1. Know your worthValuations based on the latest global data on deal completions reveal very satisfactory multiples for tech, media and telecoms firms, with a median revenue to enterprise value multiple of 1.7x TTM (trailing 12 months) revenue, and a range of 0.9x and 3.0x. The software sector median valuation to revenue is 3.3x, with a range of 1.2x at the smaller end to 5.8x for larger companies.
2. It’s all about revenues, but don’t lose sight of profitsBuyers are looking for evidence of sustainable revenue growth going forward so don’t cut costs in a bid to boost earnings. It’s the robustness of revenue growth that helps command high multiples, not a short-term boost to profit.
3. Be transparentSoftware firms can have a variety of revenue streams from different sources and products. However, for the purposes of a sale it is better to do some housekeeping and make revenue clear and transparent so there are no question marks in a potential buyer’s mind.
4. Address legacy issuesSoftware firms can be a mix of more recent products plus those developed earlier. These “legacy” products may still generate revenue and feed investment – but they’re not the company’s future and they’re not why strategic buyers are interested. It’s sometimes worth considering a separate sale or divestment.
5. Interact with “hot areas” of technologyThere are always new developments in software and technology so either coming up with new products in these spaces or show how your existing products and services either relate or can benefit from these hot new areas will boost valuations.
6. Make sure your IP is in orderIn virtually no other sector is the area of due diligence so important as software. Buyers will keenly check that you do have the absolute IP rights to your products/services so if you are not 100 per cent certain, better check before starting any sales process.
7. Foster partnershipsUS software firms are very astute at partnering with brand leaders, on development projects and research to reap the reflected glory of these relationships, which adds credibility, authority and can add tangible value on a sale.
8. Decide on your ideal buyerAre you looking for a trade or financial buyer? They look for different things. The latter is looking for growth potential and the former is typically looking to complement its service or product range. Make sure your firm best presents itself to the type of buyer selected.
9. Meet your milestonesPotential buyers keenly watch to see if software firms hit the milestones in their sales information memorandum. Missing too many of these can lead not just to a price reduction but to the buyer walking.
10. Never appear to be already spending the moneyThis is a truism for all company sales. If you appear to think the deal is done and you are already thinking of what luxury car home or holiday to buy, more often than not the buyer will see this and re-negotiate, down. Related Article: How to value a business Raymond Fagan is a partner at Cavendish Corporate Finance and has been involved in the financing, management and sale of growing companies for more than 20 years. His focus is on the sale of businesses in the technology, media and telecom sectors.
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