There’s one thing at the heart of any successful software business sale – preparation.
All too often leadership teams that plan to sell their software businesses wait for a great deal opportunity to turn up then rush to capitalise on it.
Our advice? The chances of this succeeding are small.
If you have aspirations of selling your business, it’s vital that you get the groundwork in place long before you start practising your drive-a-hard-bargain speech.
You need to address things like shareholder agreements, customer agreements, IP ownership, and employment contracts. If you don’t, they could become a problem at the exact moment when you need things to run smoothly.
The good news? At Monterro, we’ve managed countless transaction processes and learned a huge amount of lessons on the way.
In this blog, we've condensed that knowledge into practical insights and strategies so you start laying the foundations of a successful software business sale process. And maximise your potential deal value in the process.
Let’s dive in.
Draw up a shareholder agreement
A smooth buying process has monetary value. And the more you’re prepared, the smoother the process.
The cornerstone of it? The shareholder agreement.
If preparation is the recipe for success, a shareholder agreement is the key ingredient. It’s the most important document to prepare – and you should complete it as soon as possible.
Think of it as a rule book that sets out your intended transaction. Aligning around this early helps you agree on shared objectives – and how to achieve them.
“Discuss the vision and goals for the company at an early stage, including the level of ambition of all your shareholders, the timeline for ownership, and everyone’s risk-taking appetite.” Gunilla Åberg – CEO, Next One Technology.
This becomes especially important when it comes to things like drag-along regulations. Without them, you might end up in a situation where 95 out of 100 owners want to accept an offer – but five don’t. And without drag-along regulations, they can block the deal...not good.
Your shareholder agreement should cover change of ownership.
Getting this sorted early avoids massive roadblocks later on. Especially because it can be difficult to retrospectively agree on a solution that involves a change of ownership. Even if you can agree, these solutions are often problematic for tax purposes.
But a shareholder agreement is just the beginning…
Nail these three vital documents
There are also three documents that can have saved you a lot in potential legal fees if you get them sorted:
1. Employment contracts: You’d be surprised by how many businesses turn this building block into a tripwire – especially when it comes to developers and software engineers.
2. Customer contracts: It’s not uncommon for these to get messy too. So-called ‘Change of Control’ situations (a customer’s right to terminate if all or parts of the company are sold) often cause problems.
While it’s not possible to have 100 identical agreements (as each must be negotiated on an individual basis), if you develop a framework for your agreements, you’ll reap the benefits. A unified starting point makes it easier for a buyer to review – and guarantees you don’t omit important clauses.
“It’s so important and can easily be handled in advance. Whilst ‘Change of Control’ is, in practice, a smaller problem for a financial buyer, it can be a dealbreaker for an industrial one.” David Kuritzén – Partner, Monterro.
3. IP ownership: It’s vital to keep track of IP ownership. All of it. Buyers pay a lot for IP, so it’s a sensitive issue.
Ask yourself these questions before a buyer does:
Q: Have you used external code or freeware?
Q: How did you handle it?
Q: Do your agreements clearly state that those who develop code for the company have transferred all code to you?
One way to tackle an IP challenge, or get it under control, is to conduct an IP scan of your tech stack in advance.
This will give you an overview of the situation. You can then either fix challenges that arise, or set up a mitigation plan. These steps will be evident in a transaction – so be one step ahead.
Know your reporting figures
The numbers and metrics are your armour.
If you can report on your key figures you’ll build the confidence needed to sustain momentum throughout a long process.
These figures include:
- Annual recurring revenue (ARR)
- Cost of acquiring a customer (CAC)
- Net retention (measure upsell and cross-sell of your existing customers)
- Churn (amount of lost customers within a certain period), over a decent length of time)
You should also identify key criteria and measure them as early as possible. If you can show your track record to an investor, you’ll have an easier time. You may even command more premium pricing.
We’ve seen companies ignore this bit of advice – at their peril. Don’t fall into this trap.
“Founders tell us they are well prepared and the house is in order. But once you pop the hood, it’s not spick and span: data is quite messy and KPIs are guesstimates.” Carl-Sebastian Zadig – Partner/M&A Advisor, HDR Partners
Hire the right CFO
If you don’t have a CFO – time to get looking.
Historically, CFOs could be seen as a cost centre. But that perception is changing fast. Not only do CFOs free up time for the CEO and senior management – they’re increasingly at the strategic helm of the whole operation. This makes them crucial to a successful divestment process.
If you want to hear our seven golden rules for superstar hiring, read our field-guide to talent management for Nordic software companies going through growth.
And that’s it…almost
We hope this blog post has given you a clear idea of how to lay the foundations for a successful software business sale process.
But there’s plenty more to it than getting your house in order. For example, how to navigate the transaction itself and actually get the deal done.
We’ve covered these phases in our eBook The field-guide to selling your (software) business (the right way).
It’s full of insights from people who’ve been there and done it so you can expect both step-by-step guides and cautionary tales.
