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Every business will eventually transition to a new owner, merge with another company, or close. Busy software company founders may not spend much time on their exit strategies, but that often means they find themselves in an undesirable position when it’s time to move on.
However, planning will help you maximize your business’ value and the return on your investment of time, risk, effort, and finances in your company.
Business consultant firm Mastery Partners has determined that only 17 percent of businesses successfully transition.
3 Common Methods of Software Business Transition
Exit strategies for software companies can follow various models, for example:
Sale to a private investor:
The software company owner may plan and initiate this exit, or an investor may approach you. This type of exit requires that you have a realistic view of your business value and typically takes lengthy negotiations.
Secondary purchase:
In this case, an investor purchases shares in your company but sells its shares to a second party, often who is interested in running the business. You still have shares and receive income from the business.
Initial public offering (IPO):
Among all types of successions, taking a company public has the likely potential for the most return. Examples are continually making headlines. For instance, in June 2020, B2B database company Zoominfo had an IPO valuation of $8.2 billion and a share price of $21. By the end of 2020, shares had more than doubled to $47.10 per share.
What’s Your Business Worth Today?
If you’ve decided that it’s time for you to retire or move on to the next great thing, you need to have a clear picture of what your company is worth. You have several options for determining your business’s value, such as:
Market Value Method
This method compares your business to comparable companies that have sold, similar to how real estate is valued. One of the downfalls of this method is that, unlike real estate, the price that someone pays for a business isn’t always a matter of public record, so you may not be able to find a sale on which to base your business value.
Multiple of Revenue or Multiple of Earnings Methods
Multiple of revenues may be a useful method for Software as a Service (SaaS) companies; it’s based on recurring revenues. Multiple of earnings, on the other hand, multiplies all earnings before interest, taxes, and depreciation (EBITDA) by a value based on market share, sales per customer, and other factors.
Discounted Cash Flow Method
The discounted cash flow method bases a business’ value on expected future cash flow, considering business decisions and expenditure patterns. This method isn’t foolproof. Because it’s based on projections, it could over- or underestimate the value. However, enterprises like Google and Microsoft have used this method when acquiring software companies.
What Your Business Could Be Worth Tomorrow
Once business owners gather the information they need and run the numbers, it’s not unusual for the result to fall short of their expectations. Fortunately, you can make changes that could increase your business value, such as:
- Streamlining and automating processes for greatest efficiency and scalability, which a buyer or investor could consider an indicator of revenue growth and profitability
- Achieving higher-than-average growth, showing momentum for continued success
- Providing solutions to an emerging market, which will be more attractive than software developed for a market on the decline
Steps you can take to increase business value take time, so it’s vital always to keep business value and your exit strategy play front of mind – even from the early days of your business. Ensuring maximum business value at all times will enable you to capitalize, even if an unexpected opportunity arises.
M&A Success Stories
Technology mergers and acquisition (M&A) activity drove much of Q3 2021’s global total of nearly $1 trillion, and it appears the momentum will continue into 2022.
PwC points out M&A trends include “hybrid-tech,” technology that’s embedded in products or services of industries such as healthcare, automotive, or banking. Enterprises are looking to gain emerging technologies through acquisition. PwC adds that M&A “hotspots” include crypto, health-tech, energy storage, and the Metaverse.
Notable M&A announced in early 2022 includes Microsoft’s intent to purchase games developer Activision Blizzard for $68.7 billion to gain a key component of Metaverse platforms. Additionally, Sage ERP acquired e-commerce management software Brightpearl, and data integrity software provider Precisely announced it would acquire Place IQ, developer a location-based consumer insights platform.
If your software aligns with M&A trends, you may have an opportunity to see your exit strategy play out successfully this year – if you have planned and maximized your business’ value. Evaluate your business and know where you stand.
