatest debate today when you sell your software business is how do you value the Intellectual capital of the company. Clearly if your company is biased towards services rather than products then many would argue that this indeed is the major asset of your company.
  • - Conservative accountants will argue that Intellectual capital of a software company does not appear on the balance sheet. The trend at the moment for software business sales is assessing value based more on the balance sheet than before. However, we have also seen that most buyers prefer earn outs and that key staff are “golden handcuffed” so that the intellectual capital does not walk out of the door once the buy transaction has been concluded.
  • - Customer Base of a software company
  • - As stated earlier the value of IPR is incrementally linked to usage. In today’s market buyers of software companies are very keen on acquiring a customer base when an owner sells a software business. The reasons are as follows:
  • - As the buyer community sees software and services as commodities, capturing new customers has become increasingly expensive. The cost of creating new business is usually ten times the cost of maintaining an existing customer, in some cases that cost is nearer 15.
  • - Recurring revenues of software companies for sale. Annuities, in the form of maintenance and additional service revenue, are predictable and generate significant cash and a very high margin. Hence the value of SaaS based models will eventually increase valuations.
  • - Customers tend to be amenable to buying from preferred suppliers rather than new ones. The opportunity exists to sell more products to existing customers.
  • - The Brand of the software company for sale
  • - Would Yahoo or Google be as valuable by any other name? Along with goodwill the intangible assets of your company such as branding and visibility can dramatically affect value when you sell your software business. Many years ago we conducted Market Research on the CRM market in the United Kingdom (UK) for a service management client. At that time the actual market was worth £32 million and Siebel were twelfth in actual market share in the United Kingdom. However, their PR machine told the world that they WERE the market leader in the UK. The market believed them.
  • - The effect of the ‘cloud’ on software business sales
  • - The ‘cloud’ is still a pretty vague term and can refer to many things. However, since online storage and hosting is available more and more software solutions can be provided and approached online. This increases the influence of software and the effect it will have on software to be applied in business processes. SaaS based models will eventually increase valuations as it is more easy to add new customers and revenue. As gaining new clients is becoming more important the influence of cloud based models will increase valuations of software companies that go for a business sale.
  • - According to our data, software companies sold for an average of 3.34x multiple in 2018 – with the most profitable company selling at a 5.25x multiple.
  • - $$ Profit amount x Multiple = Appraised value of the business.
  • - Average 2.37x multiple in 2014
  • - Average 2.77x multiple in 2015
  • - Average 2.90x multiple in 2016
  • - Average 3.16x multiple in 2017
  • - Average 3.34x multiple in 2018
  • - It’s important to recognize that net profit isn’t the only factor in determining value. In fact, valuation is greatly impacted by the size of the business as well. Let’s look closer at whether small or large sized businesses are worth more in this market.
  • - In 2015, software businesses that generated $20k – $110k in net profit would fetch on average a 2.53x multiple. The businesses that did $115k – $600k in net profit would fetch 3.63x on average. Those were the two largest groupings for 2015 and they demonstrate the difference in multiple based on the profit size.
  • - 2016 brought a similar trend but with a more drastic contrast. The smaller profit businesses (again the $20k – $110k range) only averaged 1.92x. The medium-sized profit businesses (up to $600k) would sell for an average of 3.37x.
  • - In 2017, the data corroborated the same finding but with higher multiples all around: 2.28x multiple for smaller profit businesses, 3.88x for medium profit businesses.
  • - Price Bucket Avg Multiple for Software
  • 0-$250k 2.53
    $250-500k 1.42
    $500k-$1 Million 3.23
    $1-2 Million 3.07
    $2-7 Million 3.92
    Over $7 Million 4.45
  • - So, if we look at a quick summary of the past 4 years in software business sales…
  • - These companies were valued at an average of 3.04x multiple
  • - They sold for an average of over $1M
  • - Software companies generated more than $148 million in transaction value combined
  • - The process of selling your Software business will vary depending on the size of your company, but generally follows this straightforward procedure:
  • - Get a valuation of your business so you know what it’s worth
  • - Put together the prospectus (facts, figures and numbers about your business)
  • - List your business on a high-quality investment platform like Digital Exits
  • - Negotiate a price with potential buyers (or have an agent handle this for you)
  • - Conduct due diligence to verify the buyer’s financials
  • - Transfer all assets and money
  • - Help transition the new buyer into running your business
  • - Smaller software business and micro-businesses are usually best sold privately by the owner through forums or classified websites.
  • - Flippa – Best for businesses under $100,000 in yearly profit
  • - Medium sized software businesses in the $100k-$1m are best sold through brokers.
  • - Digital Exits – best for software businesses $100 – $1m in yearly profit
  • - Larger software businesses with yearly profit larger than $1m are best sold through investment banks.
  • - Business Exits – best for software businesses making over $1m in yearly profit
  • - The first thing you need to know when selling a SaaS or software company is how to price a software company. Many people with software companies may not be that experienced in selling a business and may not know how to value their business.
  • - This results in the buyers controlling how the price is set, and you get the short end of the offer. Instead, hire a professional to give you a reliable estimate of the value of your software or SaaS business.
  • - The second thing you need to know is your financial information must be transparent. A Software Business Broker can help you with this. You don’t want buyers questioning the validity of your income when you’re trying to extract maximum value.
  • - Finally, you have to know who the right buyers are. The software world is a big one, and not every investor is looking for the same thing. You need to market to the software buyers who want just what you’re selling.
  • - These formulas vary and are highly dependent on revenues, scalability, and the size of a company’s client base.
  • - Up to 1 to 3 times revenue (trailing 12 months) plus inventory
  • - Up to 7.5 times SDE
  • - 5 to 7 times EBITDA
  • - 4 to 6 times EBIT
  • - CLIENT TYPE
  • - Enterprise value is a factor of business-to-business, business-to-consumer, or the combination of the two customer bases. For B2B, make sure to pay attention to the average length of the maintenance agreement and the length of time the average client remains with the vendor. B2C software companies are more sales focused, so it is necessary to remain ahead of the marketplace. Providing products that consumers want and need is vital. Innovation and progression are essential for sales focused client types.
  • - ARCHITECTURE
  • - Software architecture is the engineering platform that consists of high-level structures, the process of creating these structures, and their documentation. The software industry is constantly changing and progressing. Popular technology that is accurate and up to date can influence value dramatically. Fundamental structural changes can be costly and hard to change once executed, so it is vital to understand exactly what is necessary when implementing the architecture of your software company.
  • - MAINTENANCE REVENUE
  • - Software companies are directed by two crucial factors- existing product sales and most importantly, continuing maintenance dollars. Recurring maintenance revenue is stable within the software industry and surely adds more value. For companies that mainly focus on selling software licenses, maintenance revenue can implement revenue profitability, stability, and support. This recurring revenue stream is highly dependable and high margin and provides earnings stability while enabling margin expansion even if license sales fail.
  • - LICENSE REVENUE
  • - Another way of selling software is through licensing. Rights, terms, and liability can all be interchanged to create several types of licensing types. Most companies believe that using a licensing model is more beneficial than direct sales. Legacy system license revenue is lessening, but it can certainly add value to your software company.
  • - SUBSCRIPTION REVENUE
  • - The sale of software under a subscription is becoming more and more popular and is the common business model for SaaS. According to Gartner, more than 80 percent of software vendors will change their business model from traditional license and maintenance to subscription by the year 2020. Recurring subscription revenue adds more value when selling your software company. Valuations of SaaS companies show that investors and acquirers value the predictability of this progressive business model.
  • - Billion-dollar plus acquisitions in 2018 have commanded a median 17.7x trailing enterprise value to revenue multiple.
  • - That’s great, except for the fact that very, very, very few software companies will ever see an acquisition the size of recent ones like LinkedIn ($26 billion), Github ($7.5 billion), Mulesoft ($6.5 billion), Concur ($8.3 billion), and Ariba ($4.3 billion). These companies should be applauded – but so should the ones who are successfully securing smaller scale exits.
  • - Buyers are sitting on $4 trillion in cash right now ($1 trillion from strategic buyers and $3 trillion from private equity). That’s more than ever before, but the M&A process isn’t getting any easier despite the market being so hot. Due diligence is getting more complex, buyers have more opportunities than ever, and buyers are smarter than ever
  • - While it can feel exciting when a buyer comes knocking on the door of your software company, only 11 percent of those solicitations actually end in a sale. What’s worse than that low probability is the risk that the potential buyer might not even be serious about buying your company – instead that “buyer” might just be looking to learn more about your company and your top employees than you’d be willing to share.
  • - Successfully selling isn’t the only positive outcome that can come from trying to sell your company. Even if the sale falls through, you can still gather valuable market feedback and build relationships with key executives and stakeholders, for example.
  • - When I envision the M&A process, I picture the champagne at the end of the sale. What we don’t think about is the concept of “deal fatigue.” The process of selling your company can takes longer than you think, and it can be exhausting. Corum estimates there can be upwards of 1,000 communications (emails, phone calls, etc.) when selling a company. Add to that the fact that you still have to run your business while you’re trying to sell it, and it becomes clear that selling is harder than you’d think.
  • - Culture is incredibly important to the integration of your company
  • - A misconception comes from the tried saying: “Good companies are bought, not sold” – which essentially says you wait for it just to happen. Every successful entrepreneur that I know would never just wait for something to happen.
  • - You don’t have a “buy force” to move your product or solution. You have a sales force. They proactively initiate a compelling discussion with your customers.
  • - Fourth, and probably the most important – start with the end in mind. From the beginning days of a company’s history, you should plan for an eventual exit. That means you organize all of your files and documents, track client and partner agreements, protect your IP with employee agreements and NDAs, avoid debilitating clauses and terms in third party agreements (most favored nation, right of first refusal, source code agreements, etc.). And finally, track your performance and hold yourself accountable.
  • - One of the key assets in your company is you and your management team. The best way to show that you understand your business and market is to create a track record of performance. Come up with a budget and a plan. Then record your performance against plan, celebrate your success, plan to counter the shortcomings, and recalibrate with a new plan for the next term. Many times, a prospective buyer will ask for a forecast of future activity. Your credibility in standing behind a forecast is easily sustained by looking at your history of performance. If you successfully hit your forecasts in years past, then your current forecast becomes much more meaningful.
  • - From an operations perspective, I wish I had known not all revenue is created equal. I wish I had a better grasp of revenue models to understand the difference between license/maintenance, managed services, and recurring revenue. Also, know the importance of customer retention.
  • - From a strategic perspective, I would strongly encourage CEOs and executives to build and maintain personal relationships with their partners and customers. This goes beyond signing a partnership deal. Take the time to connect with the executives of these companies, at least on a quarterly basis. Follow up on partner issues, but also share market trends and insights. Create an opportunity with your customers to know your partners. You never know when you need to pick up the phone to have a more serious M&A related conversation with a company. If seeds are planted, that conversation turns from a cold-call into a meaningful, relevant dialog that could lead to a very serious M&A contender (even when they weren’t planning to be involved in the first place)
  • - Plan for the end in mind. I’d create a vigilant oversight of corporate governance, reporting, and tracking.
  • - Find a trusted source to calibrate the strategic winds of the market. Make time every month to lift your head out of the operational workload to take a breath and look at the trends and market movements that affect your ecosystem. Who is partnering with who? Who is acquiring who? Why? What are your customers telling you? I know it sounds like a commercial, but Corum Group’s free monthly tech webinar is jam packed with objective market info. There are other sources as well. Whatever the source, keep tabs with the market.
  • - See my point above about starting with the end in mind. The other exercise that is helpful is to calibrate your business model with your industry. If you run a SaaS business in a market that values content subscription versus technology subscription, then find a way to monetize your content. Don’t let your business model become outdated. Yet always ensure you are customer-driven in doing so.
  • - Don’t get ahead of your own funding and growth. There is always a big temptation to take down another round of financing to get to the “next level.” However, a new round of investment comes with more restrictions on a potential exit. The floor – or minimum amount—is raised. The pool of prospective buyers is decreased. Exponential growth becomes the minimum expectation. It is not uncommon for companies to become stagnant after taking too much investment before they’re truly able to scale.
  • - Big Freaking Enterprises are utterly price insensitive at price points you are contemplating (all amounts below $500 a month sound like rounding error), and having a few BFE clients grants you social proof to help sell other BFEs and smaller customers, as well. Nobody ever got fired for picking IBM, but if nobody at IBM got fired for picking you, then you must be good enough for Dr. Smith's office, right?
  • - 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.
  • - Not understanding what buyers actually want
  • - 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.
  • - A spreadsheet will almost always tell you to hold the SaaS and reconsider selling it in six months and it will generally be correct. Unless of course, it all blows up somewhere in those six months. And that’s the key consideration. When you estimate “how will my SaaS business be doing in 6-12 months” the answer is very bi-modal.
  • - Diversification felt like one of the better reasons to sell a business. I felt at the time that the benefits of diversification, reducing my overall risk, outweighed the opportunity cost of the potential money I could earn by continuing to run the business.
  • - As soon as Storemapper reached a point of providing me a full-time income I began optimizing to reduce my time requirements, rather than trying to maximize revenue and growth. I started looking for another project a bit further up the hierarchy of needs.
  • - Being transparent and making the business visible by blogging, tweeting and podcasting, brought a number of potential buyers to my inbox. I would estimate at least 50-75 people have emailed me over five years
  • - In my case, I had a few preliminary calls with buyers. I was very transparent about the business since I already had nothing to hide. In the initial calls, we didn’t explicitly discuss a sale price, although we did allude to a range of multiples just to make sure we were on the same general page about deal size.
  • - For my part, I was also interviewing each potential buyer about the non-monetary factors. Most importantly, what did they plan to do with the business and would there be opportunities for my team? But also making sure they seemed technically competent so that the handover wouldn’t become a giant headache. I asked a few of them for references that I could speak to from people they had worked with or other companies they had acquired. It’s a perfectly reasonable request and is immensely helpful.
  • - Once you generally feel that this could be a serious buyer, the next step is for the buyer to prepare a letter of intent (LOI). An LOI is a legal document with no legal weight whatsoever… or at least that is my perspective, I am not a lawyer. The goal of it is for the buyer to start to put some details in writing about what they are willing to offer for the business and to lay out the terms of how you will approach due diligence. Due diligence is the process where the buyer really starts to dig into the details of the company and it will vary enormously from buyer to buyer. In the LOI you will typically describe the timeline for due diligence and the buyer may ask for a period of exclusivity, say 30-60 days, in which they will conduct due diligence and you will agree not to talk to other buyers.
  • - You do not have to agree to exclusivity. As soon as you get an LOI from a serious buyer you can and should immediately begin looking for another buyer. Having a strong backup buyer is the absolute best way to ensure you get a good deal and have a strong negotiating position all the way to the end.
  • - How do you actually conclude the sale?
  • - This is by far the most common question I’ve gotten but it has a pretty simple answer. The asset purchase agreement will more or less lay out the terms. You will use an escrow agent, a law firm or dedicated escrow firm. Both the buyer and seller sign a simple document with the escrow agent who then accepts a wire transfer from the buyer. The escrow agent then confirms to you that they have the money in their account and you start a pre-defined process of handing over control of the assets of the business. Once things like the domain, the servers, and various passwords are handed over, the buyer has a short period of time to review them and make sure you haven’t been completely misleading them. Then they give the escrow agent the thumbs up, and the escrow agent releases the money to you.
  • - Run your business to sell it, before you want to sell it
  • - Acquisition offers are a hidden benefit of radical transparency
  • - I joined the radical transparency train after being inspired by, and learning a ton from the founders of Buffer, Baremetrics, Keen, Patrick McKenzie and many more. I felt at the time that being transparent even with the financial metrics of the business added an appropriate level of credibility and was helpful to readers.
  • - Over time, as copy cat apps started popping up, I began to question whether being so transparent was really a good idea, although they never made a material dent in the business. However being public about the numbers behind Storemapper certainly increased the number of acquisition inquiries I received over the years. People knew the revenue and growth and could immediately tell whether Storemapper was roughly in the range of businesses they were looking for. Between that and reading my transparent blogging about the strategy and challenges, we only needed to briefly discuss the costs and profitability before they would have enough information to credibly make an initial offer. This hugely accelerated the speed at which I could have acquisition discussions. Having multiple buyers involved at the same time really helped me feel confident to press forward with the deal. In the end transparency definitely was a big net benefit.
  • - Go to conferences
  • - This one is pretty self-explanatory but despite all the blogging and sporadic inbound interest in Storemapper, I only reached a critical mass of serious acquisition offers after attending my first Micro-Conf in Las Vegas.
  • - Be an opportunistic seller
  • - The absolute most important factor in getting a great deal in a sale is not having to sell. All of the work here happens well before the sale. Craft your business in a way that you would be perfectly happy to run it indefinitely. Get your work/life balance in order and your stress level under control. Go into a sale process with the idea that if you don’t get exactly the offer you want, you are 100% willing to just wait it out and run your business for another year. Running yourself into the ground, getting burned out or bored of your business, or falling into a cash crunch, or any other situation where you really need to sell the business is an excellent way to get lured into accepting a low-ball offer.
  • - Be aggressive and ready to walk
  • - Not having to sell allows you adopt an aggressive ‘take it or leave it’ attitude to a sale negotiation. You want to be extremely polite, nobody wants to buy a business from a jerk, but continually remind the buyer, “look if we’re not on the same page here, no big deal, let’s just save each other some time and move on.” Smart buyers can sense if you are a really motivated seller and can use all kinds of tactics, waiting until the last minute of negotiations when you have already invested a lot of time and energy into the deal, to try to gain last minute leverage. The sale process can be long and grueling. With every hour you spend working on a deal, your brain starts to become more and more committed to getting the deal done. You start envisioning your life post-sale before it closes. But, that is a sunk cost fallacy. Throughout the process I repeatedly made myself sit down and visualize the process of walking away from the whole deal if necessary and that gave me the confidence to stand my ground, from actually turning down a pretty big offer to holding firm on several small points, to get the best deal I think was reasonably possible.
  • - Have multiple offers in parallel
  • - Being aggressive and ready to walk away from one particular negotiation is made immensely easier if you have multiple offers on the table. It’s important to make an effort to develop those offers at roughly the same time. From the time you meet a buyer to the time you have a firm offer may be many months. When you’re in late-stage negotiations, having another firm vaguely interested in talking about an acquisition is not nearly as useful as having three LOIs in the same week. You can view each thread with a buyer as a conversion funnel and try to keep as many conversations moving forward in parallel.
  • - Purposefully under-optimize
  • - The first few recommendation are all about the seller’s mindset, but it’s important not to neglect the buyer’s psychology. One thing I would recommend is to purposefully under-optimize certain aspects of your business. A business that is fully optimized in every aspect, with the juice wrung out of every possible avenue of improvement, is not actually attractive to a buyer. They want to see areas where they can come in and bring their own skills and resources to quickly accelerate the business. For example, I really do not understand paid search advertising (Google Adwords, Facebook, etc) so I purposefully put almost no effort into it as a customer acquisition channel for Storemapper. I would highlight that fact to buyers saying, “Despite the fact that revenue is growing well, I have put almost no effort in paid ads, if you have an Adwords guru on staff, I’m sure they can fire up a profitable paid advertising funnel in no time to further increase growth.”
  • - Build a narrative for the buyer
  • - At the end of the day buyers need to tell themselves a story about acquiring your business. If they have raised outside funding and have partners or a board, they need to be able to tell that story to defend their investment to their partners. If they are a solo buyer they still need to tell that story to their spouse or to themselves. Almost everything in this post was part of an explicit narrative that I built and gave to potential buyers. For me it looked something like this:
  • - “I’ve been running this business for five years. It’s profitable, growing and has product-market fit. I have a great team who handle most of the day to day operations so I’m perfectly willing to run it indefinitely. However, because I’ve run this with a lifestyle business approach, certain aspects are very under-optimized and its still performing well below its full potential. The right buyer, who I, and more importantly my team, would like working with, could pay a comparatively high price for the business and still generate a very strong return on investment.”
  • - Build your own narrative and sell that story to the buyer.
  • - What we attempt to do is to help the buyer justify paying a much higher price than a pre-acquisition financial valuation of the target company. In other words, we want to get strategic value for our seller. Below are the factors that we use in our analysis:
  • - Cost for the buyer to write the code internally - Many years ago, Barry Boehm, in his book, Software Engineering Economics, developed a constructive cost model for projecting the programming costs for writing computer code. He called it the COCOMO model. It was quite detailed and complex, but I have boiled it down and simplified it for our purposes.
  • - We have the advantage of estimating the projects retrospectively because we already know the number of lines of code comprising our client's products. In general terms he projected that it takes 3.6 person months to write one thousand SLOC (source lines of code). So if you looked at a senior software engineer at a $70,000 fully loaded compensation package writing a program with 15,000 SLOC, your calculation is as follows - 15 X 3.6 = 54 person months X $5,800 per month = $313,200 divided by 15,000 = $20.88/SLOC.
  • - Before you guys with 1,000,000 million lines of code get too excited about your $20.88 million business value, there are several caveats. Unfortunately the market does not care and will not pay for what it cost you to develop your product.
  • - Secondly, this information is designed to help us understand what it might cost the buyer to develop it internally so that he starts his own build versus buy analysis. Thirdly, we have to apply discounts to this analysis if the software is three generations old legacy code, for example. In that case, it is discounted by 90%. You are no longer a technology sale with high profitability leverage. They are essentially acquiring your customer base and the valuation will not be that exciting.
  • - If, however, your application is a brand new application that has legs, start sizing your yacht. Examples of this might be a click fraud application, Pay Pal, or Internet Telephony. The second high value platform would be where your software technology "leap frogs" a popular legacy application.
  • - An example of this is when we sold a company that had completely rewritten their legacy distribution management platform for a new vertical market in Microsoft's latest platform. They leap frogged the dominant player in that space that was supporting multiple green screen solutions. Our client became a compelling strategic acquisition. Fast forward one year and I hear the acquirer is selling one of these $100,000 systems per week. Now that's leverage!
  • - Most acquirers could write the code themselves, but we suggest they analyze the cost of their time to market delay. Believe me, with first mover advantage from a competitor or, worse, customer defections, there is a very real cost of not having your product today.
  • - We were able to convince one buyer that they would be able to justify our seller's entire purchase price based on the number of client defections their acquisition would prevent. As it turned out, the buyer had a huge install base and through multiple prior acquisitions was maintaining six disparate software platforms to deliver essentially the same functionality.
  • - Waiting too long to sell
  • - 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
  • - Lacking transparency
  • - During the Due Diligence process, the prospect acquirer will want to uncover everything about your business. It’s imperative to be transparent during this process, as failure to resolve or disclose any ‘skeletons in the closet’ could impact the terms of the sale.
  • - I didn’t realize it at the time, I thought a business was a business, but I can see now that what type of business you decide to build very much dictates what kind of life you will lead.
  • - Software is one of the best business models to develop a competitive advantage with, especially if you build something people can’t live without and where switching cost (going to another option) is high.
  • - Performance: The company’s ability to execute many requests for many users within the smallest amount of time.
  • - Manageability: This defines how easily a system administrator can manage the application once it’s deployed.
  • - Interoperability: This is the ability of services to interact with other services, utilizing the data within the system.
  • - Security: Security measures the confidentiality and authenticity of users that are trying to interact with the system.
  • - Maintainability: Defined as the degree to which an application can be understood, repaired, or enhanced.
  • - Extensibility: The ability to add functionality to a component without modifying other components.
  • - Scalability: The ability of the system to handle load increases, sometimes rapidly, without decreasing performance.
  • - Availability: The quality of a system or component that assures a high level of operational performance for a given period of time.
  • - Very nice numbers, unfortunately unless its in the multi-millions its difficult to find a buyer but not impossible.
  • - #1 whats the growth rate look like (Month over Month, Q over Q, Y over Y since company launched the current product?
  • - #2 Can you increase that growth rate x3 or higher if you had an infusion of capital?
  • - #3 Are you willing to sell the business from $750K (the most likely) - $2.5M (max), I'm not joking most of the acquisitions you hear are the exception, the majority receive 1.5x - 5/6x max ARR or 20-40x EBIDA
  • - Your best bet is to start talking to competitors and seeing what they would like to do with the leads you have. A lot of them might actually offer you an acqui-hire position (especially if you were the founder that did most of the big sales), in that case I think you could find a potential acquirer for probably $750K-$1M cash plus a cushy 6 figures for head of sales.
  • - If I were in your shoes (and was real risky) and you can get #2 with a fund raise I would try to get a seed fund or Series A going if those numbers are not attractive, however even if you get the funds and you fail you might lose it all.
  • - If I were in your shoes (and was conservative) I would do a lifestyle business until I raised the company up to about 1.5M annually in revenue with 500K in profit. Then either hire a ninja to do the job for $ABC in salary + equity and retire, or just keep doing the work myself and using the profit.
  • - Are you potentially accretive to another larger lead generation business, ideally with a revenue run-rate of >$10m?
  • - Are you taking into account your salary when you calculate your pre-tax margin?
  • - A Word On Small Business Brokers
  • - Ask yourself if it can make you more money—if not, don’t buy it
  • - The exception is buying tools that don’t make money, but will help you get more money
  • - The most common reason founders sell is because they get tired of it
  • - If the ARR (annualized recurring revenue) is more than 1 million and is growing at a healthy pace, you can predict what would happen if you were to buy the business
  • - Prior to reaching 10 million in revenue is usually just a small transaction
  • - In Hiten’s experience, they tend to buy businesses that come to them or they buy if they really like the business
  • - Hiten is not looking for businesses to buy; but, most of the time, they are connected to sellers that do not want their businesses anymore
  • - Look at your own financials and theirs and see if it can make you more money—do the math
  • - If you are a seller, help the buyer figure out how they can get more money and when they can get it
  • - The buyer and the seller should talk about what they can both get from the deal and settle on a price
  • - When the buyer is hunting down companies, the seller is at a disadvantage because the buyer already has a price in mind that they’re not telling the seller
  • - If you are the seller and the buyer hunted you down, ask yourself why the buyer wants to buy your company and estimate the price
  • - When deciding the structure of your deal, ask yourself why the buyer is buying
  • - The biggest red flag is a misalignment—to avoid this, ask questions
  • - When doing a deal on the phone or in person, make sure you have a written document, so you are both aligned
  • - If you are selling, talk to your broker about everything, but you don’t necessarily have to go with him
  • - The broker can help you calibrate as they have the data and can look from the buyer’s perspective
  • - It is much harder to start a SaaS business than to grow one
  • - Hi, I’m Ryoma living in Tokyo, running a content marketing company and also a co-founder of bootstrapped SaaS called ZenMetrics (http://www.zenmetrics.com) - content discovery tool for Facebook marketers. I'm thinking to close down or sell ZenMetrics because of following reasons.
  • - 1) We lost our passion to solve a Faebook marketers’ problem which was “creating engaging Facebook content is hard work". We lost our passion because we found that Facebook Page API has too many uncertainties which is too hard for us to keep iterating the product development in our limited resource.
  • - 2) We can’t realistically believe anymore that we can be best Facebook content discovery tool in the world.
  • - 3) We think our market is not huge untapped market because when we tried to sell our product to our potential customers they said “Creating engaging content for our Facebook Pages is hard work but not really searching for a solution since we have more important issues” I’ve personally spent about $6K for the design/coding/server and $0 for development since it’s made by our technical co-founders in revenue-share model. Our best wish is to sell ZenMetrics.com and at least cover our costs but I think it's difficult as we don't have any paid customers yet. I'm looking for Clarity experts' advice for us.
  • - Frankly without customers it would be a challenge to position the IP for a sale. With the barrier to entry being low in building the base technology, you have to show that there is something compelling you have built and customers really need this solution (even if they are not paying).
  • - (Admittedly) In hindsight I can tell you this - don't build anything till you have lined up customers who are ready to pay. This is true even if you are building a freemium product.
  • - Unless the technology you have built is remarkable and might find a place in some other company and given that the amount is relatively small, I would attribute it to cost of lesson learnt and move forward.
  • - The ideal thing to do is doing marketing before the product. If you found a problem worth solving, launch landing pages to test if people are willing to pay for the solution. Do this BEFORE building the solution.
  • - Because you already have the solution built, try talking with your "potential customers" and ask why they are not willing to pay and use your solution. Learn from them and try to mind where should you pivot to then build solething they are willing to pay!
  • - Passion is key for this. If you are loosikg pasaion for your project, find something where you really want to spend the next 5-10 years!
  • - There's no business here to sell. You have some assets though. Domain, brand, designs, webpage, technology, some process.
  • - Invest minimal time - circulate the word among indsutry peers and past clients (if any) that it's for sale, throw it on a couple of marketplace (nominal cost in both time and money) and recoup a couple of thousand if you'd like.
  • - If you're pursuing this sale and stating $6k invested in your question, it suggests the sum is still a significant enough of a number for you. In which case, releasing the assets for a discounted "rebate" is likely worth it to you.
  • - Throw together a summary pitch. (Simply model a few successfully closed listings in whatever marketplace you put it into). Load it on a few marketplaces. Take a best offer.
  • - As you’re preparing to be acquired, keep in mind that your revenue is likely to be one of the most scrutinized facets of your business. The overarching question being if your buyer has confidence that your revenue has been accurately and properly booked (likely to GAAP standards).
  • - We got organized several years before our acquisition and systemized our filing and identification of customer contracts. If it was non-standard, we knew about it. We applied similar rigor to vendor and employee contracts and agreements. Your contracts will likely be reviewed and risk will likely be assigned to them during diligence. Your purchase agreement will then likely contain reps and warranties that tie back to your contracts. So, if you’ve made a thousand special contractual exceptions, now’s the time to identify and document them. Better yet, don’t make a thousand special exceptions and save yourself the reps and warranties headaches.
  • - Buyers hate risk. If you become risky, your value goes down or your deal gets killed. Access to your source code and any private information (PI) must be strictly controlled and rigorously managed. Unfettered access to code undermines the value of your intellectual property (reducing valuation). Loose access to PI increases your liability and/or compliance risk (adding massive carve outs to your reps and warranties). You’re trying to avoid raising red flags in diligence. Loose security practices point to lax policies or enforcement, which implies poor management. Nothing says ‘you’re a idiot’ like giving an intern in the Philippines access to your code base. Try to limit that impression.
  • - Think about positioning for opportunities and de-risking for valuation as you’re preparing to be acquired. The majority of what I’ve discussed here is long-term. It will be hard to fix many of these issues a few months before you go to market. The most defensible position is one based on three-plus years of solid, audited performance in these key areas. Are you doomed if you don’t have this stuff together? No. You’re probably not doomed. But, your process is likely to be more challenging; your valuation less solid; and your purchase agreement longer with more stringent reps and warranties. If you have the choice, prepare to be acquired now, and make your life easier when it’s time to go to market.
  • - Systematize your business.
  • - SaaS businesses often require a high degree of technical knowledge and competence to run, compared to what other business models require. The more difficult your business is to run and manage, the more limited will be your pool of buyers. Investors are typically looking for businesses easy to take over.
  • - So, as you prepare for the sale of your SaaS business, remove yourself from the day-to-day. If your branding and marketing prominently feature you as the owner, you'll want to make sure you aren’t the face and centerpiece of the business anymore.
  • - This also means creating documented step-by-step processes and procedures for your business. The easier your checklists and documents are to follow and understand, the better. Anybody with the right technical experience should be able to follow your documents to the completion of a given task.
  • - Maximizing revenue. It is often less expensive to hold on to existing customers and get them to renew than to try to attract new ones to replace cash flow. Use upgrades to your advantage, as they can help you mitigate cancellations. Also, take time to evaluate your revenue model to ensure its suitability and sustainability, and look for ways to maximize revenue.
  • - Minimizing costs. Customer acquisition can be quite costly, especially if human assistance is required at different stages. In an ideal world, your business would be entirely self-serve. But since that's not possible, use videos, FAQs, tutorials, knowledge bases and other support material to cut down on direct human involvement.
  • - Clean up your source code,
  • - A multi-million dollar SaaS business should have clean source code, with annotations and documentation. The code should also be tested and verified. Even if your finances are in order, if your source code is cluttered, messy or lacking in documentation, buyers are going to shy away from the deal.
  • - Clean code is essential for seven-figure SaaS businesses. It is unlikely that the sale will go through unless your source code follows a set of guidelines and standards and is simple, concise and reliable.
  • - As an owner, you might know all the ins and outs of the source code. But that same code can present challenges to the buyer, who might not know how to alter or upgrade the software. Your business is far from future-proof if the code isn’t adequately documented. Make it easy for the seller to take over.
  • - Optimize your customer support.
  • - Customer support can literally make or break a SaaS business. If a high volume of complex questions is constantly bombarding your email, help desk or ticketing system, buyers will be less likely to go through with the sale.
  • - Before putting your business up for sale, audit and evaluate your customer service function. What software are you using to manage customer questions? What is your average response time? What is your resolution rate? How satisfied are your customers?
  • - A high volume of simple questions may not necessarily present a problem for buyers, as there are likely ways to cut down on such requests, with content like videos or FAQs. But, in general, the less time it takes to answer the questions, the better. If there are a high number of technical questions that require a lot of time to answer, your customer support isn’t sufficiently optimized yet.
  • - In order to sell your business, you must ready it for the sale. This means removing yourself from the day-to-day and making it easy for the buyer to take over when the deal has finally gone through. If you plan to be part of a partnership type acquisition, then make sure the buyer understands how you and your team operate and how you will mutually benefit from the partnership.