How to Sell a Software Company
If there’s one business venture that will be enjoying economic growth for years to come, it’s the technology industry. Technology has been improving lives across the globe since its invention, and there’s no end in sight for when it will stop evolving. That’s why software companies are in such high demand at the moment. Big corporations are ready to pay millions (if not more) for a quality software company to call their own.
As the owner of a software company offering unique computer programming solutions, you’ve probably been enjoying steady success and growth in your field. Whether you want to try your hand at something new or you’re looking to retire comfortably in the foreseeable future, finding the right tools is key in how to sell a software company successfully. You’ve built your business from the ground up, and you should be fairly compensated for your innovative efforts.
At Ashley Capital Group, we dedicate our top advisors to helping you figure out how to sell your software company for the maximum ROI. From the critical first steps of valuing your software company until the last signature that completes the terms of purchase, we’ll be with you every step of the way to ensure you get the most beneficial deal possible. We serve clients throughout New York and New Jersey. Contact Ashley Capital Group to speak with a representative today.
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Valuing a Software Company
Unless you’re a seasoned M&A expert, you probably don’t know the best process on how to sell a software company prosperously. No worries, that’s what we’re here for! The first, and most pivotal, step is valuing your business. To you, your enterprise is priceless — to the buyer, it’s a dollar sign. The two of you must come to a mutual agreement of what the company is worth for a successful transaction to take place. However, that doesn’t mean you should let someone else dictate the market value of your company.
How to Value a SaaS Company
There are two main factors to take into consideration when estimating how much to sell your software company for: the revenue and the multiplier. To accurately measure your company’s performance and revenue, we’ll utilize the SDE or EBITDA revenue evaluation methods.
The Seller’s Discretionary Earnings (SDE) formula is most commonly used for businesses that are valued under $5 million. Since these businesses are commonly owner-operated, the owner’s compensation plays a crucial role in the formula. Companies valued under the SDE method will subtract the cost of goods sold and operating expenses from their gross revenue, then add the owner’s compensation for an accurate portrayal of the company’s profitability.
Businesses that are valued over $5 million are typically not owner-operated; instead, they have an established hierarchy of employees and management personnel, as well as shareholders. Thus, they are valued through the Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) method.
The criteria for which revenue evaluation method to use to accurately depict your company’s profitability, performance, and stability is not secluded to current revenue. Various other contingencies are taken into consideration, such as financial data, customer churn, marketing and advertising costs, operations, and more. These factors are essential in identifying the correct multiple.
Exit Strategy, Negotiating, and Closing
When it comes to selling your software company for how much it’s truly worth, valuation is the key to a profitable negotiation. However, that’s not to say that every other step in the M&A process should be ignored. On the contrary, building an exit strategy, constructing a solid business proposal, searching for the right buyers, having a strong negotiator, and closing the deal through due diligence and a firm purchase agreement, cement a good working relationship and a favorable business transaction for both parties.
You deserve to be granted the best deal possible when selling your business, whether that be software or manufacturing. At Ashley Capital Group, we can make that happen. Get in touch with any of our advisors in New York and New Jersey to get started on selling your software business today!